Weekly Market Prep - 4/1/2024

The cyclical rally continues, but Friday's jobs report is a wild card.

Welcome back to ETF Focus!

It’s Sunday! That means it’s time to get prepped and ready for the week ahead!

What We’re Talking About This Week!

   + Weekly Market Reset

   + Key Economic Reports This Week

   + Dividend Landscape

   + Market Outlook

Weekly Market Reset

It was a quiet holiday-shortened week for the markets, which helped the major averages establish new highs again, but the composition of the rally continues to be the big story. While AI remains a popular trade, “magnificent 7” leadership has been fading for a while and tech has become an underperforming sector. Investors whose core portfolio positions were in the S&P 500 undoubtedly enjoyed the 10% gain in the 1st quarter, but those who diversified away from tech as the quarter wore on and tested out cyclicals and small-caps did even better.

The overall market theme, in my opinion, is still the Fed. Powell’s indication this month that the Fed’s forecast of three rate cuts in 2024 was still on effectively confirmed that the reflation trade will likely be a winner for the time being. The central bank is unlikely to do anything to derail this economic growth cycle and will probably allow inflation to remain above its 2% target as long as it doesn’t spiral out of control again. That would be a positive for cyclicals and small-caps, but would probably keep more expensive stocks, such as tech, from keeping up.

The problem with that narrative is what we’re seeing from utilities and gold. Both have been strengthening over the past few weeks and that’s usually a sign that investors are taking risk off the table, not adding to it. There’s certainly some impact from global central bank plans to cut interest rates here, but I think the fact that all of these traditionally defensive asset classes are performing so well at the same time suggests there’s some genuine risk-off positioning taking place.

The Bank of Japan seems to be a clear disruptive catalyst here. Just a few weeks ago, the markets were expecting a hawkish policy pivot. Now, the Japanese government looks like it needs to step in to backstop a falling yen. Clearly, this adds an unexpected source of uncertainty to the markets and could threaten any short-term risk asset rally. There’s a strong bullish undercurrent here and I think that can’t be ignored, but it would be unwise to dismiss the yen risk altogether.

Key Economic Reports This Week

The main event will be Friday’s non-farm payroll report, which should deliver another robust jobs added number. The unemployment rate has risen from a cycle low of 3.4% to its current 3.9% level. That 0.5% increase has historically acted as a warning sign for the markets that a larger weakening in the labor market may be starting. With the jobless rate still sitting south of 4%, I don’t think we’re at imminent risk of seeing the labor market cracking, but I think the overall trend is worth watching closely. If the unemployment rate ticks up to 4% and the jobs added figure comes in below expectations, we could get a potentially strong reaction from the markets.

This week’s manufacturing and services PMI reports should confirm what we know - the manufacturing space is starting to show a modest uptick, while the services sector remains a little more mixed. Some of the most recent data suggests we may be seeing a bit of a turnaround in China and Sunday night’s PMI report could help confirm that.

Dividend Landscape

Dividend stocks are beginning to finally experience a bit of a renaissance here. They’ve beaten the S&P 500 by more than 1% over the past month and the rallies in both cyclicals and utilities have been the sweet spot for dividend payers. As long as the cyclical rally continues, dividend stocks should have a tailwind behind them to keep performing well. High yield strategies are outperforming more defensive dividend growth strategies, which shouldn’t be surprising, but quality-focused ETFs are still a popular choice among investors.

Market Outlook

The extreme bullish sentiment we’ve seen in recent weeks should have few roadblocks up until Friday’s jobs report. The cyclical rally seems firmly in place and the relative value that still exists in this group should allow them to move higher again. There’s likely going to be further pressure on yields to move lower, but, again, Friday’s jobs report could be the wild card that moves bonds in either direction.

Until investors are willing to price risk a little more normally, I think the short-term rally in stocks could continue with non-tech sectors probably seeing the biggest benefit. On the flip side, when sentiment finally turns, I think it could be sharp and decisive. It’s just unlikely to happen this week.

Looking good for: cyclicals, quality, the dollar, Treasuries

Looking worse for: Japan, large-caps, dividend growth