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Weekly Market Recap – July 5, 2024

Weekly Recap:

The first week of the second half of 2024 was largely a continuation of what has been the dominant trend of the past 18 months, with technology stocks pulling large cap benchmarks higher while other parts of the market were mixed. The S&P 500 gained 2% on the week, despite the fact that 56% of the index constituents (281 out of 503 stocks) finished lower. Meanwhile, the tech-dominated Nasdaq (+3.5% on the week) continued to pull ahead in the 2024 performance race, while the more cyclical Dow (+0.7% on the week and just +5.5% YTD including dividends) lags far behind. Similarly, US small and midcap benchmarks (which are not nearly as tech-heavy as large caps) finished lower on the week, and have also meaningfully underperformed on a YTD basis.

Rates finished lower across the curve last week thanks to so softer-than-expected macro data, allowing bond prices to rise. Despite the holiday it was a busy week for macro, including below-consensus prints for both manufacturing and services activity in the month of June:

* ISM’s Manufacturing PMI slid deeper into contraction territory at 48.5

* ISM’s Services PMI fell into contraction at 48.8 (lowest print since May of 2020)

The week concluded with the monthly jobs report from the BLS, which showed steady growth in both jobs (+206k NFP) and hourly earnings (+3.9% y/y). Labor force participation ticked higher to 62.6%. Perhaps most importantly, the closely-watched U-3 unemployment rate rose 10bp sequentially to 4.1%. Despite rising sequentially for the 3rd straight month, U-3 remains slightly below the level that would trigger the Sahm Rule and potentially indicate the start of a US recession.

Chart of the Week: Nonfarm Payrolls (m/m net change)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x 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 single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or twice in 2024, most likely at some point in the 2nd half of the year. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.


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.

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Quarterly Letter Excerpt: From John Bird’s Desk

As Albion grows and matures – and we’re now in the early years of our fifth decade – it’s inevitable that we find ourselves celebrating the retirement of long-time team members, honoring their contributions, yet continuing into the future without disruption. We’ve had a few over the years and it’s time to celebrate another. Doug Wells, Partner and head of business development, will be retiring in early July. Doug reached out to Albion in the 1990’s when he was looking for financial planning advice. He liked what he saw. Several years later, in 2002, Doug came back and pitched Toby and me on why we should hire him. Those of you who know him know he can be persuasive! We brought him into Albion and never looked back. His desire to learn was immediately apparent and within a few years had earned, in addition to his MBA, the CFP (Certified Financial Planner) and CFA (Chartered Financial Analyst) designations. He helped us along our path of continuous improvement where we strive to add more value to everything we do on behalf of clients. And he worked to get the word out into our community about Albion. Over the years he turned his network of business associates into a group of lifelong friends. From being a ski instructor at Deer Valley, hosting a radio show on KPCW, trying Bikram Yoga, or organizing group mountain bike rides, Doug has never shied away from trying new things. And with that spirit, he is trying a new chapter in his life, that of retirement.

He has helped scores of Albion clients make the decision to retire. More often than not the decision is far more personal than financial; it can be difficult to leave what you’ve known for decades and step off into the unknown. Having successfully counseled people through the transition he knew it was time to follow his own advice.

We will miss Doug. His energy, upbeat attitude, and intelligence are all characteristics we knew we could depend on. But we also know he leaves behind a highly functioning team that is already filling the void he leaves behind. Thank you, Doug, for choosing Albion!


Note: This blog post is an excerpt from Albion’s Quarterly Letter to clients. Find the entire letter posted in the Learning Center of this website.


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.

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Market Recap – Q2 2024

Q2 Recap:

Inflation

After several hotter-than-expected inflation prints in Q1, the data released in Q2 suggest that price pressures began to cool a bit. The m/m increase in Core CPI and Core PCE fell sequentially in both April and May, leaving Core CPI at +3.4% y/y and Core PCE at +2.6% y/y. Substantially all of the remaining inflation in the economy is in core services. Food and energy inflation are roughly +0.5% y/y combined as of the end of Q2, while core goods inflation is actually negative (i.e., deflation) at -0.4% y/y.

Monetary Policy

There were no changes to overnight interest rates in Q2, and the June update to the Summary of Economic Projections clearly reflected a “higher for longer” outlook, due to lingering inflation concerns. The median projection among FOMC members fell to just one 25bp rate cut in 2024, although to be fair, the committee was quite close to being evenly split between one rate cut and two. Fed Chair Jerome Powell reiterated during the most recent press conference that the committee will need to see more sustained progress towards the 2% inflation target before they will have sufficient confidence to begin cutting rates.

Economy

Data released in Q2 suggest a slowing, but still growing, US economy. The labor market is normalizing: new jobless claims rose by ~20k per week, open jobs fell to 8.06 million, and unemployment ticked higher by 20 basis points to 4.0%, but job creation remained solidly positive (3m avg +249k nonfarm payrolls added). Persistently high mortgage rates have inhibited housing sector activity. Manufacturing remains weak, but strength in services driven by solid consumer demand continues to drive the economy forward. Analysts currently forecast an acceleration in S&P 500 earnings growth in Q2, with bottom-up consensus estimates at +8.8% y/y.

Bond Market

Treasury yields moved higher across the curve in Q2, particularly in the belly and long end as investors continue to grapple with longer-term inflation assumptions and US budget deficits. Credit spreads tightened in April and early May, but then retrenched in June to finish slightly wider for the quarter. In the aggregate, the US investment grade bond market is down slightly YTD at the halfway point of 2024.

Stock Market

Gains were concentrated in Q2, continuing the “narrow rally” theme. Large caps that could be tied to the generative A/I theme did well in Q2, led by semiconductor stocks like Nvidia (+36.7%). Public utility stocks also continue to benefit from the significant expansion in power and cooling that will be required to support the growing A/I infrastructure. Elsewhere though, it was a difficult quarter, with cyclicals, small caps, and most international benchmarks finishing lower.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x 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 single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or twice in 2024, most likely at some point in the 2nd half of the year. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.


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.

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Weekly Market Recap – June 21, 2024

Weekly Recap:

Most equity benchmarks finished in the green once again last week, albeit with different leadership this time. Tech stocks took a step back on Thursday and Friday, particularly the semiconductor companies (Nvidia, Broadcom, Taiwan Semiconductor Manufacturing, Qualcomm, etc.) that had been fueling the recent rally. In the end, cyclicals and small/midcap stocks outperformed on the week as what had been a very narrow rally broadened out a bit.

Despite a variety of macro updates that in the aggregate were a bit weaker than expected, rates moved higher by 3-5 basis points across the curve. Meanwhile, IG corporate credit spreads widened for the 3rd consecutive week, and have now widened by nearly 10 basis points on average since the end of May.

Most of the macro updates from last week suggested a gradually softening outlook for the US consumer, including:

* US retail sales ex autos fell 0.1% sequentially for the 2nd straight month

* The NAHB Housing Market Index fell 2 points to 43 in June

* Housing Starts fell 5.5% m/m on a seasonally adjusted basis in May

* Residential Building Permits fell 3.8% m/m on a seasonally adjusted basis in May

* The Conference Board LEI fell 0.5% m/m and is now -14.2% off its cycle peak

However, there were a few bright spots that allowed cyclicals to rise, including:

* Industrial Production rose 0.9% m/m in May

* US Manufacturing Capacity Utilization rebounded 50bp to 78.7% in May

* S&P’s Manufacturing PMI rose to 51.7 in preliminary June data

* S&P’s Services PMI rose to 54.8 in preliminary June data

Chart of the Week: Conference Board LEI (Total)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x 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 single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or twice in 2024, most likely at some point in the 2nd half of the year. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.


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.

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Weekly Market Recap – June 14, 2024

Weekly Recap:

In a week where an updated dot plot from the FOMC showed that consensus among committee members had moved to just one 25bp rate cut by year-end, futures markets actually increased the odds of a second rate cut from roughly 50/50 to more like 90/10.

The reason was inflation data. All three inflation metrics released last week came in well below consensus expectations, beginning with CPI data for May which hit the tape only a few hours before the conclusion of the 2-day FOMC meeting:

* Headline CPI was flat sequentially and fell to +3.3% y/y

* Core (ex food & energy) CPI rose 0.2% m/m and fell to +3.4% y/y

Then on Thursday, the Producer Price Index (PPI) showed similar softness, coming in 30bp below consensus estimates across the board:

* Headline (final demand) PPI was -0.2% m/m and fell to +2.2% y/y

* Core (ex food & energy) PPI was flat sequentially and fell to +2.3% y/y

Finally, import/export prices released on Friday showed a similar trend:

* Import prices printed at -0.4% m/m and fell to +1.1% y/y

* Export prices printed at -0.6% m/m and fell to +0.6% y/y

In response, bond prices rose as rates fell by ~20bp across the entire Treasury yield curve. On the equity side, real estate and large cap growth stocks were the biggest beneficiaries of the fall in rates, while cyclicals and small caps finished lower. The tech sector also got yet another boost from rosy A/I-driven earnings reports and forward guidance from Broadcom, Oracle, and Adobe.

Chart of the Week: Consumer Price Index (y/y change)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x 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 single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or possibly twice in 2024, most likely at some point in the 2nd half of the year. Belly and long end rates are likely already near their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Moderating energy prices have recently been helpful in terms of the inflation outlook.


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.

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From College Savings to Retirement: How to Fund a Roth IRA with Extra 529 Money 

Executive Summary: 

  • Overfunded 529 Plans can be rolled into a Roth IRA to jumpstart retirement savings. 
  • This can be a great strategy in certain situations, avoiding the 10% penalty on non-qualified distributions and receiving tax-free growth and withdrawals in retirement. 
  • However, there are complex rules to consider, like the 15-year account age requirement and the $35,000 lifetime rollover cap. 
  • In addition, the beneficiary must have earned income, and the rollover amount must stay within annual contribution limits.  
  • Lastly, changing the beneficiary may restart the 15-year clock, though the IRS has not released official guidance at the time of writing. 

While 529 plans are often the best way to save for college expenses, many worry about over funding these accounts. 

And it makes sense, because while a 529 plan is great for qualified education expenses (benefitting from tax-free growth and tax-free distributions), when used for other purposes, 529 distributions can incur unwanted taxes and penalties. 

Of course, in a perfect world, savers would end up with the exact amount they need to fund their education expenses, but the reality is not so simple. Instead, many wind up with extra funds, opting for overfunding rather than underfunding their college needs.  


Which raises the question: what should you do with the extra 529 funds? 

Fortunately, you’ve got options: from simply withdrawing the funds and incurring taxes and penalties, to changing the beneficiary of the account to an eligible family member and funding their college needs.  

And now, with the passage of SECURE 2.0 you’ve got another powerful option: Roll the funds into a Roth IRA for the beneficiary, helping them jumpstart their retirement savings. 

In this article, we will explore the pros and cons of this approach and highlight the key rules and regulations to consider. 

First, let’s look at the pros and cons of rolling unused 529 money into a Roth IRA. 


Pros of Funding a Roth IRA with Unused 529 Money: 

  1. Jumpstart retirement savings: Rolling unused 529 money into a Roth IRA can help the beneficiary get an early start on retirement savings. 
  1. Avoid Penalties: By rolling funds into a Roth IRA, you can avoid the 10% penalty on non-qualified distributions. 
  1. Tax benefits: Roth IRAs benefit from tax-free growth and tax-free distributions in retirement, making them a powerful investment account.  

Ultimately, rolling unused 529 money into a Roth IRA can jumpstart retirement savings for the beneficiary, avoid the 10% penalty on non-qualified distributions, and offer tax benefits with tax-free growth and distributions in retirement. 


Cons of Funding a Roth IRA with Unused 529 Money: 

  1. Withdrawal Rules: While Roth IRAs are great for retirement savings, they do have certain withdrawal rules that can limit your ability to access funds penalty-free. 
  1. Loss of control: With a 529 plan, you own the funds, no matter who the beneficiary is. Alternatively, if you contribute to a Roth IRA for your child or grandchild, they have full control over the account, assuming they have reached the age of majority.  
  1. Complex rules: Lastly, there are several rules that you need to be aware of when rolling unused 529 money into a Roth IRA, which we will cover in detail below. 

Ultimately, this can be a great strategy, but be aware of the cons: Roth IRAs have withdrawal rules that may limit penalty-free access to funds, you lose control of the funds once they are in the beneficiary’s account, and the process involves navigating complex rules and regulations. 

Next, Here Are The Key Rules and Regulations When Rolling 529 Funds into a Roth IRA 

Next, let’s explore the key rules and regulations for rolling 529 money into a Roth IRA. These guidelines are essential to ensure compliance and to maximize the benefits of this strategy.  

  • The 529 plan must have been open for a minimum of 15 years. (Important note: Changing the designated beneficiary of the 529 plan may restart the 15-year waiting period*.) 
  • The Roth IRA must be in the same name as the beneficiary of the 529 plan. 
  • The beneficiary must have earned income during the year the rollover is conducted. 
  • The beneficiary’s income must be below the annual limit for Roth IRA contributions. 
  • The rollover amount cannot exceed the annual contribution limit for IRAs. 
  • The amount rolled over cannot be more than the contributions made to the 529 plan, plus any earnings, within the last five years before the rollover.  
  • The total amount that can be transferred from 529 plans to Roth IRAs is capped at $35,000 per beneficiary. 
  • Contributions made to the 529 plan within the last five years are not eligible for rollover.  

*The 529 industry submitted a letter to the IRS in September of 2023 to determine whether a change in beneficiary would reset the 15-year clock. That said, at the time of writing, the IRS hasn’t released official guidance on this issue, and it is unclear if or when they will.  


The Bottom Line 

In the end, rolling unused 529 money into a Roth IRA can be a powerful way to give your kids or grandkids a jumpstart on their retirement savings. But, like many complex strategies, it’s essential to be aware of the different rules and regulations to avoid running into issues. Consulting with a financial advisor can ensure you’re making the most of this opportunity while staying compliant. By strategically executing this strategy, you can provide a solid foundation for your loved ones’ financial future. 


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.

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Weekly Market Recap – June 7, 2024

Weekly Recap:

Stocks were higher in the aggregate (fueled by another 10% rise in NVDA) during a busy week for macro news that provided mixed signals with respect to the state of the US economy. Early in the week, some softer-than-expected updates on labor and manufacturing suggested that the economy was slowing to the point where multiple rate cuts by year-end were a probable outcome, but Friday’s stronger-than-expected monthly jobs report turned that notion around in a hurry.

On Monday, ISM’s Manufacturing PMI for May fell to 48.7 (contraction territory), with fresh weakness in new orders. Later in the week, however, ISM’s Services PMI gained more than expected, with strength in both new orders and employment. This is consistent with the pattern in the US economy for the past 2+ years, during which a strong services sector (the bulk of the US economy) has offset what has essentially been a recession in manufacturing.

Labor market data also painted a mixed picture. On Tuesday, the Job Openings and Labor Turnover Survey (aka, the JOLTS report) showed a second consecutive large m/m drop in open jobs in the US, falling to 8.06 million (the pandemic era peak was over 12 million). Weekly initial jobless claims also ticked up slightly to 229k, which is towards the higher end of the range that has persisted for the past 2+ years. But then on Friday, the month jobs report from the BLS far surpassed consensus with 272k nonfarm payrolls added (consensus = 180k), and 4.1% y/y growth in average hourly earnings (consensus = +3.9%). The strong report left traders rushing to cover their rate cut bets, leaving the odds of a second cut in 2024 at roughly 50/50 as the week drew to a close.

Chart of the Week: Nonfarm Payrolls Added

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20.7x 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.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or possibly twice in 2024, most likely at some point in the 2nd half of the year. Rate cut expectations have been tempered recently due to sticky inflation prints.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Moderating energy prices have recently been helpful in terms of the inflation outlook.


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.

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Monthly Market Recap – May 2024

May Recap:

Inflation:

Data released in May suggested that price pressures may have eased back just slightly in April. The m/m change in Core CPI fell 10 basis points sequentially to +0.3%, leaving the y/y figure at +3.4%. Similarly, the m/m change in the PCE Core Deflator also fell 10 basis points to +0.2%, with the y/y figure holding steady at +2.8%.

Monetary Policy:

May featured what might be termed “a meeting in two parts,” at least in terms of how financial markets reacted. At the conclusion of the FOMC meeting on May 1st, markets breathed a sigh of relief that the committee did not appear to be seriously contemplating rate hikes to combat sticky inflation. Rates fell across the curve in early May as a result, while Fed funds futures markets priced in a second rate cut prior to year-end. However, when the minutes from that meeting were released on May 22nd, investors were discouraged by the very clear reminder that many committee members lacked confidence that inflation was sufficiently under control to seriously contemplate rate cuts in the near term. Odds of a second rate cut in 2024 fell to roughly 50/50 by month end.

Economy:

Data released in May was mixed. The labor market remains strong but is gradually normalizing: new jobless claims remain low at ~220k per week, but job creation slowed (175k nonfarm payrolls added) and unemployment ticked higher by 10 basis points to 3.9%. Consumer confidence indicators were also mixed: the Conference Board’s index rebounded 4.5 points to 102.0, while the University of Michigan saw an 8 point decline to 69.1 with weakness in all components. Meanwhile, persistently high mortgage rates appear to have stalled any upward momentum in housing sector activity. Q1 GDP growth was revised lower by 30bp to +1.3% q/q annualized, but Q1 corporate earnings growth was robust at roughly +6% y/y for the S&P 500, well in excess of inflation.

Bond Market:

Treasury yields see-sawed, initially falling after what felt like a dovish FOMC meeting, only to reverse course and retrace most of that ground later in the month after the meeting minutes were released. Finally, yields fell again after the May 30th release of a downwardly revised Q1 GDP print, leaving bond prices higher on the month. Credit spreads remained steady throughout at levels that are very tight by historical standards.

Stock Market:

Stocks of nearly all stripes were higher in May, aided by the tailwinds of lower rates, solid corporate earnings, and renewed enthusiasm for A/I themed companies after yet another blowout earnings report from Nvidia. Falling oil prices pushed the energy sector slightly into the red, but all other sectors in the S&P 500 finished higher, led by technology stocks.

S&P 500 Total Return by Sector – May 2024

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20.3x 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.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or possibly twice in 2024, most likely at some point in the 2nd half of the year. Rate cut expectations have been tempered recently due to sticky inflation prints.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Rising oil prices driven by armed conflicts in Ukraine and the middle east are also a risk to the inflation outlook.


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.
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Weekly Market Recap – May 24, 2024

Weekly Recap:

Last week’s market action was a product of two countervailing forces: a disappointing (but hardly surprising) reminder that the Fed is not ready to declare victory over inflation, followed by renewed euphoria regarding the potential of G-A/I after Nvidia yet again exceeded the market’s expectations with blowout Q1 earnings and revenue guidance.

Minutes from the April 30 / May 1 FOMC meeting showed that committee members are concerned about the recent stickiness in inflation, and see potential upside risks to the inflation outlook from geopolitical events via energy prices. Members cited a lack of confidence to move forward with rate cuts, a sentiment that has also been reflected in post-meeting public statements. Rates moved higher across the curve in response, particularly in the front end as the odds of a 2nd rate cut in 2024 fell to roughly 1-in-3, the lowest they’ve been all year.

After the close on that same day, Nvidia released Q1 earnings and updated revenue guidance that somehow exceeded the lofty expectations baked into consensus estimates and the stock price. NVDA rose more than 9% on Thursday, and was up another 2.6% on Friday, dragging other A/I-theme stocks higher too.

The net result of these two forces was a heavily skewed equity market, in which the S&P 500 finished slightly higher on the week at the index level, despite the fact that nearly 3/4 of the index constituents were lower. As the chart of the week shows, it is highly unusual for the index to be up when so many constituents are down. In fact, the S&P 500’s weekly net advancer/decliner score of -235 is the lowest for any week with a positive index price change in the past 30+ years.

Chart of the Week: S&P 500 Weekly Price Change % vs. Advancers-Decliners

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20.5x 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.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or possibly twice in 2024, most likely at some point in the 2nd half of the year. Rate cut expectations have been tempered recently due to sticky inflation prints.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Rising oil prices driven by armed conflicts in Ukraine and the middle east are also a risk to the inflation outlook.

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Weekly Market Recap – May 10, 2024

Weekly Recap:

In a mostly quiet week for macro news, rate volatility eased lower and stocks moved higher, although Friday’s U of M consumer sentiment print caused a modest reversal of those trends.

The BofA MOVE index (a measure of Treasury rate volatility, similar to the VIX for equities) finished the week at 94.23, its lowest level since the start of April and one of the lowest prints of the past 2 years. While rate vol is still elevated relative to pre-pandemic norms, it has been trending lower over the past 12 months, to the benefit of stock prices. See the Chart of the Week for a time MOVE index time series.

Stocks finished the week in the green across the board, led by utilities which have been on a remarkable run lately after being mostly unloved for the better part of 2 years. As of Friday’s close, S&P 500 Utilities Sector Index had risen 13.5% since mid-April, vaulting it into second place in YTD performance amongst sectors in the S&P, trailing only Communications which has been driven primarily by technology stocks within the sector, including Meta (Facebook) and Alphabet (Google).

While the week was mostly quiet from a macro perspective, it ended on somewhat of a sour note as the University of Michigan’s Consumer Sentiment survey came in weaker than expected across the board in the preliminary May reading. The headline index fell nearly 7 points to 67.4, with significant weakness in both Current Conditions (68.8 vs. consensus of 79.0) and Future Expectations (66.5 vs. consensus of 75.0). Perhaps most concerning was that consumers’ inflation expectations moved higher: short term (1y) expectations increased 30bp to 3.5%, while longer term (5-10y) expectations increased 10bp to 3.1%.

Chart of the Week: BofA MOVE Index

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20.4x 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.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or possibly twice in 2024, most likely at some point in the 2nd half of the year. Rate cut expectations have been tempered recently due to sticky inflation prints.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Rising oil prices driven by armed conflicts in Ukraine and the middle east are also a risk to the inflation outlook.