US equities finished lower for a 3rd straight week as a rebound in consumer confidence and signs of renewed strength in labor markets appeared to give the Fed more latitude for aggressive tightening of monetary policy. All sectors in the S&P 500 were down, with traditional defensives (utilities, health care, and staples) posting smaller declines while cyclicals and growth stocks faced sharper selling pressure. Small caps underperformed. And finally, international benchmarks echoed
the declines in the US.
Bond prices fell as rates moved higher for most of the week, although Friday saw a partial reversal after the monthly jobs report showed a few pockets of softness. Fed fund futures had gravitated towards a 75bp September rate hike in the days following Powell’s speech, but shifted back to virtually even odds of either 75 or 50bp on Friday. Credit spreads moved wider over the course of the week as equities declined, causing corporate bonds to underperform.
It was a big week for economic news:
- US Manufacturing PMIs from ISM (52.8) and S&P (51.5) were steady
- Factory (-1.0%) and Durable Goods (-0.1%) orders shrank in July
- Consumer Confidence (Conf. Board) rebounded to a 3-month high of 103.2
- Heavily lagged home price data showed sharp deceleration in June
- US job openings (11.2mn) rebounded while initial jobless claims (232k) fell
- Nonfarm payroll growth of +315k exceeded consensus estimates of +298k
- Average weekly hours worked fell slightly to 34.5 hrs
- Unemployment (3.7%) rose on a +30bp labor force participation rate (62.4%)
Albion’s “Four Pillars”
Economy & Earnings
US GDP growth fell in Q1 (-1.6%) and in Q2 (-0.6%), but job creation remained strong in 1H22 with 2.75mn NFP added. Consensus calls for slow growth in 2H22 despite weak consumer confidence and softer housing and labor markets. Corporate operating margins remained robust in 1H22, but many companies have warned that inflation could pressure margins going forward.
The S&P 500’s forward P/E of 16x is slightly above the long run average, and more predictive valuation metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits.
Rates have risen across the curve in 2022 in response to a shift in monetary policy. Fed Fund Futures markets are pricing in a total of 14 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.50% by year end.
Inflation is at 40yr highs as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. That said, core inflation has been trending lower for several months now, and headline inflation also eased lower in July data thanks to falling energy prices.