What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

The resilient economy narrative continues to push risk asset prices higher, including equities, junk bonds and bitcoin. As has been the case for a while, leadership generally remains with cyclical sectors, especially industrials, but there’s enough strength from utilities to cast some doubt about how investors are feeling at the moment. The deep underperformance from traditionally defensive consumer staples and healthcare strongly indicate that the bulls are in control, but the unstoppable rally in gold should probably be interpreted as either a safe haven trade or an inflation hedge. Neither is particularly good.

For now, at least, things continue to look pretty good. The next wild card, in my opinion, is the election in a couple of weeks. I think it’s safe to say that both candidates will do little to address the monstrous budget deficits or the federal debt, but the potential of introducing economically punitive tariffs present two potentially divergent paths. Trump, obviously, has been very vocal about imposing high tariffs in order to bring manufacturing and jobs onshore, but that comes with a high risk of bringing back crippling inflation.

It’s more of the same from the bond market. Short-term Treasury rates are generally trending lower, but some of that is being undone by the aforementioned resilient economy narrative. Long-term Treasury rates are drifting higher on the Fed and, in my opinion, the re-introduction of inflation risk, which is still being underpriced. Junk bonds continue outperforming as long as the underlying economic data is solid. Investment-grade corporates are still hanging tough, but yield seekers still prefer T-bills and total return seekers are finding better opportunities in junk bonds, so they’re getting a little lost in the shuffle. I don’t think there’s much momentum for a big safe haven trade, so low quality could still be the trade.

Key Economic Reports This Week

Not a whole lot on the economic calendar this week. We’ll get some new global PMI data on Thursday, but it’s likely we’ll just hear more of the same - services is strong, manufacturing is weak, but the economy as a whole is doing fine. Consumer sentiment and U.S. housing market data will likely also show a continuation of recent trends and I don’t expect either to really move the markets.

The Bank of Canada is expected to cut its interest rate by 50 basis points this week, bringing it down from 5% during the first half of the year to 3.75%. The nation’s inflation rate is down to 1.6%, which gives the central bank ample opportunity to normalize rates and keep the recent progress on the economic growth front moving forward. The BoC will have to be careful about moving too far, too fast though. Services inflation is still 4% and rent inflation is all the way up to 8%, so the battle to control prices is far from over.

Dividend Landscape

Dividend stocks are still looking pretty good here overall. The strength, however, is coming from a relatively narrow group of stocks though. Industrials have been a steady outperformer for some time now and financials have really picked up in recent weeks. Those tend to be positive for high yield strategies, but mixed for others. On the flip side, utilities have been leveling off relative to the S&P 500, while energy, consumer staples and healthcare, three sectors usually well-represented in dividend ETFs, have been lagging badly.

As long as cyclicals remain in favor here, I think high yield probably has a bit of a better outlook than dividend growth. It’s interesting to see that the WisdomTree U.S. Total Dividend ETF (DTD), which doesn’t target any particular tilt within this universe, is among the best performers on the list above over the past month. Sometimes just owning instead of targeting makes more sense!

Market Outlook

I’m admittedly a little nervous about the current rally in gold here, but I’m having trouble finding many potential momentum killers at the moment. The high level economic data still looks pretty good. Early returns on the Q3 earnings season have been positive so far. Retail sales and consumer sentiment in the U.S. are at relatively healthy levels. Of course, it could turn at any time, but the bulls sure seem to be in control here.

I’m still watching long-dated Treasury yields here. That would be a fairly clear indicator to me that inflation is becoming a growing risk and I think we’re seeing some of that getting priced in. Admittedly, I think we need to see more evidence before considering any potential portfolio shifts, but the risk is still elevated.

Looking better for: value, junk bonds, gold, equal-weight

Looking worse for: long-term Treasuries, healthcare, transports, high beta