This conference call covered the economic landscape of late 2023, including labor market trends, 2024 recession outlook, inflation & prices, the housing market, interest rates & monetary policy, cash alternatives, U.S. deficits, relations with China, equity markets, and more!
Listen below for the isolated audio of the conference call:
Last week felt fairly quiet and uneventful, particularly on the macro front where fresh data was limited. The most notable release occurred on Friday, when the University of Michigan posted the preliminary November reading of its consumer sentiment index, which deteriorated sequentially and was worse than consensus across the board:
* Overall Consumer Sentiment = 60.4 (prior month = 63.8)
* Current Conditions = 65.7 (prior month = 70.6)
* Future Expectations = 56.9 (prior month = 59.3)
* 1y Inflation Expectations = 4.4% (prior month = 4.2%)
* 5-10y Inflation Expectations = 3.2% (prior month = 3.0%)
The Fed is closely watching consumers’ inflation expectations, which have begun to drift higher over the past two months. Longer term (5-10y) expectations have now reached a new cycle high. See the Chart of the Week for a time series.
Otherwise, the most notable update from last week were some public comments from Jerome Powell cautioning investors not to assume that another 25bp rate hike was completely off the table. Markets responded by pushing yields higher in the front end, and adding roughly 18% to the implied odds of another hike occurring by January.
Action in the long end of the curve was muted, allowing tech stocks to continue on their recent path higher. Otherwise, equities were mixed, with poor performance from then energy sector (driven by steadily falling oil prices) pulling down small and midcap benchmarks.
The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.
The S&P 500’s forward P/E of 18x is above the long run average, so valuation could 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 over the next decade are likely to be in the mid single digits.
Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets now imply roughly a 1-in-4 chance of another 25bp rate hike in late 2023 / early 2024, followed by a pause.
After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.
What a difference a week makes! Bond yields fell sharply on a relatively benign (compared to expectations at least) quarterly refunding plan from the US Treasury, a somewhat dovish-sounding Jerome Powell (again, relative to expectations) at the November FOMC meeting, and a monthly jobs report that saw lower-than-expected nonfarm payrolls and wage gains, as well as a tick higher in unemployment.
After very briefly trading above 5% intraday on October 23rd, 10y Treasury yields had fallen more than 40bp by the end of last week, with 30y yields lower by a similar amount. Meanwhile, futures markets had all but eliminated any expectations of an additional 25bp rate hike before the inevitable long pause, with odds settling at around 5% for the December meeting and topping out at 10% in January of 2024.
The abrupt fall in rates eased some of the recent pressure on P/E multiples. US equities surged 5+% on the week, with most benchmarks finishing higher every single day. Rate-sensitive sectors were the biggest beneficiaries, including real estate and longer-duration growth stocks. International stocks were better as well, but to a slightly lesser degree than domestics.
Behind the scenes amidst all of the recent rates-driven price volatility, Q3 earnings season has been coming in slightly better than expected. By the end of the week, 81% of the companies in the S&P 500 had reported Q3 numbers, with a blended earnings growth rate of +3.7% y/y, on revenue growth of +2.3% y/y plus 40bp of margin expansion to an average net margin of 12.0%. The pivot to earnings growth follows three consequence quarters were earnings for the S&P 500 were lower on a y/y basis.
The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.
The S&P 500’s forward P/E of 18x is above the long run average, so valuation could 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 over the next decade are likely to be in the mid single digits.
Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets now imply only a 10% chance of another 25bp rate hike in late 2023 / early 2024, followed by a pause.
After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.
Global risk premia expanded last week as the war between Israel and Hamas intensified, with an increase in rocket and missile attacks ahead of what appears to be an imminent ground invasion of Gaza by the Israeli army. Meanwhile, the US conducted air strikes inside Syria in retaliation for what it believes were Iran-backed drone attacks on US military bases and personnel in the area.
Treasury yields were volatile but finished the week lower, as the flight-to-safety temporarily outweighed concerns regarding upcoming supply. Bond investors were happy for the reprieve, as stable credit spreads passed the price gains from Treasuries through to corporates as well.
Equities were not so fortunate, as the deepening conflict in the middle east weighed on sentiment despite relatively healthy US macro data. Most US benchmarks were down 2-3% on the week, with international stocks faring slightly better.
The first estimate of Q3 US GDP was released last week, with the economy growing 4.9% q/q annualized. The outsized growth was fueled primarily by a combination of consumer spending, inventory build, and government expenditures. None of those factors appear sustainable at these levels, and economists expect growth to slow significantly in the coming quarters, even if recession is avoided. See the Chart of the Week for a GDP time series with consensus estimates for 2023/24).
Finally, on the inflation front, Core PCE for September (+0.3% m/m; +3.7% y/y) was in line with expectations. However, the University of Michigan’s estimate of consumers 1-year forward inflation expectations jumped to 4.2%, a development worth watching given the sensitivity of energy (and thus gasoline) prices to conflict in the middle east.
The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.
The S&P 500’s forward P/E of 17x is above the long run average, so valuation could 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 over the next decade are likely to be in the mid single digits.
Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets now imply a roughly 1-in-3 chance of one additional 25bp rate hike in late 2023 / early 2024, followed by a pause.
After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.
Bond yields had initially fallen in the immediate aftermath of the attacks by Hamas in Israel as financial markets experienced a “flight-to-safety”, but that moment proved short-lived as yields resumed their march higher last week. 10y and 30y yields rose by 30+ basis points as most of the Treasury curve hovered around 5%.
Rising yields in the belly and long end of the curve continue to put pressure on P/E multiples and stock prices, even as corporate earnings appear poised to return to y/y growth when the Q3 earnings cycle is completed. Equities experienced broad-based declines last week across most sectors, market caps, and geographies.
Despite the recent declines, US stocks have had an solidly positive year in the aggregate (particularly the large cap growth companies). As a result of resilient stock performance and the ongoing rise in bond yields, relative value between stocks and bonds has shifted as the equity risk premium (ERP) has declined. One way to measure the ERP (admittedly a very simple one) is to compare the yield-to-worst on the US Aggregate Bond Index (5.67% as of Friday’s close) with the earnings yield on the S&P 500 (5.65%), and by this method the ERP is now effectively zero. In fact, this is the first time that the yield on the Agg has exceeded the S&P’s earnings yield since 2002.
Macro data released last week suggested a continuation of existing trends for the economy, including mixed signals in manufacturing (industrial production up 0.3%, but prior month revised lower by 40bp) and housing (permits down 4% m/m, starts up 7%), a resilient consumer (retail sales +0.7% m/m), and a strong labor market (sub-200k initial jobless claims). Lastly, the Conference Board’s Leading Economic Index (LEI) fell for the 18th month in a row, and remains at y/y levels that in the past have always been associated with the imminent onset of recession.
The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.
The S&P 500’s forward P/E of 18x is above the long run average, so valuation could 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 over the next decade are likely to be in the mid single digits.
Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets now imply a roughly 1-in-3 chance of one additional 25bp rate hike before year-end, followed by a pause.
After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.
After absorbing the initial shock of the brutal attacks by Hamas in Israel, market participants were mostly focused on incoming inflation data last week. In the aggregate, it is fair to say that inflation came in slightly above expectations:
* The Produce Price Index (PPI) rose 0.5% m/m vs. consensus of 0.3%
* PPI ex food & energy rose 0.3% m/m vs. consensus of 0.2%
* The Consumer Price Index (CPI) rose 0.4% m/m vs. consensus of 0.3%
* CPI ex food & energy rose 0.3% m/m, in line with consensus
Consumers’ inflation expectations are also on everyone’s mind, including the Fed’s, particularly after the spike in energy prices driven by the possibility of escalating armed conflict in Israel. Prices at the gas pump had already been elevated during the summer driving season in the US, and in the University of Michigan’s preliminary October survey, consumers’ 1y forward inflation expectations surged 60bp to 3.8%, the highest print in 5 months.
Rates markets reflected the general uptick in geopolitical risk aversion, with front-end yields mostly stable while belly and long bond yields fell. Rates had perhaps become a bit oversold of late, as concerns regarding a supply/demand imbalance for new Treasury issuance dominated the narrative, creating room for some bounce-back performance in the short run.
In US equities, earnings season kicked off with a number of big banks reporting better-than-expected results on Friday, as expanding net interest income more than offset relatively moribund loan growth and deal-making. As financials outperformed on Q3 results, energy and defense companies saw their stocks rise due to the events in Israel.
The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.
The S&P 500’s forward P/E of 18x is above the long run average, so valuation could 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 over the next decade are likely to be in the mid single digits.
Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets now imply a roughly 1-in-3 chance of one additional 25bp rate hike before year-end, followed by a pause.
After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.
Labor market data dominated the narrative last week, sending bonds yields higher while producing mixed results for equities. The action got started on Tuesday, when the JOLTS report showed an unexpected 690k increase in open jobs, registering 9.6 million in the month of August. Bond yields rose immediately, the odds of another 25bp Fed rate hike prior to year-end jumped by nearly 10%, and stocks came under heavy selling pressure.
Markets promptly reversed course the very next day, when the ADP employment change for September (89k net payrolls added) came in well below expectations. Odds of another 2023 rate hike fell from slightly above 50% to below 40% on the news, and stocks enjoyed a moderate relief rally.
On Thursday, initial jobless claims held steady at just over 200k per week, extending their recent strength as employers hang onto recently hired workers even as revenue growth slows. Markets were fairly calm as all eyes looked ahead to Friday’s monthly jobs report from the BLS.
Finally, Friday’s nonfarm payroll print of +336k for the month of September surprised to the upside, initially sending rate hike odds and Treasury yields higher, and stocks lower. Under the covers, however, the report was a bit softer than the headline suggested, with average hourly earnings rising at a slower-than-expected +0.2% m/m, while unemployment (U3) held steady at 3.8%. As market participants digested the details, the initial knee-jerk negative reaction faded, leaving 2023 rate hike odds at slightly less than 50% to finish the week. Bond yields finished higher across the curve, especially in the belly and long end, suggesting that the current abundance of new Treasury supply may be a bigger factor than any labor market / inflation read-thru.
The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.
The S&P 500’s forward P/E of 18x is above the long run average, so valuation could 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 over the next decade are likely to be in the mid single digits.
Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as the Fed remains committed to fighting inflation. Futures markets now imply a roughly 50/50 chance of one additional 25bp rate hike before year-end, followed by a pause.
After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged
The disinflationary trend mostly continued in Q3, although rising oil prices (+$20/barrel over 3 months) pushed headline inflation higher as the quarter progressed. The y/y change in Headline CPI rose 70bp between June and August to +3.7% currently, while Headline PCE rose 30bp over the same period and stands at +3.5%. Core (ex food and energy) inflation continues to moderate but remains higher, with Core CPI now at +4.3% y/y while Core PCE stands at +3.9%. Of note, consumers’ inflation expectations remain well anchored despite rising energy costs, with the U of M survey reporting 1y forward expectations of 3.2% while 5-10y expectations have fallen to 2.8%.
The Fed raised overnight interest rates by 25bp at its July meeting, to a range of 5.25% to 5.5%, and then did not change rates at the September meeting. The updated Summary of Economic Projections (SEP) implies one additional 25bp rate hike is still to come before year-end, but futures markets are currently pricing only a 50/50 chance of such an outcome. Sandwiched in between Q3’s two FOMC meetings was the Jackson Hole Economic Symposium, where Jerome Powell’s keynote speech once again made clear that the FOMC intends to keep its policy rate restrictive for some time to come, as summarized by the “higher for longer” narrative.
Q3 data was mixed. PMIs from S&P Global and ISM continue to show weakness or outright contraction in manufacturing, as do many regional Fed surveys. Consumer sentiment indicators from the Conference Board and the U. of Michigan have recently moved lower, a reversal of the upward trend from the spring and early summer. Housing markets continue to be plagued by availability and affordability challenges driven by high mortgage rates, hindering activity. Finally, the labor market is slowly normalizing, with wage gains slowing and the number of open jobs falling. Despite these cross-currents, consensus estimates among Wall Street economists for Q3 GDP Growth stand at +3.0% q/q annualized, while the Atlanta Fed’s real-time “GDPNow” estimate stands at a whopping +4.9%.
Rates moved significantly higher in the belly and long end of the curve in Q3, as excess refi supply of US Treasuries was met with weaker demand from key domestic and foreign buyers. Mortgage rates followed suit, and now sit well above 7% nationally for traditional 30-year fixed rate loans. Credit spreads were stable to slightly better in the quarter, pushing most of the price declines in Treasuries through to munis and corporates.
Equities rallied to YTD highs in July before succumbing to rates-driven pressure on P/E multiples in August and especially September. Energy stocks posted solid gains driven by rising oil prices, but otherwise the selling was broad-based across market caps, sectors, and geographies.
The US economy has shown resilience so far in 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.
The S&P 500’s forward P/E of 18x is above the long run average, so valuation could 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 over the next decade are likely to be in the mid single digits.
Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have drifted even higher in 2023 as the Fed remains firmly committed to fighting inflation. Futures markets now imply a roughly 50/50 chance of one additional 25bp rate hike before year-end, followed by a pause.
After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 18 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.
Last week was a busy one on the macro front, with an abundance of fresh data:
* The FOMC left its policy rate unchanged at 5.25% to 5.50%
* US housing starts fell 11% sequentially to 1.28mn SAAR
* Residential building permits rose 7% sequentially to 1.54mn SAAR
* Initial jobless claims fell to 201k, the lowest print since January
* Continuing claims eased lower by 21k to 1.66mn, also the lowest since January
* S&P’s US Composite PMI was essentially flat at 50.1 (Mfg. was higher, Svc. lower)
* The Conference Board’s Leading Economic Index (LEI) fell 0.4% m/m
The decline in the LEI marked the 17th consecutive month that the index has moved lower, which is noteworthy given its strong historical track record in forecasting the US economy. The LEI is now down 7.6% on a y/y basis, and has fallen 10.5% from its recent peak at the end of 2021. Historically, y/y and absolute declines of this magnitude have always been shortly followed by a recession. See the Chart of the Week for a y/y time series.
Meanwhile, rates marched higher again last week due to a combination of factors:
* (Front end) The “dot plot” still implies one additional rate hike this year
* (Belly & long end) Concerns regarding the upcoming supply of Treasury issuance
Finally, September continues to live up to its reputation as a difficult month for stocks. The combination of higher rates, a resilient labor market, mixed signals on the strength of the US economy, and a determined Fed continue to weigh on equity valuations. The P/E multiple on the S&P 500 has lost a full turn this month, falling from 19x forward earnings at the end of August to 18x today.
The US economy showed resilience in the first half of 2023, and Wall Street analysts expect full-year corporate earnings to be roughly flat y/y. Albion’s base case expectation is that the US economy will enter recession in late 2023 / early 2024, putting downside pressure on earnings.
The S&P 500’s forward P/E of 18x is above the long run average, so valuation could be a headwind to future returns. More predictive 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 mid single digits.
Rates rose dramatically in 2022 due to a sharp pivot in monetary policy, and have remained elevated in 2023 as progress on inflation has been slower than hoped. Futures markets now imply a roughly 50/50 chance of one additional 25bp rate hike before year-end, followed by a pause.
After reaching 40yr highs in spring of 2022, inflation has moderated somewhat over the past 12 months. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.
We made the list again! Albion Financial Group is honored to have been included on CNBC’s ‘Financial Advisor 100 List’ for the third consecutive year.
This recognition places us among the top financial advisory firms in the nation. We are proud of our consistent presence on this prestigious list, which is a testament to our expertise and dedication, yet we measure our true success by the satisfaction of each client we serve.
As we celebrate our 41st year in business, we express our sincere gratitude to our clients for their ongoing loyalty and support. Cheers to many more years of providing exceptional financial planning and investment services!