The Schwab US Dividend Equity ETF (SCHD), the Vanguard High Yield Dividend Yield Index Fund (VYM), and the iShares Core Dividend Growth ETF (DGRO) have pulled back in the past few weeks as US bond yields continued rising.
The SCHD ETF has dropped by 7.3% from its highest level in 2024. Similarly, the DGRO and VYM ETFs have fallen by 5.85% and 5.15% from the same period. These ETFs, together with others that track American equities are bracing for key events that will affect their trajectories this year.
US inflation data ahead
The most important event that will impact key indices like the SCHD, VYM, and DGRO ETFs will be the upcoming US consumer price index (CPI) data.
Economists polled by Reuters expect the data to show that the headline CPI rose from 2.7% in November to 2.9% in December. Core inflation, which excludes the volatile food and energy prices, is expected to remain at 3.3%.
These will be important numbers to watch because of their impact on the Federal Reserve, which has hinted that it will maintain a hawkish tone this year.
The Federal Reserve’s key concern is inflation, which could tick up this year. First, the ongoing wildfires in California will have an immediate impact as prices of key goods and services rise. There are reports that rents have started rising because of the ongoing demand and supply dynamics.
Second, Donald Trump’s policies, if implemented, will be highly inflationary. He has pledged to deport illegal immigrants, raise tariffs, and implement substantial tax cuts. Additionally, he has talked about taking the Panama Canal, a key shipping artery that is used by thousands of ships each month.
Wednesday’s inflation report will have an impact on US government bonds, whose yields have been in a strong uptrend. The 30-year yield is hovering near 5%, while the 10-year has moved to 4.80%.
Higher inflation figures than expected means that the Fed will maintain a more hawkish tone this year. The Fed has hinted that it will deliver two rate cuts this year, while some analysts anticipate that it will not cut after all.
Dividend ETFs like SCHD, VYM, and DGRO often underperform the market when the Fed turns hawkish.
Corporate earnings season
The other important event that will affect these ETFs are the upcoming earnings season, which starts on Wednesday. Some of the top companies that will release these results are firms like Goldman Sachs, JPMorgan, Blackrock, and Wells Fargo.
These companies will send the tone of what to expect in the earnings season. The base case is that the fourth-quarter earnings growth stood at 11%, the highest level since 2021. Higher earnings growth will fuel these ETFs this year.
Donald Trump inauguration
Meanwhile, the SCHD, DGRO, and VYM ETFs will react to Donald Trump’s inauguration next week.
Trump’s administration will have different policies than Joe Biden’s. The most important policies that may affect stocks are tariffs, which he can implement using executive order. On the positive side, there are reports that he will implement these tariffs gradually.
The other ambitious parts of his policies will be more difficult to implement since they will need to be passed by Congress. While Republicans control the Senate and the House of Representatives, their margins are thin and passing any ambitious bills will be difficult.
Some of Trump’s policies like deportations will need billions of dollars, which will need to be passed by Congress. While most Republicans favor deportation, some are concerned about the ballooning public debt.
Still, stocks may jump as investors remember the surge that happened when he became the president in 2017.
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