Bond yields rose and equities fell after stronger-than-expected labor market data and rising inflation expectations dampened rate cut hopes.
On the labor front, the monthly JOLTS report showed 8.1 million open jobs in the US for November, more than 350k above consensus estimates which had called for a small sequential decline. The prior month was revised higher as well.
Then on Friday, the monthly jobs report from the BLS also exceeded consensus, with 256k nonfarm payrolls added. Unemployment (U3) fell 10bp sequentially to 4.1%, and underemployment (U6) fell 20bp to 7.5%.
At the same time as the labor market was showing continued strength, inflation concerns were stoked by the ISM Services Index, as the Prices Paid component unexpectedly rose more than 6 points sequentially to 64.4.
And finally, preliminary January data from the University of Michigan’s Consumer Sentiment survey showed rising inflation expectations over short (1y = 3.3%; +50bp m/m) and longer term (5-10y = 3.3%; +30bp m/m) time horizons.
The outcome for financial markets was predictable:
* Fed funds futures now imply just one 25bp rate cut will occur in 2025
* Treasury yields rose across the curve, with the 20y briefly breaking above 5%
* Equity prices fell, led by rate-sensitive sectors like tech, financials and real estate
Chart of the Week: Net Nonfarm Payrolls Added
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 21.5x 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 likely 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.
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.
As we bid farewell to the first quarter of the 21stcentury, we stand at the crossroads of innovation and uncertainty, where the echoes of past challenges mingle with the whispers of future possibilities. In this letter, our CEO John Bird explores how perspectives of political events have shifted over time, challenging our understanding of economic decision-making. Our CIO Jason Ware remarks on the economics of 2024, setting the stage for an intriguing financial landscape in 2025.Then, Senior Wealth Advisor Anders Skagerberg, standing at the threshold of this new year with its opportunities and challenges, looks to turn your aspirations into achievable goals and navigate the evolving landscape of personal finance with confidence and clarity.
FROM JOHN BIRD’S DESK
While inauguration day is still several weeks away it’s clear President elect Trump is already having an impact on how we view policy and economics domestically and globally. Markets responded favorably to his propensity toward deregulation and lower taxes. Individual reactions to Trump’s statements vary wildly depending on preconceived notions of his policy and personal views of his character. This is normal. Yet for the better part of a century the field of economics treated human emotions as secondary. When and why did economics become a field viewing itself as distinct from politics specifically and the vagaries of the human condition writ large?
The study of political economy evolved in the sixteenth century as philosophers of the time worked to understand the interplay of government policy and household management. These early writers wanted to know how we as individuals made decisions and how government policy choices impacted those decisions. Adam Smith is perhaps the best known visionary in this school of thought though there were several others influential at the time. An overriding thesis was the notion that allowing for individual incentives fostered greater creativity, effort, and wealth creation than dictates from on high.
Centuries later, toward the end of the eighteen hundreds physical sciences were expanding understanding of our natural world through the scientific method and increased use of mathematics. It was in this period that the term “economics” began to supplant “political economy” as the field worked to shift more toward mathematical modeling of economic decision making with less reliance on factoring in the human emotional element driving the course of our economic path.
In the twentieth century the study of economics was dominated by factors that could be quantified. Numbers ruled the roost. And this period gave us volumes of insights into the working of our economic system which continue to help guide policy and investment decisions today. Yet an awareness of the importance of human behavior in economics can scarcely be overstated. Many of us work to be logical in our decision-making. But when we pull the trigger, it is the emotion of the moment that compels us to act. As investors we ignore this reality at our peril.
The University of Michigan collects data on consumer sentiment based on political party and the insights are a striking example of how our worldview impacts our perceptions. The information highlights that when a democrat is elected to the oval office democratic consumer sentiment spikes upward while republican sentiment plummets. When a republican is elected the effect is inverted. These changes in sentiment are at best loosely correlated (and typically not correlated at all) to unemployment rates, income growth, interest rates or other quantifiable factors that impact aggregate financial well-being. Rather, it’s us as humans acting … human. Turns out how we feel about something has a big impact.
When we look at how we respond to various events – like elections – it’s clear that “political economy” is a better way of understanding our environment and our behaviors than economics alone. It’s also essential to note that while we may understand the why of the financial markets a bit better that doesn’t mean we should change our approach. We continue to invest in companies with competitive advantages that can be sustained for the foreseeable future. We continue to hold those companies regardless of the emotions of the moment. Sometimes in the face of emotional swings so common to our human condition our best course of action is to follow the advice of the white rabbit in Lewis Carrol’s Alice in Wonderland: “Don’t just do something, stand there.” As we enter 2025, we will keep the wise words of said rabbit in mind and keep a steady hand on the tiller of your investments. Thank you for your continued trust and confidence in the Albion team. We wish you a healthy and prosperous new year.
ECONOMY & MARKETS by Jason Ware
What a charmed time this has been for Wall Street! The economy and earnings are doing well. Inflation and interest rates are coming down. Shoppers are outshopping. The US dollar has rallied, and the incoming administration is assumed to be more business friendly. The stock market is in its happy place as evidenced by yet another +20% annual gain. As we close out the year, let us explore each.
The US economy is strong. The labor market is healthy, people are pending, we have a boom in technology capex(AI and Cloud), and there remains a sturdy pro-growth fiscal tailwind. Things look fine today (nothing in the data points to recession) and growth in the years ahead should be stronger than the decade pre-Covid … not by a lot, but better … on rising real incomes, sustained expansionary policies from the Beltway, strong spending and investment on infrastructure and technology, and enhanced productivity.
On prices, the 2021-23 inflation problem has been solved. Not in terms of price level, that’s not going back down (a good thing). But as it relates to price growth, we’re now far better off. While the Fed’s 2% target remains elusive, we are close. Our view holds (for a few reasons) that we can expect inflation roughly in the mid-2s … that 2% will be this cycle’s floor not its ceiling (like in the 2010s) … and that’s just fine. Anything under 3% should be constructive for the economy and financial markets.
Meanwhile, the Fed is now in an easing cycle with a goal to arrive at “neutral.” For those with better things to do than study magic numbers in economics, the neutral rate is essentially inflation plus what economists call “r-star” (r*)– a real rate of interest that’s said to balance the economy. Neutral policy is neither expansionary nor contractionary. Presently, we consider this level to be perhaps 3.5-4.0% (note: for its part, the Fed currently thinks it’s 3%). Meaning, if things go well, we can expect a couple more quarter-point cuts along this path. Now, it’s possible (probable?) this won’t go perfectly to plan without some hiccups, but it could. And if so, that’s conceptually the track forward.
Bond yields take their cues from this base rate math. If 3.5-4.0% represents neutral fed funds and a reasonable term premium for the 10-year Treasury is maybe 1.0% or so, then 4.5-5.0% would be structural equilibrium. On the investment grade corporate side, add about +0.75-1.0% in risk premium. Certainly, these things will move around based on factors like mood, geopolitics, prospects for growth, inflation, and government deficits, making real-time bond yields messier than this straight-forward theoretical exercise. Nevertheless, today is a pretty good time to lock in yields, where appropriate, for balanced accounts.
Over in equity land, unsurprisingly we remain long run bullish on US stocks. The American system endures as the most innovative, dynamic, nimble, and resourceful economy on the planet. The finest universities, brightest minds, and most cutting-edge companies all reside here, not to mention the deepest and most efficient capital markets around. Combined, this is what Buffett calls the “American tailwind” – a force the now 94-year-old sage still believes will propel us onward in the years and decades to come. We agree. Accordingly, our belief is that stock prices will continue to do what they’ve always done: track the general direction of workforce demographics, economic growth, innovation, and business profits, all of which move up over time taking with them the long-term oriented investor.
Speaking of corporate profits, the single biggest item that informs stock prices, they’re at record highs. It’s likely that the S&P 500 logged ~$240 in earnings-per share (EPS) in 2024. If the economy holds up (our base case) we could see ~$275 in 2025 and perhaps ~$300 in 2026! For perspective, EPS troughed at ~$138 during Covid and was ~$162 the year before the pandemic. US companies are quite skilled at making money. More importantly, our portfolio companies continue to shine on this front. We still skew positive for our outlook on corporate earnings. Naturally though, there are some warts. Notable is valuation as stocks aren’t cheap. However we don’t deem them as expensive as those who cite “24x”, CAPE, or whatever. Moreover, it depends on where one chooses to look. Are there expensive parts of the market? Absolutely. More attractive expanses? Totally. At the index level, the S&P 500 currently has a price-to-earnings ratio (P/E) of just over 24x 2024 EPS and 21x that of 2025. Again, not cheap, but not crazy either. It’s been higher at times, and P/E is a terrible timing tool (its best use is to gage expected returns over longer periods, like a decade) so we can’t glean much from these figures as to where the market goes short run. Resultantly, we judge valuation as OK especially if earnings are expanding, inflation is benign, and we’re in an easing cycle with sensible and stable(ish) long rates. Too, post-election, we believe that earnings over the next year or two might come in higher than existing estimates on the notion that less regulation, lower taxes, and increased buybacks could fuel even loftier figures. We’ll see.
Underneath the index level, technology, AI, and the ‘Mag 7’ do look richer relative to other areas, while most everything else is cheaper (S&P 500 is ~16x ex-tech). Spots like health care (and other “defensives”), industrials, REITs, small caps, mid-caps, international, all sport lower valuations – both on a relative and absolute basis. The practical application of this being that portfolio construction and investment tilts matter, while diversification is still the only “free lunch” when investing. If equities broaden out (in earnest) in 2025, it’ll be important to have suitable exposures while preserving deliberate tilts toward quality businesses in tech and growing consumer names. Adding up the puts and takes, we think it unlikely the S&P 500 will be driven by multiple expansion in the years to come. Rather, earnings growth may contribute the lion’s share of the return. But don’t let that get you down beat. If earnings compound at, say, +6-8% (utterly doable) while dividends and buybacks add another couple percent, then the S&P 500 as purely an “earnings growth and shareholder returns story” can be a good stock market indeed. Falling P/Es would be a head wind to this calculus, but for now that’s not our expectation.
As we look ahead to 2025 we are calling it “A Year of Three-Twos.” That is, a US economy firmly growing mid-2s; (core) US inflation settling into the mid-2s; and a Fed that maybe cuts 2 times. 222 … an “angel number” (let’s hope!). Of course, amid all these variables and moving parts we’ll continue to do our job as your investment manager in navigating the landscape for our companies / investments. Thanks for your continued trust in us, and Happy New Year!
PLANNERS CORNER by Anders Skagerberg
As we step into 2025, the planning team remains committed to guiding you to a lifetime of good decisions.
The start of a new year is a chance to reflect, refocus, and take meaningful steps toward your financial goals. Whether you’re planning for a major milestone, fine-tuning your retirement plan, or simply looking to enhance your financial knowledge, we’re here to support you every step of the way.
Looking back, 2024 was a big year – markets were up, we had a presidential election, and so much more. As we look forward to the new year, no one knows for certain what it will hold, but we’re confident that with thoughtful planning and a focus on what truly matters, it can be a year of progress, opportunity, and positive change.
In this planner’s corner update, we will cover:
How to Crush Your Financial Goals in 2025 Practical tips and strategies to set meaningful goals, automate your success, and celebrate progress along the way.
Key Updates for 2025 A look at higher contribution limits, expanded gifting opportunities, Social Security adjustments, and new catch-up provisions for those nearing retirement.
What We’re Working on This Quarter An overview of our initiatives, from updating RMD calculations to integrating income and employer benefits changes into your financial plan.
Let’s make 2025 a year of financial progress and success. Together, we’ll navigate the opportunities and challenges ahead with confidence and clarity!
Next, How to Crush Your Financial Goals in 2025
As we kick off the new year, it’s the perfect moment to take a step back and think about what matters most to you—and how your finances can support that vision.
Depending on your stage of life, your financial goals might be less about growing your wealth and more about maintaining it, simplifying your financial life, or finding ways to use your money to create lasting memories with those you love.
Whatever your focus, the key is to make your goals clear and actionable.
Instead of aiming to “save more” or “spend less,” think about specifics. Maybe you want to fund a family trip, increase your charitable giving, or update your estate plan. Having a concrete goal gives you something to measure progress against—and makes it much easier to see the finish line.
Once you’ve clarified your goals, it’s time to focus on how to make them happen. One of the simplest ways to stay on track is to automate whenever possible. Automating your distributions, bill payments, or even charitable contributions ensures you’re consistent without having to think about it too much. Plus, it gives you more time and energy to focus on what really matters—whether that’s planning your next adventure, enjoying time with family, or pursuing a hobby you love.
Of course, flexibility is just as important as structure. Life has a way of throwing curveballs—unexpected expenses, changes in tax laws, or even an unexpected opportunity you want to pursue. Having some wiggle room in your financial plan can help you roll with the punches while staying on track. For some, that might mean keeping a healthy amount of cash on hand or simply revisiting their plan more regularly to make adjustments.
As you think about the year ahead, it’s also worth reflecting on the bigger picture. How does your financial plan fit into the legacy you’re building? Maybe it’s about leaving something meaningful for your loved ones or supporting causes you’re passionate about. Having a conversation with your family about your values, your estate plan, or even your charitable intentions can make all the difference in ensuring your vision is carried forward in the way you intend.
Finally, don’t forget to pause and appreciate the progress you’ve already made. Achieving your goals—big or small—is worth celebrating.
Whether it’s checking off a bucket-list experience, reaching a financial milestone, or simply enjoying the peace of mind that comes with knowing you’re on track, these moments matter. They remind us that financial success isn’t just about the numbers; it’s about living the life you want and sharing it with the people you love.
Here’s to making 2025 a year full of progress, purpose, and the joy that comes from seeing your hard work pay off.
Next up, here are some key financial updates to be aware of for 2025.
Key Updates for 2025:
Higher Contribution Limits:
401(k)/Roth 401(k): Increased to $23,500, with a $7,500 catch-up for those aged 50+.
IRA/Roth IRA: Remains at $7,000 with an additional $1,000 catch-up if you’re 50+.
HSA: Increased to $4,300 for individuals and $8,550 for families, with a $1,000 catch-up for those aged 55+.
Qualified Charitable Distributions (QCDs): Increased to $108,000 for those over age 70.5. This can be a great way to support the charities you love while receiving valuable tax savings.
Social Security Benefits COLA Increase:
Social Security benefits will receive a 2.5% Cost-of-living increase for 2025.
Expanded Gifting Opportunities:
The annual gift tax exclusion has increased to $19,000, (up from $18,000) offering more opportunities for tax-efficient wealth transfers. This means that you can give $19,000 tax-free each year to any person. For a couple, that’s a combined $38,000 per year they can give to a single person.
NEW “Extra” Catch-Up Contributions for those age 60, 61, 62, and 63:
Larger catch-up contribution limits are now in place for those aged 60-63, making it easier to save more if you’re nearing retirement age. The limit is $11,250 instead of $7,500. This is a new change as of this year and is part of the Secure 2.0 Act passed in 2022.
Inherited IRA RMDs
If you inherited an IRA from someone other than your spouse after January 1, 2020, the SECURE Act introduced a 10-year rule requiring the account to be fully distributed by the end of the 10th year following the original owner’s death. For beneficiaries where the original account owner had already begun taking required minimum distributions (RMDs), the IRS requires annual RMDs in addition to the account being emptied by the end of the 10-year period.
However, due to clarifications and administrative challenges, the IRS waived the annual RMD requirement for 2020 through 2024. This means that even if you didn’t take any distributions during these years, you did not face penalties. Starting in 2025, the annual RMD requirement will resume, and beneficiaries must take these distributions or potentially face penalties. The 10-year deadline for fully depleting the account remains unchanged.
If you are interested in learning more about any of these updates or need additional clarification, as always, we are here to support you.
Next up, here are some of the things we are working on this quarter as well as a few action items for you.
What We’re Working on This Quarter
The start of the year is always a busy time, and we’re focused on ensuring your financial plan is positioned for success. Here’s what the planning team is focused on:
Calculating Required Minimum Distributions (RMDs) for those who need them. For those who take monthly distributions to satisfy your RMD, we will be updating those amounts as well to reflect your new RMD for the year.
Updating Payroll Information and Benefits: If you’ve had changes in pay or recently made benefits elections during open enrollment, we’re integrating those updates into your plan.
Annual Tax Packages: for those with taxable accounts (non-retirement accounts) you will be receiving your annual tax package that includes a summary of your portfolio income for 2024. Reminder: this is not a tax document, just a summary. Investment account tax documents will be available from custodians starting in mid-February.
Action Items for You:
If you’ve received a raise, send us your updated pay stub so we can adjust your financial plan accordingly.
If your employer has an open enrollment period, share your benefits details with us to ensure your elections align with your goals.
Of course, this list is just a glimpse of what we’re focusing on this quarter. As always, we’re here to handle the details so you can stay focused on what matters most.
Ultimately, we’re thrilled to kick off another year of partnering with you to make thoughtful, informed financial decisions. Here’s to a successful and prosperous 2025!
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.
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.
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.
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.
Chart of the Week: US Treasury 2s10s Curve
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.
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.
Chart of the Week: Headline & Core PCE (y/y change)
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.
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.
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.
Chart of the Week: Net Change in Nonfarm Payrolls
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.
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.
As the year draws to a close, many people feel inspired to give back, whether to the causes they care about or to the people who mean the most to them.
Whether you’re considering charitable donations or financial gifts for family members, understanding the financial implications of these gifts can make your generosity go further.
Here’s a financial planning guide to charitable and family gifting to make this season even more impactful.
Giving to Charity
Charitable giving allows you to support the causes you’re passionate about, often with the added benefit of tax savings. Understanding specific strategies for charitable contributions can maximize your impact, ensuring more of your gift reaches the charity and less goes to taxes.
Tax Benefits: Understanding the Basics
Tax benefits for charitable donations are only available when donations are made to qualified organizations, such as 501(c)(3) nonprofits. Additionally, these benefits apply only if you itemize deductions rather than taking the standard deduction. Some people maximize tax savings through a “bunching” strategy, where they combine donations in one tax year to surpass the standard deduction threshold.
Qualified Charitable Distributions (QCDs)
Qualified Charitable Distributions (QCDs) offer an effective way for individuals 70½ or older to make charitable donations directly from their IRAs, potentially reducing taxable income. Here are the main considerations:
Eligibility: You don’t have to be taking required minimum distributions (RMDs) to use a QCD. As long as you’re 70½, you can make QCDs.
Limit for 2024: The QCD limit is $105,000 per individual, adjusted annually for inflation.
Reporting Requirements: The forms used to report IRA distributions don’t indicate if a QCD was made. To ensure this distribution is not taxed, communicate with your tax preparer and inform them of your QCD and the amount.
Donating Appreciated Stock
If you have stocks or other assets that have appreciated in value, donating them to charity can provide substantial tax savings:
Comparison: If you sell appreciated stock, you’ll owe capital gains tax before donating the proceeds, reducing the overall impact of your gift. Donating the stock itself avoids capital gains tax and provides a deduction based on the stock’s full market value.
Additional Benefit for Charities: Charities can sell the stock without any tax obligation, keeping the full value. This effectively removes taxes from the equation, maximizing funds for both you and the charity.
Use with Donor-Advised Funds (DAFs): Appreciated stock can also be contributed to a DAF, offering an immediate tax deduction while allowing you to decide which charities to support over time.
Donor-Advised Funds (DAFs)
DAFs allow you to contribute assets, claim an immediate tax deduction, and choose when and how to distribute funds to charities. This flexibility can be especially useful in years of unusually high income:
Tax Savings in High-Income Years: By contributing more to a DAF during high-income years, you can reduce the amount taxed in the highest bracket, often resulting in significant savings.
Giving to Family
In addition to supporting charities, many people choose to share financial gifts with family members. By planning these gifts carefully, you can help loved ones while minimizing tax implications.
Annual Gift Exclusion
The annual gift exclusion is a straightforward way to transfer wealth to family members without incurring gift tax. For 2024, you can give up to $18,000 per recipient, per year. Here’s how it works:
Gift Limit: Each individual can gift up to $18,000 per recipient annually without affecting their lifetime estate exemption. For instance, a couple could gift a combined $36,000 to each child without using any of their lifetime exemption.
Advanced Strategy: Annual Gifting through Irrevocable Trusts
For high-net-worth families, annual gifting can be elevated by establishing irrevocable trusts for grandchildren or other heirs. This strategy allows assets to grow over time on behalf of the beneficiaries while still taking advantage of the annual gift exclusion:
How It Works: By contributing the annual exclusion amount into an irrevocable trust each year, you can gift money that grows tax-free within the trust for the grandchild’s future needs, ensuring that the funds remain in the family’s financial plan.
Legal Considerations: To qualify the gift for the annual exclusion, specific rules must be followed to show that it’s a “present interest” gift. This often involves Crummey Powers, which give beneficiaries a temporary right to withdraw the funds, ensuring eligibility under IRS guidelines.
Importance of Expert Guidance: This strategy is complex and requires precision. An estate attorney can guide you through the rules, explain Crummey Powers, and ensure the trust meets legal standards for tax purposes.
Lifetime Exemption and Gift Tax Considerations
For gifts that exceed the annual exclusion, the excess amount counts toward the lifetime estate and gift tax exemption, which is $13.61 million per individual ($27.22 million per couple) in 2024. However, this amount is set to change:
Upcoming Reduction: Under the Tax Cuts and Jobs Act (TCJA), the lifetime exemption is scheduled to revert to around $6 million per individual when (or if) the act sunsets in 2026. Staying informed of these changes can help guide your long-term estate and gifting strategies.
Direct Payments for Medical or Education Expenses
There is an exception to gift tax rules for direct payments made to healthcare providers or educational institutions:
How It Works: Payments made directly to cover medical or educational expenses don’t count toward your annual gift exclusion or lifetime exemption.
Important Caveat: To qualify for this exemption, payments must be made directly to the provider or institution. If you give the money to a family member to pay the expenses, it will count toward the annual exclusion.
Gifting to 529 Plans
Helping a family member with future education costs is a meaningful way to support their goals. 529 college savings plans grow tax-free when used for qualified educational expenses.
Gift Acceleration: You can front-load 529 plan contributions by making five years’ worth of gifts at once—up to $180,000 for a couple—without using your lifetime exemption. However, only the account owner is eligible for any state tax benefits associated with contributions, so it may make sense to let the primary contributor (often a parent or grandparent) own the account.
The Importance of Planning Your Giving
Whether you’re supporting a meaningful cause, helping family members, or both, strategic planning can enhance your impact and ensure your gifts align with your financial objectives. The holiday season provides a perfect opportunity to reflect on these goals, making the most of your giving today and for future generations.
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 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.
S&P 500 Total Return by Sector – November 2024
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.
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.
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.
Chart of the Week: Total Returns for US and Foreign Benchmarks Post-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.
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.
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.
Chart of the Week: Consumer Price Index by Component (y/y change)
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.
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.
