2024 Recap:

Economy:

Even as growth slowed in Europe and China, the US economy remained strong in 2024. Unemployment is low and wage gains are solid, supporting continued growth in consumer spending. Regional Fed surveys suggest that domestic manufacturing is still in a slump, but services PMIs (representing the bulk of the US economy) are solidly in expansion territory. Fiscal policy continues to be an economic tailwind thanks to a 2024 federal budget deficit equal to nearly 7% of GDP according to CBO projections.

Inflation:

The disinflation trend continued in 2024, albeit at a slower pace than in 2023 when inflation fell rapidly from its mid-2022 peak. With one month of data (December) still to come, CPI inflation had fallen 60-70 basis points in 2024 to +2.7% (y/y) headline and +3.3% core, while PCE inflation was down a more modest 20-30 basis points to +2.4% (y/y) headline and +2.8% core. Progress on inflation appeared to stall in late 2024 as shelter costs showed early signs of reacceleration.

Monetary Policy:

The FOMC cut overnight interest rates at each of the last three meetings in 2024, by a total of 100 basis points (1%). Futures markets imply that one or two 25bp more cuts are likely to occur sometime in 2025, after a near term pause. The Fed’s updated Summary of Economic Projections (SEP) released at the December meeting also suggest a slower pace of rate cuts (2 instead of 4) in 2025 and a higher terminal rate (~3%) than was previously forecast by committee members.

Election:

After Donald Trump earned a second term as US president and the GOP took control of both houses of Congress, US stocks rallied on the prospect of lower corporate taxes and less regulation. Meanwhile, rates moved higher on the potential inflationary impact of tariffs and tight border controls, as well as concerns regarding future US federal budget deficits.

Bond Market:

Treasury yields moved higher for a 4th consecutive year, and the yield curve mostly reestablished an upward slope after a 2+ year period of inversion. Credit spreads gradually got tighter, reaching an all time tight of 74 basis points on the Bloomberg US Corporate Agg index shortly after the election. Mortgage rates for 30-year fixed were in the 6% to 7+% range all year, constraining transaction activity in the housing market.

Stock Market:

US stocks soared for a 2nd straight year, led once again by large cap technology companies. Financials also delivered strong returns, thanks in part to a steepening yield curve. Most other parts of the equity market posted smaller but still positive total returns, including cyclicals, defensives, small caps, and internationals.

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 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 mid single digits.

Interest Rates

After the “hawkish cut” at the December 2024 FOMC meeting, a near term pause on further rate cuts is likely, and the curve has mostly resumed its normal upward slope. Belly and long end rates in the 4% to 5% range may represent the “new normal” given solid economic growth, lingering inflation pressures, and large US fiscal deficits.

Inflation

After the disinflationary trend resumed in the summer of 2024, more recent inflation data has shown some renewed signs of stickiness. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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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 “Santa Rally” period (typically defined as the last five trading days of the year plus the first two of the new year) got off to a solid start last week, but then stalled on Thursday and Friday as rising rates in the belly and long end proved to be a headwind for US equities. Nevertheless, gains from Monday/Tuesday allowed most US and international equity benchmarks to finish in positive territory for the week.

As many have predicted, the Treasury yield curve has steepened of late, driven by a combination of solid economic growth, lingering inflation pressures, and concerns regarding the trajectory of US budget deficits. The 2s10s curve finished at +29 basis points, the highest level in nearly 3 years. See the Chart of the Week for a 2s10s time series.

Macro news was limited last week due to the holiday. Durable goods orders were down -1.1% in preliminary November data (-0.1% ex transports), while new home sales rose +5.9% on a seasonally adjusted basis in November after being down sharply in October. Initial (219k) and continuing (1.9mn) jobless claims were in line with recent trends.

Perhaps the most notable macro update was an 8-point sequential decline in the Conference Board’s Consumer Confidence Index, from an upwardly revised 112.8 in November to 104.7 in December. Most measures of consumer confidence showed a significant post-election bump higher, but this update from the Conference Board suggests that the boost in sentiment may have been short-lived as Americans continue to grapple with inflation and other concerns.

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 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 mid single digits.

Interest Rates

After the “hawkish cut” at the December 2024 FOMC meeting, a near term pause on further rate cuts is likely, and the curve has mostly resumed its normal upward slope. Belly and long end rates in the 4% to 5% range may represent the “new normal” given solid economic growth, lingering inflation pressures, and large US fiscal deficits.

Inflation

After the disinflationary trend resumed in the summer of 2024, more recent inflation data has shown some renewed signs of stickiness. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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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.

Domestic equity and fixed income markets reacted negatively to Fed Day Jerome Powell and the FOMC delivered what was widely interpreted as a “rate cut.” Despite lowering overnight interest rates by 25 basis points, to a range of 4.25% to 4.5%, Powell made it clear that the FOMC’s attention has shifted from the balance of risks posture of recent meetings to a clearer focus on sticky inflation. The updated Summary of Economic Projections (SEP) show just two 25bp rate cuts in 2025, down from four that were projected in September, and Powell’s press conference comments suggest that a near term pause is likely.

Financial markets responded immediately, with rates moving 5-10bp higher across the curve within minutes of the press release, and equities falling. Fed Funds Futures markets are now pricing one or possibly two 25bp cuts next year, roughly consistent with the FOMC’s own projections, but markets are sharply divided as to whether further cuts in 2026 will occur. The glide path to a terminal rate in the neighborhood of 3% is likely to be long and bumpy, with rate hikes a possibility at some point along the way.

Markets got a bit of a reprieve on Friday though, thanks to PCE data for November that came in roughly 10 basis points below consensus across the board. Tech stocks had a strong session on Friday after the PCE print, mitigating a portion of the week’s decline in large cap benchmarks. Despite being slightly better than consensus, however, both core and headline PCE have trended higher on a y/y basis in recent months, which is a source of concern for investors and the Fed. See the Chart of the Week for a PCE time series.

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 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 mid single digits.

Interest Rates

After the “hawkish cut” at the December 2024 FOMC meeting, a near term pause on further rate cuts is likely, and the curve has mostly resumed its normal upward slope. Belly and long end rates in the 4% to 5% range may represent the “new normal” given solid economic growth, lingering inflation pressures, and large US fiscal deficits.

Inflation

After the disinflationary trend resumed in the summer of 2024, more recent inflation data has shown some renewed signs of stickiness. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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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:

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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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.

November 2024 Recap:

Election:

Domestic financial markets reacted positively to the US election outcome, which saw Donald Trump earn a second term as US president while the GOP took control of both houses of Congress. US stocks rallied on the prospect of lower corporate taxes and less regulation. Rates initially moved higher on the potential inflationary impact of tariffs and tighter border controls, as well as the potential fiscal impact of unfunded tax cuts. The selection of Scott Bessent as nominee for US Treasury Secretary seemed to calm rates markets toward the end of the month.

Inflation:

Data released in November appeared to bring a measure of relief to investors amidst concerns that inflation might be ticking up again in real time. The most recent monthly prints for CPI (+2.6% y/y headline; +3.3% y/y core) and PCE (+2.3% y/y headline; +2.8% core) were right in line with consensus estimates. Meanwhile, Q3 Core PCE was revised lower by 10 basis points to +2.1% q/q annualized.

Economy:

Incoming data continues to depict a strong US economy. Jobless claims fell in November as the impact of October storms and the Boeing strike faded. Unemployment remains low, and wage gains are strong. Regional Fed surveys suggest that domestic manufacturing is still mired in a slump, but services PMIs (representing the bulk of the US economy) are solidly in expansion territory. As Q3 earnings season winds down, US corporates appear on track for high single digit y/y EPS growth in 2024.

Monetary Policy:

As expected, the FOMC cut overnight interest rates by 25 basis points at the November meeting. Futures markets imply that one more 25bp cut is probable (but by no means assured) at the December meeting, after which a pause is likely. At this point only two additional cuts (50bp total) are priced into the forward curve in 2025, a sharp deceleration in the pace of rate cuts relative to expectations from just a few months ago.

Bond Market:

Treasury yields did a round trip in November, moving higher in the immediate aftermath of the election and then falling in the last week of the month on in-line inflation data and the nomination of Scott Bessent as US Treasury Secretary. Credit spreads rallied along with equities post-election and are near all time tights. Mortgage rates remain elevated but are likely to track lower in the coming weeks, following the path of Treasuries.

Stock Market:

The impact of the election outcome and Trump’s “America First” policy agenda is readily apparent in stock prices. Domestic stocks soared, led by small caps (+11%) which tend to be more US-focused businesses. Conversely, international stocks finished lower in the aggregate, with trade-dependent emerging markets among the hardest hit.

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 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 mid single digits.

Interest Rates

Futures markets imply that the Fed may 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 near what are likely to be their post-pandemic equilibrium levels, 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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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:

US stocks finished mostly higher in a fairly quiet week for macro news. The post-election broadening of the US equity market rally (a trend that really began back in July) continued apace, with cyclicals and small caps outperforming.

International benchmarks posted only modest gains and continue to lag far behind the US in 2024. The prospect of higher tariffs and stricter border controls under a second Trump administration has weighed on sentiment around global trade, with the effects expected to disproportionately impact the more export-oriented economies of Europe and Asia. See the Chart of the Week for a comparison of US and international equity performance since the US election on November 5th.

Tech bellwether Nvidia saw some profit-taking on Friday but finished essentially flat on the week after posting blowout Q3 earnings, including yet another quarter of triple-digit y/y EPS growth. CEO Jensen Huang noted that production of the company’s new Blackwell chips has begun ramping up, but relentless demand from data centers will still exceed available supply for the next several quarters.

On the macro front, homebuilder sentiment improved on the prospect of fewer regulatory hurdles in the future, although that optimism has yet to flow through to increased construction activity as persistently high mortgage rates continue to impact affordability and demand. Elsewhere, S&P’s US manufacturing (48.8) and services (57.0) PMIs improved sequentially in the preliminary November reading, and the US labor market remained solid with the October storms-driven uptick in jobless claims now solidly in the rearview.

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, with consensus calling for double-digit y/y growth in 2025 as well.

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 mid single digits.

Interest Rates

Futures markets imply that the Fed may 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 near what are likely to be their post-pandemic equilibrium levels, 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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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:

Bond yields rose and equity markets gave back some of their post-election gains after fresh inflation data cast additional doubts on whether the Fed would cut overnight interest rates in December.

Consumer Price Index (CPI) data for October was released on Wednesday and showed little change sequentially, with core (ex food & energy) inflation still well above the Fed’s target at +3.3% y/y. See the Chart of the Week for a breakdown of CPI.

Later in the week, Producer Price Index (PPI) data showed a sequential increase in upstream inflation pressures, with core PPI inflation rising 30 basis points sequentially to +3.1% y/y. Import/export prices also rose sequentially, although trade is not currently a significant driver of inflation in the US.

By Friday’s close, futures markets were pricing in only slightly better than 50/50 odds of a rate cut in December. Meanwhile, rates moved higher across the curve last week, with 10y Treasury yields briefly touching 4.5% for the first time in five months.

Against this backdrop of sticky inflation and rising rates, equities were unable to sustain their post-election gains. The healthcare sector was particularly hard hit after President-elect Trump nominated RFK Jr. to head up the US Department of Health and Human Services. Small caps were also weaker last week after outperforming significantly in the first few days following the election.

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, with consensus calling for double-digit y/y growth in 2025 as well.

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 mid single digits.

Interest Rates

Futures markets imply that the Fed may 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 near what are likely to be their post-pandemic equilibrium levels, 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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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:

US stocks moved sharply higher in the wake of Tuesday’s election outcome, which saw Donald Trump reclaim the White House while the Republican party achieved majorities in the House and Senate. Cyclicals and small caps were the biggest beneficiaries, as the prospect of deregulation and lower taxes gave investors greater confidence to invest in economically sensitive sectors. Meanwhile, international markets moved lower in the immediate aftermath of the US election and finished close to flat in the aggregate on the week, as Trump’s “America First” agenda and the prospect of significant tariffs weighed on foreign stocks.

Rates initially moved higher across the curve on the election result, but then drifted lower in the back half of the week. As expected, the FOMC delivered a 25 basis point rate cut on Thursday. Fed Chair Jerome Powell struck a balanced tone during the ensuing press conference, noting that the committee is attempting to find the “middle path” between moving too quickly and undoing the progress on inflation, and moving too slowly and allowing the labor market to weaken too much.

Also of note during the press conference, Powell indicated that he would serve out his full term as Fed Chair, even if asked to resign by President-elect Trump. He also noted that the committee would not speculate on the potential impact of Trump’s policy priorities (tariffs, stricter border control, deportation of undocumented immigrants, etc.) on inflation or the economy, and would not enact monetary policy changes in anticipation of any such policies. Rather, the committee will continue to assess incoming economic data in real time, and recalibrate monetary policy as needed in order to fulfill its dual mandate of price stability and full employment.

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, with consensus calling for double-digit y/y growth in 2025 as well.

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 mid single digits.

Interest Rates

Futures markets imply that the Fed will deliver another 25 bp interest rate cut at the FOMC meeting in December 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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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.