What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

The biggest market moving event of last week was the slate of mega-cap tech earnings. The street was waiting to hear about the latest progress on AI and cloud development, but the results were relatively mixed. Alphabet delivered a solid set of results, but the other companies had some issues. Whether it was slowing growth rates, the need to spend more than anticipated or the lack of capacity to handle anticipated demand, it seems like the period of unbridled optimism for AI may be ending. In its place, we may be entering the cooldown phase where some some of the extreme optimism gets burned off and stock prices begin to consolidate before expectations get reset. I wouldn’t be surprised if we’re headed for an extended period where tech does little more than match or underperform the market as other sectors and themes get a turn in the lead.

The non-farm payroll report was a little tough to get a good read on. Under normal conditions, the small number would be cause for concern, but with two hurricanes and strikes for Boeing and port workers to consider, it’s difficult to determine what the “real” number might have been. There wasn’t really any expectation that the jobs number was going to fall off a cliff, which is why I think there wasn’t much of a market reaction. I imagine investors will wait until the November report a month from now to see how things balance now. While the labor market is slowing somewhat, there’s still enough job growth to show that it’s steady, if nothing else.

Of course, the main event this week is the presidential election on Tuesday. The markets appear to be pricing in a greater likelihood of a Trump victory, but either candidate could realistically win. It may be natural to try to pick apart the winners & losers depending upon who wins, I think it’s important to remember that regardless of the outcome, the government will continue to run enormous budget deficits and keep plenty of liquidity flowing in the system. That’ll be a good thing for risk assets, which means we could see stock and junk bond prices continue to rise heading into 2025, especially with the Fed lowering rates in the background.

Key Economic Reports This Week

The next Fed meeting this week will almost certainly result in another quarter-point cut, but the markets will be looking for clues about where rates might head from here. For several weeks now, the market has been pricing out some cuts as the economic numbers look resilient and there are no clear changes in the state of inflation or the labor market. Right now, the futures market is looking at 125 basis points of cuts by the end of 2025. The Fed recently pivoted from a focus on inflation to a focus on growth and it’ll be interesting to hear if Powell and company still see some of those growth risks today.

We’ll also get rate decisions from central banks in Australia, England and Brazil. The BoE is expected to cut by another quarter-point as well. With inflation back below 2%, there’s some flexibility in how quickly it may be able to move. Brazil, however, is back to hiking rates and it’s expected to lift by another 50 basis points this week. Inflation there is sticky and trending in the wrong direction, something which we may begin seeing in other markets in the near future.

Dividend Landscape

Dividend stocks beat the S&P 500 last week, but that’s more a result of the tech sector pulling the major averages lower. If you look at the performance of the major defensive sectors, there’s no leadership to be found. Even among the cyclicals, the recent winners, including industrials and financials, have begun to turn mixed.

I think there’s some short-term potential for dividend payers to outperform. Last week’s magnificent 7 earnings yielded mixed results and that could trigger a stretch of underperformance for this sector, especially if valuations ease and the froth from the AI boom begins to calm. As mentioned earlier, I think the longer-term view is still favorable for risk assets, which may keep dividend stocks struggling to keep up.

Market Outlook

I still believe that the election results could be viewed as a “sell the news” event, but we may not know the winner until later in the week. The markets sure seemed cautious last week and investors may not want to do any major buying or selling until the question of “who wins” is finally answered.

The VIX has moved modestly higher, but bond market volatility has really picked up. I’m think that the spike in long-term Treasury yields is due to inflation worries, but there’s some evidence that the mountain of new Treasury supply being issued isn’t being met with the commensurate demand and that’s driving yields higher as well. Either way, Treasuries don’t look particularly healthy at the moment and that is concerning.

Looking better for: mega-caps, low volatility, junk bonds, quality

Looking worse for: long-term Treasuries, Brazil, high beta