Weekly Recap:
Benign macro data, low rate volatility, a solid outlook from Taiwan Semiconductor (TSM), and some commodity relief in the form of falling oil prices combined to create a constructive backdrop for US equities. The S&P 500 and the Dow both finished the week at fresh all time highs, while the Nasdaq Composite remains just a hair below the record high set on July 16th. TSM rose 9.8% on Thursday after bolstering revenue guidance, reinforcing the upward trend in A/I theme stocks.
International equities were weaker, due in part to a second straight week of declines in China after disappointing comments from President Xi Jinping regarding the scope and magnitude of Beijing’s monetary and fiscal stimulus measures.
Rates barely budged last week and remain 40-50 basis point higher across most of the curve relative to levels immediately prior to the Fed’s 50bp rate cut in mid-September.
Oil prices dropped by more than $6 per barrel over the course of the week after Israel elected not to target Iran’s nuclear and oil production capabilities as part of its retaliatory response to the recent missile attack.
Macro data released last week was mostly constructive outside of housing:
* Import (-0.3% m/m) and export (-0.7%) prices fell sequentially and are down y/y
* Retail sales (+0.4% m/m; +0.5% ex-autos) surprised to the upside in September
* Initial jobless claims (+241k) pulled back from recent storm driven highs
* Housing starts (-0.5% m/m) and building permits (-2.9%) remain subdued
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. S&P 500 earnings are on track for high single-digit or low double-digit y/y growth in 2024, provided that the economy continues to expand.
Valuation
The S&P 500’s forward P/E of 22x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the low-to-mid single digits.
Interest Rates
Futures markets imply that the Fed will deliver 25 bp interest rate cuts in each of the last two FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After becoming sticky in the 3-4% range in the first half of 2024, more recent data has reinforced the disinflationary trend, and the Fed has expressed confidence in the path to its 2% target. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.
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