Author: Albion Financial

Weekly Recap:

The Fed was once again in focus last week, and financial markets were not disappointed. First came the minutes from the July FOMC meeting, which included the following summation of the committee’s current outlook:

“The vast majority of participants observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”

Next up was Jerome Powell’s speech at the Jackson Hole Economic Symposium on Friday, where the Fed Chair essentially declared victory in the fight against inflation, noting:

“Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic.”

Bond prices rose as rates moved lower across the curve in response to these statements, while futures markets continue to debate whether the September rate cut will be just 25 basis points (~70% implied probability) or a full 50 basis points (~30% chance).

Equities of all stripes were higher as well, with notable strength in small caps and cyclicals (ex energy) as the rally in stocks once again showed signs of broadening out beyond its mega cap tech base.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x 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 single digits.

Interest Rates

Futures markets imply that the Fed will enact multiple interest rate cuts across the last three FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

Macro data released last week, while somewhat mixed, was generally supportive of the soft landing narrative.

Inflation data came in below expectations, bolstering rate cut confidence:

* PPI dropped to +2.2% y/y (consensus = +2.3%; prior month = +2.7%)

* CPI dropped to +2.9% y/y (consensus = +3.0%; prior month = +2.9%)

Labor market and consumer-related data remained solid:

* Initial jobless claims eased lower for a 2nd straight week, to 227k

* Retail sales rose +1.0% m/m in July (consensus = +0.4%)

* U of Michigan consumer sentiment rose slightly to 67.8 in prelim August data

Manufacturing and housing remain challenged, but so far that has not tipped the broader economy into recession and may not derail the soft landing outcome:

* Empire manufacturing remained in contraction territory at -4.7 for August

* Industrial production fell 0.6% m/m and capacity utilization fell to 77.8% in July

* Housing starts fell 6.8% sequentially in July to a SAAR of 1,353k

* Residential building permits fell 4.0% sequentially in July to a SAAR of 1,396k

Amidst this slew of macro data, the S&P 500 registered gains each day last week, with all sectors finishing the week in positive territory. The Nasdaq outperformed on renewed strength in mega cap tech stocks. In fixed income, rates fell modestly in the belly and long end of the curve as the market finds a new equilibrium after the flight-to-safety trade in early August. Credit spreads tightened during the week on renewed risk appetite, pushing corporate bond prices higher.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x 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 single digits.

Interest Rates

Futures markets imply that the Fed will enact multiple interest rate cuts across the last three FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

Following a tense weekend where renewed concerns about the US economy collided with technicals associated with an unwind of the Japan carry trade, US stocks started out in freefall on Monday the 5th, extending a decline that had begun during the latter portion of the previous week. The S&P 500 opened more than 4% lower and the Nasdaq was down more than 5% to start the session. Most notably, the VIX (the Chicago Board Options Exchange Volatility Index) briefly spiked to more than 65, a level only reached previously during the severe market shocks associated with the pandemic in March of 2020 and the financial crisis in Q4 of 2008. See the Chart of the Day for a time series of the intraday highs on the VIX.

Thankfully, stocks stabilized during the course of Monday’s session, aided in part by the 10:00 am release of the ISM Services Index (51.4) for July, which came in better than expected across the board. The rest of the week was a gradual recovery as the panic subsided, with stocks finishing only modestly lower by Friday’s close.

Fixed income also experienced some normalization over the course of the week.  Rates moved higher across the curve as the flight-to-safety trade waned, and credit spreads inched tighter day by day, in sync with the gradual recovery in equities. Mortgage rates appear to be a beneficiary of the recent fall in rates, with the national average 30-year fixed rate mortgage falling roughly 1/4 percent week over week in the most recent market survey.

Besides the ISM Services print, macro news was sparse last week. Initial jobless claims (233k) pulled back slightly, and total consumer credit outstanding grew by $8.9 billion in June, slightly lower than consensus estimates.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20.2x 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 single digits.

Interest Rates

Futures markets imply that the Fed will enact multiple interest rate cuts across the last three FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

The sector rotation trade gained momentum last week, as large cap tech significantly underperformed while most other parts of the US equity market rallied. Cyclicals and defensives were almost universally higher, with energy stocks the lone exception thanks to sagging oil prices driven by soft demand from China. Small caps massively outperformed once again, with the Russell 2000 climbing 3.5% on the week to reach 10+% so far in July. International markets finished lower, particularly E/M thanks to weakness in Chinese stocks.

In fixed income, rates moved lower across most of the curve, particularly in the front end as monthly PCE data reinforced the disinflation narrative. Dovish comments from former FOMC member Bill Dudley, who surprisingly called for a July rate cut to stave off a possible recession, also helped push short rates lower. While futures markets continue to price almost no chance of a cut from the FOMC at the end of July, the implied odds of a September cut are now virtually 100%.

Macro data released last week was consistent with recent trends. The first estimate of Q2 US GDP growth came in at +2.8% (q/q annualized), with better-than-expected personal consumption (along with some inventory build) as strong income growth continues to support consumer spending. Home sales (new & existing) remain weak due to persistently high mortgage rates. The preliminary reading of S&P’s PMIs for July saw manufacturing (49.5) slip back into contraction, while services (56.0) exceeded consensus and kept the composite (55.0) in expansion territory. And finally, Core PCE (the Fed’s preferred inflation gauge) was +0.2% m/m in June and +2.6% y/y, a relief to market participants who are wary of any reacceleration in inflation ahead of the September FOMC meeting.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x 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 single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or twice in the 2nd half of 2024, with additional cuts in 2025. Belly and long end rates have already priced in a rate cutting cycle and are likely near their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the ~3% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

A sharp sector rotation trade played out across US equity markets for a second consecutive week, with high flying tech stocks coming under selling pressure while previously unloved areas of the market found a bid. Cyclicals, real estate, and small caps were areas of relative strength. The Dow was the winner among US large cap benchmarks, while the Nasdaq was down more than 3% and is now slightly in the red for the month of July. Meanwhile, international equity markets had a challenging week, and remain well behind the US on a YTD basis.

Bond yields moved higher by 5-6 basis points across most of the Treasury curve, pivoting midweek after a fairly strong bond rally that had seen yields fall by ~25 basis points over the previous 2+ weeks.

Macro was a mixed bag last week. Import/export prices continue to suggest that international trade is not a significant source of inflation at this point. On the positive side, retail sales in June were better than expected, and housing activity rebounded slightly, with permits and starts both up 3+% sequentially. On a more challenging note, jobless claims ticked higher once again as the labor market continues to normalize, and the Conference Board’s Leading Economic Index (LEI) fell another 0.2% m/m. The LEI is now 14.8% off of its peak from the end of 2021, and in the past, declines of this magnitude have always been followed by a US recession. See the Chart of the Week for a time series.

Lastly, despite causing significant disruption in many industries, it does not appear that Friday’s global Crowdstrike outage had any meaningful effect on most financial asset prices (CRWD is a notable exception, of course).

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x 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 single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or twice in the 2nd half of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the ~3% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

Unlike the first week of July, which was largely a continuation of the tech-dominated rally of the past ~18 months, last week saw a broadening of the rally to include previously unloved sectors like cyclicals, real estate, and small caps. Among large cap benchmarks the Dow was the best performer, but the real star was the Russell 2000 (small cap benchmark) which surged 6% on the week. That said, the Dow and the Russell both remain far behind the more tech-heavy S&P 500 and especially the Nasdaq on a YTD basis.

The primary catalyst was Thursday’s lower-than-expected CPI print, which saw headline inflation drop 30 basis points sequentially to 3.0% y/y, while core inflation fell 10 basis points to 3.3%. The decline in Core CPI was largely driven by declining services inflation, rather than core goods which has already been in deflation for some time. Core services is the primary driver of inflation in the economy at this point, so seeing the moderating trend there is encouraging.

Earlier in the week, during his semi-annual 2-day testimony before Congress, Fed Chair Jerome Powell highlighted the fact that inflation is no longer the only risk on the committee’s mind, as the gradual normalization of the labor market has led to three consecutive sequential increases in U-3 unemployment, to 4.1% as of the most recent print. Financial markets interpreted Powell’s comments to mean that a September rate cut is in play, and the subsequent CPI print sent the implied odds of a September cut to nearly 100%. Rates fell across the curve as well, driving solid gains for fixed income investors on the week.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x 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 single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or twice in the 2nd half of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

The first week of the second half of 2024 was largely a continuation of what has been the dominant trend of the past 18 months, with technology stocks pulling large cap benchmarks higher while other parts of the market were mixed. The S&P 500 gained 2% on the week, despite the fact that 56% of the index constituents (281 out of 503 stocks) finished lower. Meanwhile, the tech-dominated Nasdaq (+3.5% on the week) continued to pull ahead in the 2024 performance race, while the more cyclical Dow (+0.7% on the week and just +5.5% YTD including dividends) lags far behind. Similarly, US small and midcap benchmarks (which are not nearly as tech-heavy as large caps) finished lower on the week, and have also meaningfully underperformed on a YTD basis.

Rates finished lower across the curve last week thanks to so softer-than-expected macro data, allowing bond prices to rise. Despite the holiday it was a busy week for macro, including below-consensus prints for both manufacturing and services activity in the month of June:

* ISM’s Manufacturing PMI slid deeper into contraction territory at 48.5

* ISM’s Services PMI fell into contraction at 48.8 (lowest print since May of 2020)

The week concluded with the monthly jobs report from the BLS, which showed steady growth in both jobs (+206k NFP) and hourly earnings (+3.9% y/y). Labor force participation ticked higher to 62.6%. Perhaps most importantly, the closely-watched U-3 unemployment rate rose 10bp sequentially to 4.1%. Despite rising sequentially for the 3rd straight month, U-3 remains slightly below the level that would trigger the Sahm Rule and potentially indicate the start of a US recession.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x 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 single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or twice in 2024, most likely at some point in the 2nd half of the year. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.