What We're Talking About This Week!

• Weekly Market Reset

• Key Economic Reports This Week

• Dividend Landscape

• Market Outlook

Weekly Market Reset

Last week proved disappointing for the risk asset markets as interest rates continue to move higher and the markets moderate their expectations for what the Fed will do in the coming year. The Fed is still forecasting several quarter-point cuts over the next 12 months and beyond, but inflation remains sticky, corporate earnings have been mostly solid, GDP growth is expected to come in at around 3% in Q3 and the labor market has proven resilient over the past couple months. All of those factors suggest that the Fed will be unable to enact any type of aggressive rate cutting cycle with these factors supporting ongoing inflationary pressures.

The biggest wild card will be next week’s presidential election. Regardless of who wins, it won’t change the expectation that the government will keep running trillion dollar deficits for the foreseeable future. That, in isolation, is supportive of risk asset prices, but the threat of major Trump tariffs could upend that. Any kind of significant tariff implementation against China and/or Europe will likely ignite a trade war that simply raises the prices of goods for consumers. If we get a second Trump presidency, there’s a chance that equities eventually react negatively to this outcome as it would almost certainly derail a long-term economic recovery. In the short-term, I see stock prices continue to move higher, but the outlook changes once we get more clarity on long-term plans.

Even though Treasuries aren’t participating, I’m wondering if we’re seeing the dollar and gold acting as something of a safety valve for traders right now. I’ve noted recently that I think investors may be waiting on the sidelines for the results of the election before proceeding with portfolio re-positioning. The expectation for October volatility hasn’t really played out, but investors may be thinking that November is the real possibility for volatility. At a minimum, I think the rally in gold is a result of investors’ concern about inflationary pressures, which has been getting confirmed by the behavior of TIPS. The rally in the dollar has benefited from positive interest rate differentials and, based on the direction of the data, seems likely to continue heading into the end of the year.

Small-caps would be indicating a cautious tone as well. They should, in theory, be benefiting from cyclical outperformance, but they haven’t been. They should be benefiting from a more favorable environment for value stocks, but they haven’t been. Small-cap outperformance is generally indicative of conviction in the direction of the economy and risk asset sentiment. The fact that they’ve only been matching the S&P 500 instead of outperforming it has been curious.

Key Economic Reports This Week

It’s going to be a big week with a lot of data for the markets to consider (and that’s even before we consider the implications of the presidential election next week). Tuesday’s JOLTs report in the U.S. will be a preview of the all-important non-farm payroll report on Friday. Expectations are a little more modest this time around following last month’s well-above-forecast reading, but the report is likely to show that jobs are still be added at a healthy pace and there’s no indisputable evidence that the labor market is beginning to crack. The fact that the unemployment rate has risen from its low of 3.4% in early 2023 to as high as 4.3% earlier this year looked like it was indicating that labor market conditions were turning. Since then, it’s ticked lower in each of the past two months. Perhaps this isn’t the jobs market weakening as much as it’s the jobs market normalizing.

Elsewhere in the United States, we’ll get the first reading on Q3 GDP on Wednesday, personal income/spending and the September PCE inflation numbers on Thursday and finally the latest manufacturing PMI report on Friday next to the employment numbers. All of these numbers are likely to confirm the resilient economy narrative at play right now. Growth still looks healthy and consumer spending, despite ongoing concerns related to inflation and credit levels, is still hanging tough. These numbers are worth watching, but they won’t be as important as the jobs data this week.

Outside of that, the biggest data releases will come from Europe where we’ll get a slew of first time Q3 GDP growth readings. Eurozone growth has been positive yet slow and these numbers are likely to demonstrate that the region’s recovery is in a perilous spot. In particularly, Germany is expected to report negative growth again, which would be the 5th negative quarter in the past eight. As the largest economy in the region, German weakness will prevent any type of broader recovery from taking place and I don’t suspect we will hear much that improves optimism.

The other “main event” is the interest rate decision from the Bank of Japan. It had been looking likely that the central bank would raise rates again before the end of 2024, but they’ve been moderating their stance in recent weeks. Governor Ueda just this past week urged patience and suggested that he wanted to see more data before progressing with another policy tightening. Japanese bonds and the yen have been reacting to tighter conditions for a while and are now being forced to reverse course with the BoJ slowly shifting towards a more neutral stance.

Dividend Landscape

Even though dividend stocks have been holding up relative to the S&P 500, there hasn’t been any consistent momentum that would make them leaders. That’s not surprising given the backdrop of healthy growth, low unemployment and favorable corporate earnings. High yielders have seen some benefit compared to the more traditionally defensive dividend stocks, but there hasn’t been enough of a disparity to really make a difference.

With stocks likely rallying, in my opinion, through the initial outcome of the presidential election, there isn’t a strong case for positioning in dividend payers over growth, tech or even the S&P 500 in general. The fact that dividend stocks broadly have only trailed the S&P 500 by 2.5% this year with the macro backdrop that we currently have is actually fairly impressive. I still believe that there’s a longer-term case for dividend payers if some of the growth or employment numbers ever begin relenting. I just don’t see that in the short-term, however, which means it may still be a while before this group gets an extended run of momentum.

Market Outlook

There’s a lot of data that the markets will have to digest this week. That could potentially lift volatility somewhat, but I don’t really see it derailing the markets more broadly. A big miss on the jobs market might be the most impactful in terms of market gains for the week, but the resilience of the non-farm payroll numbers suggest it’s more likely to keep the status quo than anything.

Corporate earnings have been good. The initial read on Q3 GDP will likely only confirm that the soft landing narrative is still intact. Non-farm payrolls are unlikely to show any sudden. The magnificent 7 companies reporting earnings this week will probably demonstrate solid growth on the earnings and revenue fronts (and will probably talk up their AI developments as well).

There may be a tone of caution heading into next week’s election, but I think it’s more likely than not that stocks will be able to maintain if not push higher again.

Looking better for: growth, junk bonds, magnificent 7, senior loans

Looking worse for: long-term Treasuries, consumer discretionary, Japan