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Weekly Market Recap

Market Recap

Stocks rebounded sharply last week after arguably becoming oversold following back to back weeks of 5+% price declines. The rally was broad-based with nearly all sectors in the S&P 500 finishing higher on the week, the lone exception being energy stocks. The best performers were a mixture of tech/growth and defensives, with cyclicals generally lagging the rally a bit. International stocks were mostly higher as well, although to a lesser degree than the US.

Bonds also rallied last week as Treasury yields fell by 10-12 bp across the curve. Investors slightly pared their expectations regarding the pace of monetary tightening, with Fed Fund Futures markets dropping one 25bp rate hike from the remaining 2022 forecast. Credits spreads moved slightly wider, resulting in somewhat muted price gains in corporates relative to underlying Treasuries.

Most commodity prices moved lower last week, a welcome development given the inflation backdrop. Oil slid by roughly $2/barrel, with knock-on effects on gasoline prices at the pump, while natural gas fell to its lowest level since early April. Many non-energy commodities have also fallen lately, including agricultural products like corn, wheat, and soy, as well as bellwether metals like aluminum and copper. See the Chart of the Week for a time series of non-energy commodity prices.

Incoming economic data continue to suggest growth is slowing. Last week saw declines in regional activity surveys from the Chicago and Kansas City Feds, a slight decline in U of M consumer sentiment relative to the preliminary June reading, an uptick in continuing jobless claims, a decline in existing home sales, and also a sequential decline in S&P Global’s US Manufacturing and Services PMIs.

Chart of the week – S&P GSCI Non-Energy Index

Albion’s “Four Pillars”

Economy & Earnings

Annualized US GDP growth fell to -1.5% in Q1 on headwinds
from trade, private investment, and government spending. Personal consumption remains strong, suggesting growth should resume for the balance of the year. Meanwhile, corporate operating margins remain robust.

Valuation

The S&P 500’s forward P/E of 16x is slightly above the long-term
historical 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. That said, many growth stock P/E’s are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above average.

Interest Rates

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 13 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.25% by year end.

Inflation

Inflation is at 40yr highs as supply chain disruptions, labor shortages, and
rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Does Fortune Favor the Brave?

‘Fortune favors the brave’. Matt Damon re-acquainted America with this phrase several months ago in an ad he narrated for a crypto website. When bitcoin and other cryptocurrencies were posting all time highs. [see video at https://youtu.be/9hBC5TVdYT8]

When the market is going up each day, it is fun to watch your accounts and see how smart you are. Your spouse might even look over your shoulder and comment in awe over how quickly your weekly balances are going up.  “Good job, honey”.

Matt got it right that fortune favors the brave. He missed the mark however on what it means to be brave. [Hint: It is NOT simply piling in along with the crowd].

The Federal Reserve met last week. They, like all of us, are concerned that inflation is too high. And getting worse. In fact, just days before their meeting, new data came out that caused them to go off script and raise rates by 75 basis points instead of 50 (100 basis points – “bips”- make up 1 percentage point).

In response, the market (S&P500) fell by 10%. In a single week. Year to date, it is down almost 25%. 

NOW is the time that fortune favors the brave.

There are three types of bravery at times like this.  

The first, and most important, is the  courage to stay the course with a well thought out long term asset allocation designed to meet your long term goals.  

If you work with a fee-only investment adviser, you and they likely came up with an investment allocation many years ago; an allocation designed to keep you on course during scary periods like these.

The second is the willingness to actually increase your asset allocation to equities even though they are already down significantly year to date. And – very possibly – will fall even further. 

Buying a small amount of equities might help you mentally weather the storm (“at least I was able to buy one of my favorite companies at a lower price”).  Maintaining your mental strength is important.

Buying more than a token amount of the stock of your favorite companies is a very different decision.  Perhaps, in the past, you have felt under-invested in your long term equity allocation.  

If so, now might not be a bad time to true it up. Certainly better than doing it eight months ago when the markets were at all time highs. If this resonates with you, talk to your fee-only investment adviser. Or Albion.  We are always accepting new clients with at least $1 million to invest and would be happy to chat with you.

The final type of bravery is the Matt Damon type of bravery. Buying speculative assets (cyber currency, tulips or going “all in” on a gambling spree to Vegas) that are down 60% or more year to date. 

Should you do this? To paraphrase Matt … 

As these mere mortals – just like you and me –  peer over the edge, they calm their minds, steel their nerves with 24 simple words that have been whispered by financial advisers since the time of the Romans … “wealth is occasionally created by brave, bold moves.  But it is best kept by patience, discretion, diversification and a well thought out financial plan”.

Albion Financial Group

Helping clients make a lifetime of great decisions for over 40 years

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Weekly Market Recap

Weekly Recap

Markets were down sharply again last week as the Fed ratcheted up its efforts to tame inflation. The FOMC started by raising overnight interest rates by 75bp, a move that had already been priced into fixed income markets following the release of higher-than-expected CPI data the week before.

But as is typically the case with Fed policy, the ensuing comments from Chairman Jerome Powell proved more consequential than the actual rate decision. In a speech that echoed ECB Chairman Mario Draghi’s famous “whatever it takes” moment from 2012 (albeit with a different policy goal in mind), Powell noted that the Fed remains “strongly committed” to bringing inflation down, and that it has “the tools we need and the resolve it will take”. Subsequently, the Fed’s annual report to Congress noted that the FOMC’s commitment to restoring price stability was “unconditional.”

Market participants interpreted these comments to mean that the Fed will continue to aggressively raise rates and will ultimately be willing to cause a recession if necessary to bring inflation under control. Stocks were sharply lower as a result, with the S&P 500 recording its second consecutive week of a greater than 5% decline.

Bond yields finished higher across the curve as investors priced in ~2 additional 25bp Fed rate hikes this year. Credit spreads widened, magnifying the price declines in municipal and corporate bonds.

Most commodity prices finished lower on the week, including oil which shed over $10 to finish under $110/barrel. Mercifully, gasoline prices finally stopped rising across most of the country, with the national average falling by 1c to $4.99/gallon.

Chart of the Week – FOMC “Dot Plot”

Economy & Earnings

Annualized US GDP growth fell to -1.5% in Q1 on headwinds
from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.6%.

Valuation

The S&P 500’s fwd P/E of 16x is above the long-term historical average,
and valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates

Rates have risen across the curve in early 2022 as the market prices
in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of fourteen 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.50% by year end.

Inflation

Inflation is currently high as supply chain disruptions, labor shortages, and
rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Weekly Market Recap

Weekly Recap

Markets fell sharply last week, particularly after consumer price inflation (CPI) data came in above consensus across the board:

  • Headline CPI was +1.0% sequentially in May (consensus was +0.6%)
  • Headline CPI reached +8.6% y/y (consensus +8.3%)
  • Core (ex food and energy) CPI was +0.6% sequentially in May (consensus +0.5%)
  • Core (ex food and energy) CPI reached +6.0% y/y (consensus +5.9%)

Stocks finished lower across the board, with technology, financials, and real estate feeling the worst of the selling pressure. Energy stocks were the most resilient once again, thanks to rising oil prices as US crude benchmark West Texas Intermediate closed above $120/barrel for the first time since early March.

The real action last week was in bond markets, particularly in the front end of the yield curve as investors significantly ratcheted up their expectations for additional rate hikes from the Fed. By Friday’s close 2y yields had risen 41bp and Fed Funds Futures markets were pricing nearly 10 additional 25bp rate hikes (13 total) by the end of 2022, implying a target rate floor of 3.25% in December.

Other economic news was not especially encouraging last week. Initial jobless claims ticked higher, mortgage applications fell, and the University of Michigan’s Consumer Sentiment gauge fell to its lowest level in history.

Finally, gasoline prices at the pump rose sharply again last week, with the US national average for unleaded gas finishing at exactly $5.00/gallon.

Chart of the Week – Headline and Core CPI (y/y change)

Albion’s “Four Pillars”:

Economy & Earnings

Annualized US GDP growth fell to -1.5% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.6%.

Valuation

The S&P 500’s fwd P/E of 17x is above the historical average, and longterm valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates

Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of thirteen 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.25% by year end.

Inflation

Inflation is currently high as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Weekly Market Recap

Market Recap

Most markets were soft last week as an uptick in inflation concerns pushed bond yields higher and equity prices lower. Rates moved higher following Tuesday’s JOLTS report that showed 11.4 million open jobs in the US. Friday’s monthly jobs report from the BLS was also a factor, showing +390k new nonfarm payrolls versus consensus expectations of +318k. See the Chart of the Week for a time series.

By Friday’s close, rates had moved higher across the curve, with 2y yields rising 17bp, 10y up 19bp, and 30y finishing +13bp. Meanwhile, credit spreads tightened despite the move lower in equities, cushioning the price declines in corporate bonds.

Equity markets finished lower, but in a somewhat unusual way relative to much of the year. Defensive sectors underperformed, while tech and most cyclicals (ex financials) outperformed the broader market. The energy sector was once again the outlier, finishing higher on the back of rising oil prices.

Regarding oil, OPEC+ agreed to increase production by 648k barrels per day for July and August, but the market judged this measure to be insufficient to fully bridge the growing global supply deficit, sending prices higher. Gasoline prices at the pump also rose to a fresh all-time high in the US at $4.82/gallon.

In other economic news, home price appreciation remained very strong in March according to the FHFA and Case-Shiller indices, while the Conference Board’s Consumer Confidence Index declined slightly to a still-healthy print of 106.4, exceeding the consensus estimate of 103.6.

Chart of the Week – Monthly Change in Nonfarm Payrolls

Albion’s “Four Pillars”

Economy & Earnings

Annualized US GDP growth fell to -1.5% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.6%.

Valuation

The S&P 500’s fwd P/E of 17.5x is above the historical average, and longterm valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates

Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of eleven 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 2.75% by year end.

Inflation

Inflation is currently high as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Weekly Market Recap

Weekly Recap

Last week featured a very strong rebound in US equities, particularly after the release of the May FOMC meeting minutes on Wednesday and encouraging PCE data on Friday. Prior to Wednesday’s 2:00 pm release of the FOMC minutes, the S&P 500 had risen roughly 1.4% on the week. It then rose another 5.1% in the 2+ trading days thru Friday’s close. Investors took comfort that rate hikes in excess of 50bp were probably off the table for June & July, and were also encouraged by Friday’s release which showed a 2nd straight monthly decline in the core PCE deflator.

All sectors in the S&P 500 finished the week higher, led by consumer discretionary stocks (+9.3% at the sector level) that had more or less been left for dead just a week earlier. Energy stocks (+8.2%) had another strong week as oil and natural gas prices rose, while tech and financials also produced returns in excess of 8% on the week. Defensives lagged the rally after leading the way for much of the year.

Rates continued to stabilize as Treasury yields fell slightly across the curve. Credit spreads compressed, pushing corporate and muni bond prices higher. Economic news was mixed last week:

  • S&P Global’s US manufacturing and services PMIs missed expectations
  • New home sales fell rapidly in April data released last week
  • Durable and capital goods orders also missed expectations
  • Initial jobless claims ticked lower while continuing claims rose
  • Personal spending (+0.9%) rose more than incomes (+0.4%) in April
  • April PCE was in line with consensus: Core = +0.3%; Headline = +0.2%
Chart of the Week – Core PCE Deflator (y/y change)

Albion’s “Four Pillars”

Economy & Earnings

Annualized US GDP growth fell to -1.5% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.6%.

Valuation

The S&P 500’s fwd P/E of 17x is above the historical average, and longterm valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates

Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of ten 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 2.50% by year end.

Inflation

Inflation is currently high as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Weekly Market Recap

Last week was another challenging period for US equities as investors repriced the risk of a near-to-medium term US recession. Incoming macroeconomic data was mixed, but generally supported the notion that recession risk is rising:

  • Empire Manufacturing turned sharply negative in May (-11.6)
  • NAHB Housing Market Index fell to 69, the lowest since June 2020
  • Housing Starts (1.7m) and Residential Building Permits (1.8M) fell sequentially
  • Philly Fed Business Outlook (2.6) fell to its lowest level since May 2020
  • Initial jobless claims (218k) hit a 4-month high
  • The Conference Board’s Leading Index (LEI) fell sequentially by 0.3% in April

Consumer stocks were especially hard hit last week after disappointing results from retail bellwethers Walmart and Target. A few defensive sectors managed to eke out positive returns, including healthcare, utilities, and energy (the “special 2022 defensive”).

Rates fell in the belly and long end of the curve, sending most Treasuries higher. Credit spreads widened considerably though, resulting in muted price gains for investment grade corporates and steep losses in high yield bonds.

Meanwhile the US dollar weakened slightly after reaching multi-decade highs during the prior week, bucking the “flight-to-safety” trend in most asset classes. And finally, energy prices rose anew, with oil adding nearly $3/barrel, natural gas rising above $8/MMBtu, and unleaded gasoline prices reaching yet another all-time high in the US.

Chart of the Week – Conference Board Leading Economic Index (y/y change)

Economy & Earnings – Annualized US GDP growth fell to -1.4% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.7%.

Equity Valuation – The S&P 500’s fwd P/E of 16.4x is above the historical average, and long-term valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates – Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of ten or eleven 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 2.50% – 2.75% by year end.

Inflation – Inflation is currently high on a y/y basis as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Events

May 2022 Conference Call Video

Panelists from left to right: John Bird CEO, Jason Ware CIO, and Patrick Lundergan Wealth Advisor.

Whether or not you attended our conference call earlier this week, here is your chance to watch a recording of our panelists’ discussion. They cover a broad range of topics including stock & bond valuation, oil & gas prices, recession & inflation concerns, Roth conversion strategies, blockchain technology and more.

Thank you to those who attended and asked questions during the call. Your participation and feedback inform the quality of these communications. We look forward to this year’s second conference call planned for mid-November.

Listen to the audio version of the May conference call here or subscribe to Albion Financial Group in your favorite podcasting app!
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Weekly Market Recap


Last week was a challenging one for stocks as incoming macro data pointed to continued inflationary pressures and an erosion of consumer confidence. CPI data was released on Wednesday and showed core inflation accelerating to +0.6% sequentially in April, after it had slowed to just +0.3% m/m in March. On a y/y basis, headline CPI was +8.3% while core CPI was +6.2%, both of which were 20bp higher than consensus. A day later, headline producer price inflation (PPI) also exceeded expectations at +11.0% y/y. And on Friday, the University of Michigan’s Consumer Sentiment gauge reversed its gains from April and fell to 59.1 in the preliminary May reading, the lowest print in more than 10 years.

This combination of macro data produced a classic “flight to safety” response from investors. Stocks were down as the equity risk premium expanded. Defensive sectors provided some protection, while cyclicals and growth sectors underperformed. High quality bonds rallied as Treasury yields fell, but credit spreads widened. And the US dollar rallied to a two-decade high against a trade-weighted basket of foreign currencies.

Meanwhile, oil prices remain stubbornly high thanks to the ongoing war in Ukraine, resulting in all-time high gasoline prices at the pump for American consumers. Mortgage rates also rose slightly last week, creating another headwind for American consumers looking to buy their first home or relocate.

Chart of the Week – Headline and Core CPI

*Economy & Earnings – Annualized US GDP growth fell to -1.4% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.7%.

*Equity Valuation – The S&P 500’s fwd P/E of 16.6x is above the historical average, and long-term valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

*Interest Rates – Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of ten or eleven 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 2.50% – 2.75% by year end.

*Inflation – Inflation is currently high on a y/y basis as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.

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Weekly Market Recap

Stocks and bonds moved lower last week in choppy trading after the Fed enacted the first 50bp rate hike in more than 20 years (May of 2000 was the last one). The market’s initial reaction was positive, as investors expressed relief that a 75bp hike appeared to be off the table for the June meeting, and that the initial pace of Fed balance sheet reduction (aka Quantitative Tightening, or “QT”) would be somewhat slower than feared. Most major US stock indices rallied ~3% in afternoon trading on Wednesday following the Fed’s announcement and accompanying press conference.

The optimism was short-lived, however. An hour before equity markets opened on Thursday, the Bureau of Labor Statistics released a disappointing productivity number and higher-than-expected unit labor cost data for Q1, sending bond yields sharply higher as investors worried anew about inflation. Stocks had nowhere to go but lower, and the selloff quickly became self-reinforcing.

In the end, most major US benchmarks were down modestly on the week. As has been the case throughout much of 2022, energy stocks and some defensives (especially utilities) outperformed, while most growth/tech sectors lagged. Small caps and international benchmarks also underperformed, as they have for much of the year.

Finally, the carnage continues in bond markets, as rising yields pushed prices lower once again last week. Average yields on US investment grade corporates are now at 12-year highs, as are rates on 30-year fixed rate mortgages.

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!
Chart of the Week – US Fed Funds Target Rate (Lower Bound)