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Weekly Market Recap

Weekly Recap

Rates rose anew and stock prices fell globally in the wake of Wednesday’s FOMC meeting. The updated Summary of Economic Projections showed weaker growth and higher unemployment in 2023 relative to the previous SEP release from three months ago, consistent with the notion that economic pain will be necessary in order to get inflation under control. Meanwhile, the updated Dot Plot demonstrated the Fed’s resolve in keeping rates “higher for longer”, with a median year-end 2023 Fed Funds projection of 4.625% and no sign of any “dovish pivot” prior to 2024.

With investor confidence already fragile, Friday’s poorly received budget from the new UK government provided a fresh catalyst for another leg lower. The proposal featured a raft of deficit-financed tax cuts aimed at raising economic growth to a sustained 2.5% annual rate, drawing immediate comparisons to Anthony Barber’s 1972 budget that led to a highly inflationary boom/bust cycle and eventually an IMF bailout for the UK. Economic growth of that magnitude has not occurred in the UK in 15 years, and appears highly ambitious (if not outright unrealistic) given the country’s ~0.5% population growth rate and its departure from the EU.

In US economic news, incoming data continue to suggest that the probability of recession in the coming months is very high. New residential building permits fell sharply once again as the housing market slows, moving the indicator from green to yellow on Albion’s key leading indicator dashboard. Meanwhile, the Conference Board’s Leading Economic Index (LEI) fell sequentially for the 6th straight month and is now at -1% on a y/y basis, a level that historically has indicated a near certainty of imminent recession.

Chart of the Week – Conference Board US Leading Index (LEI) – Y/Y Change

Albion’s “Four Pillars”

Economy & Earnings

US GDP growth fell in Q1 (-1.6%) and in Q2 (-0.6%), but job creation remained strong in 1H22 with 2.75mn NFP added. Consensus calls for slow growth in 2H22 despite weak consumer confidence and softer housing and labor markets. Corporate operating margins remained robust in 1H22, but many companies have warned that inflation could pressure margins going forward.

Valuation

The S&P 500’s forward P/E of 16x is slightly above the long run 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.

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 17 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 4.25% 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. Headline inflation eased lower in July and August thanks to falling energy prices, but core inflation reaccelerated sequentially in the August print.

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Weekly Market Recap – September 16, 2022

Weekly Recap

Markets got off to a strong start last week, with equities posting modest gains on Monday while rates were relatively calm. All of that changed at 8:00 am EDT on Tuesday morning when the August CPI print hit the tape. Although headline CPI declined on a y/y basis thanks largely to falling energy prices, core CPI accelerated sequentially to +0.6% m/m (consensus was +0.3%), showing that the underlying inflation pressures within the economy remain strong.

The response of financial markets was harsh. 10y Treasury yields rose nearly 14bp instantly, and Fed Funds Futures markets abandoned any hope of a 50bp hike in September and quickly priced in an extra 25bp hike by year-end. By week’s end, 1-year Treasury yields were at nearly 4% and 10-year yields were approaching 3.5%, while mortgage rates topped 6% nationally for the first time since 2008.

With the sharp move higher in rates and yet another recalibration of expectations around the near-term path of monetary policy, equity prices had nowhere to go but lower. By the end of the week, most US benchmarks were down 4-5%, with cyclicals and growth stocks bearing the brunt of the selling pressure.

Other economic data released last week was somewhat encouraging. Weekly initial jobless claims (213k) continued to fall, extending the decline that began in August. Meanwhile, small business optimism rose in August. And finally, the U of M Consumer Sentiment rose slightly in preliminary September data, marking the third straight month of improvement. Notably, consumers’ short term (1y = +4.6%) and longer term (5-10y = 2.8%) inflation expectations also declined sequentially, an encouraging trend that the Fed is surely monitoring closely.

Chart of the Week – Core CPI ex Food & Energy (m/m change)

Albion’s “Four Pillars”

Economy & Earnings

US GDP growth fell in Q1 (-1.6%) and in Q2 (-0.6%), but job creation remained strong in 1H22 with 2.75mn NFP added. Consensus calls for slow growth in 2H22 despite weak consumer confidence and softer housing and labor markets. Corporate operating margins remained robust in 1H22, but many companies have warned that inflation could pressure margins going forward.

Valuation

The S&P 500’s forward P/E of 16x is slightly above the long run 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.

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 16 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 4.0% 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. Headline inflation eased lower in July and August thanks to falling energy prices, but core inflation reaccelerated sequentially in the August print.

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Weekly Market Recap

Weekly Recap

Equity markets found their footing last week despite the ongoing rise in interest rates. All sectors in the S&P 500 finished higher, with gains spread across cyclicals, defensives, and growth stocks alike. The energy sector lagged the rally as oil prices briefly dipped below pre-Ukraine invasion levels. International stocks also lagged, particularly Chinese equities which pulled emerging market benchmarks lower on the week.

Futures markets have coalesced around a 75bp September rate hike from the FOMC, with markets now pricing in an additional 50bp in November and another 25bp in December as well. As front-end expectations were recalibrated, rates also moved higher across the Treasury curve: 2y +16bp, 10y +12bp, 30y +11bp.

Credit spreads reversed course and moved tighter after widening in sympathy with equities over the past several weeks.

Economic news was limited last week. S&P Global’s US Services (43.7) and Composite (44.6) PMIs came in slightly below expectations for August, while the ISM Services Index (56.9) improved sequentially and beat consensus. Weekly initial jobless claims moved lower once again, extending the downward trend that began in August after claims had consistently moved higher in the spring and early summer.

Chart of the Week – Oil Price per Barrel (WTI)

Albion’s “Four Pillars”

Economy & Earnings

US GDP growth fell in Q1 (-1.6%) and in Q2 (-0.6%), but job creation remained strong in 1H22 with 2.75mn NFP added. Consensus calls for slow growth in 2H22 despite weak consumer confidence and softer housing and labor markets. Corporate operating margins remained robust in 1H22, but many companies have warned that inflation could pressure margins going forward.

Valuation

The S&P 500’s forward P/E of 17x is slightly above the long run 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.

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 15 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.75% 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. That said, core inflation has been trending lower for several months now, and headline inflation also eased lower in July data thanks to falling energy prices.

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Weekly Market Recap

Weekly Recap

US equities finished lower for a 3rd straight week as a rebound in consumer confidence and signs of renewed strength in labor markets appeared to give the Fed more latitude for aggressive tightening of monetary policy. All sectors in the S&P 500 were down, with traditional defensives (utilities, health care, and staples) posting smaller declines while cyclicals and growth stocks faced sharper selling pressure. Small caps underperformed. And finally, international benchmarks echoed
the declines in the US.

Bond prices fell as rates moved higher for most of the week, although Friday saw a partial reversal after the monthly jobs report showed a few pockets of softness. Fed fund futures had gravitated towards a 75bp September rate hike in the days following Powell’s speech, but shifted back to virtually even odds of either 75 or 50bp on Friday. Credit spreads moved wider over the course of the week as equities declined, causing corporate bonds to underperform.

It was a big week for economic news:

  • US Manufacturing PMIs from ISM (52.8) and S&P (51.5) were steady
  • Factory (-1.0%) and Durable Goods (-0.1%) orders shrank in July
  • Consumer Confidence (Conf. Board) rebounded to a 3-month high of 103.2
  • Heavily lagged home price data showed sharp deceleration in June
  • US job openings (11.2mn) rebounded while initial jobless claims (232k) fell
  • Nonfarm payroll growth of +315k exceeded consensus estimates of +298k
  • Average weekly hours worked fell slightly to 34.5 hrs
  • Unemployment (3.7%) rose on a +30bp labor force participation rate (62.4%)
Chart of the Week – Monthly Change in Nonfarm Payrolls (BLS)

Albion’s “Four Pillars”

Economy & Earnings

US GDP growth fell in Q1 (-1.6%) and in Q2 (-0.6%), but job creation remained strong in 1H22 with 2.75mn NFP added. Consensus calls for slow growth in 2H22 despite weak consumer confidence and softer housing and labor markets. Corporate operating margins remained robust in 1H22, but many companies have warned that inflation could pressure margins going forward.

Valuation

The S&P 500’s forward P/E of 16x is slightly above the long run 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.

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 14 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.50% 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. That said, core inflation has been trending lower for several months now, and headline inflation also eased lower in July data thanks to falling energy prices.

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Weekly Market Recap

It was another tough week for stocks as bond yields continued to rise. Growth stocks bore the brunt of the selling pressure, sending the Nasdaq down 2.6% in a holiday-shortened week. Cyclical sectors fared better thanks to solid economic data, with materials (+0.7%), industrials (+0.4%), and energy (+0.3%) all finishing in positive territory. Small caps also finished slightly higher.

Meanwhile, the Treasury yield curve steepened considerably, with 2s10s gaining 19bp to finish at +38bp after having been inverted just two weeks prior. Credit spreads widened slightly, magnifying the price declines in high quality corporates and sending the Bloomberg US Corporate Index to its lowest level of the year.

The short week also saw a surge in energy prices. Oil gained more than $8/barrel, while natural gas rocketed higher to finish at $7.30/MMBtu, an all-time record high.

There were several positive data points regarding the economy last week. March retail sales were solid despite very high gasoline prices, industrial production rose more than expected, the Empire Manufacturing Survey came in well ahead of expectations, jobless claims remained low, and the University of Michigan Consumer Sentiment index experienced a strong rebound.

Finally, core CPI cooled slightly in March data, but other inflation metrics remain hot:

  • Headline CPI was +1.2% m/m and reached +8.5% y/y
  • Core CPI (ex food & energy) was +0.3% m/m and reached +6.5% y/y
  • Headline PPI was +1.4% m/m and reached +11.2% y/y
  • Core PPI (ex food & energy) was +1.0% m/m and reached +9.2% y/y
This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!
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Albion CIO on KPCW with Partner Doug Wells

“…With the invasion of Ukraine, the disruption of the distribution of natural resources and food supply caused by that, and other supply chain factors. How should we look at the stock market, investing, and saving during this time?

Find out by listening to Albion Partner, Doug Wells‘s interview with Albion Partner and CIO Jason Ware.

Each week Doug co-hosts the one-hour show – Mountain Money – on Park City’s NPR affiliate, KPCW Public Media.

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Weekly Market Recap

It was another tough week for stocks and bonds, prompted by hawkish commentary on Monday from FOMC member Lael Brainard regarding the potential pace of Fed balance sheet reduction. That was followed up on Wednesday by the release of the FOMC meeting minutes from March, which exacerbated investor concerns.

The result was an abrupt reversal in the flattening trend that had gripped the Treasury market this year as the curve pivoted to bear steepening: 2y yields finished higher by 5bp, while 10y yields jumped 32bp, pushing the 2s10s curve back to +19bp by Friday’s close. See the Chart of the Week for a 2s10s time series.

Equities fell as a result, with long-dated growth stocks once again bearing the brunt of the selling pressure. In a return of 2022’s familiar pattern, defensive sectors (utilities, staples, healthcare, and real estate) plus energy outperformed, while other cyclicals and especially tech shares were weaker. Small caps generally fared worse than large caps, with the Russell 2000 now trailing the S&P 500 by more than 5% YTD. International stocks also finished lower on the week.

Commodities were mixed, with oil (WTI) finishing below $100/barrel for the second straight week while natural gas rose to an all-time high on Thursday before finishing a hair lower on Friday. Non-energy commodities also finished higher on the week.

Apart from the FOMC, most economic news last week was positive: services PMIs from S&P Global and ISM remain firmly in expansion territory, initial jobless claims fell, and consumer credit surged in fresh February data.

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!
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Trey Vandiver Joins Albion’s Operations Team

We are pleased to introduce the newest member of the Operations Team at Albion Financial Group. Meet Trey Vandiver, an information technology veteran and a gifted problem solver.

For more, see Trey’s biography.

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Weekly Market Recap

A rotation trade played out last week, with defensives rallying, tech steady, and cyclicals lower as the yield curve pivoted into an inversion. Small caps outperformed, as did most international benchmarks on gains in Europe and China.

Treasuries were in focus as the 2s10s yield curve saw the culmination of a 12-month flattening trend that ended with an inversion on Friday. Coming into the week 2s10s was positively sloped at +20bp, but it flattened by 28bp in 5 days to finish at -8bp (10y = 2.38% and 2y = 2.46%). An inverted yield curve has historically been a very reliable recession predictor, albeit one with a very long lead time (6m to 2y).

Credit spreads continued to tighten, helping US corporates recoup some of the YTD underperformance relative to Treasuries. IG spreads finished 5bp tighter and are now 28bp inside the YTD wides reached just prior to the March FOMC meeting, while high yield spreads have moved ~90bp tighter over the same period.

Most commodity prices fell last week as US crude benchmark West Texas Intermediate closed below $100/barrel for the first time in nearly 3 weeks. Natural gas bucked the trend and finished higher as officials continue to paint a dire picture of what would happen to the European economy without Russian gas imports.

Finally, there was a raft of economic news last week:

  • 431k new nonfarm payrolls added and an unemployment rate of 3.6%
  • Case-Shiller’s 20-city composite showed home price appreciation of 19.1% y/y
  • The Conference Board’s Consumer Confidence Index was steady in March at 107.2
  • Personal income grew at +0.5% in February, while personal spending was +0.2%
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Weekly Market Recap

Stocks finished higher for the second straight week despite surging bond yields. The energy sector led the way with a 7.4% return on the back of a sharp rebound in oil prices, while all other sectors besides healthcare posted positive returns on the week. Small caps lagged the rally and finished slightly lower. International stocks posted smaller gains than the US, with Chinese equities temporarily range-bound after a dramatic reversal the week before.

Treasury yields rose significantly last week, particularly in the front end as increasingly bearish rates forecasts were published by sell side economists. A note from Citi on Friday predicted that the Fed would enact four consecutive 50bp hikes this year, and that the terminal Fed Funds rate would reach 3.5-3.75%, well above the ~2.8% rate currently implied by the Fed’s “dot plot”. Meanwhile, credit spreads narrowed for the second straight week, in line with the improvement in equities.

Oil prices rose by more than $9/barrel as an Iran nuclear deal looked increasingly unlikely in the near term, and Yemeni rebels stepped up attacks on Saudi Arabian Aramco facilities. Non-energy commodities also finished higher on the week. In economic news, mortgage applications and new home sales fell as mortgage rates rose, weekly jobless claims hit fresh pandemic lows, durable goods orders fell more than expected in February, and S&P’s US Manufacturing and Services PMIs exceeded expectations in preliminary March data. Overall, incoming data point to a still-strong economy with a resilient consumer, despite signs that rates are beginning to have an impact on the pace of transaction activity in housing.

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!