Weekly Recap:
Last week featured a continuation of recent themes regarding the US economy, including growth in services, softness in manufacturing, a strong labor market, and a resilient consumer.
Labor data was abundant and mostly positive last week, including:
* The “JOLTS Report” showed 7.74 million open jobs in the US (+372k m/m)
* ADP reported +146k net new payrolls in November
* Initial (224k) and continuing (1.87mn) jobless claims were largely unchanged
* The BLS reported +227k nonfarm payrolls, with +56k prior 2-month net revision
* Avg hourly wage growth rose 10bp sequentially to +0.4% m/m and +4.0% y/y
At the same time, however, U-3 Unemployment rose 10bp sequentially to 4.2%, while U-6 Underemployment also rose 10bp to 7.8%. The slight uptick may have partially allayed investor concerns that the labor market was becoming too strong, and as a result, the market outlook for a December rate cut changed from “probably” (roughly 2/3 implied odds coming into the week) to “almost definitely” (85% chance by week’s end). Rates fell slightly (2-5 basis points) across the curve on the increase in confidence around the near term path of Fed policy.
Equities were mixed amidst this macro backdrop. Technology stocks posted solid gains on the week, driving the Nasdaq and (to a lesser extent) the S&P 500 to fresh record highs. Other sectors were lower, including most defensives, cyclicals, and small caps. International stocks posted a solid week but remain far behind the US on a YTD basis, especially in the wake of the election result.
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 y/y growth in 2024, with consensus calling for an acceleration to double-digit y/y growth in 2025.
Valuation
The S&P 500’s forward P/E of 22.3x 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 mid single digits.
Interest Rates
Futures markets imply that the Fed is very likely to deliver another 25 bp interest rate cut at the FOMC meeting in December of 2024, with additional cuts possible in 2025. Belly and long end rates are already within what are likely to be post-pandemic equilibrium ranges, unless the US economy enters a recession.
Inflation
After the disinflationary trend resumed over the summer, more recent inflation data has shown some renewed signs of stickiness. Services inflation in particular remains somewhat elevated, in part due to heavily lagged shelter costs.
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