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Quarterly Letter – First Quarter 2025

As the snow melts and spring blossoms emerge, we close the books on a dynamic first quarter and look forward to the opportunities that lie ahead in this season of renewal and growth. From the desk of Albion’s President Liz Bernhard, this letter begins with a retrospective of headlines from past recessions compared to the tone of today’s newspapers. Then our CIO Jason Ware details the strengths and weaknesses of the US economy and markets. Finally, Senior Wealth Advisor Anders Skagerberg promotes the long-term mindset that is required to persist through challenging times. Read through to our Community segment for team updates and upcoming events.

From the Desk Of Liz Bernhard

“This Time Is Different”—But Is It, Really? 

Every market cycle brings its own headlines, anxieties, and reasons to believe that “this time is different.” And in some ways, it is—unique political developments, global tensions, new technologies, and shifting economic data can make the present feel unprecedented. 

Lately, investors have voiced concerns about market volatility, geopolitical strife, and domestic political uncertainty. It’s easy to feel unsettled. These moments invite the temptation to react, retreat, or alter long-term plans based on short-term fears. 

But while the circumstances change, human behavior rarely does. History shows that uncertainty is not the exception—it’s the norm. Markets have weathered wars, recessions, elections, and crises. And each time, the refrain is familiar: “But this time feels different.” 

And yet—this too shall pass. 

Let’s take a walk down memory lane. Remember the Great Financial Crisis of 2008? Of course you do. A few headlines from that time: 

  • “Job Losses Accelerate, Signaling Deepening Recession” — The New York Times, Dec. 6, 2008 
  • “Foreclosures Soar as Homeowners Fall Behind” — Bloomberg, late 2008 
  • “World Recession Looms as Markets Tumble” — BBC News, Oct. 6, 2008 

How about COVID? 

  • “Wall Street’s Coronavirus Collapse Marks Fastest Bear Market Ever” — Bloomberg, Mar. 12, 2020 
  • “Oil Prices Plunge to 18-Year Low as Demand Evaporates” — CNBC, Mar. 30, 2020 
  • “March 2020 Becomes Most Volatile Month in Stock Market History” — MarketWatch, Mar. 31, 2020 

The beginning of the war in Ukraine: 

  • “Market Volatility Spikes as Russia Launches Full-Scale Attack on Ukraine” — CNBC, Feb. 24, 2022 
  • “Stocks Swing and Oil Prices Soar After Russia Attacks Ukraine” — CBS News, Feb. 24, 2022 
  • “Global Inflation Surges Amid Ukraine Conflict” — Reuters, May 10, 2022 

And now: 

  • “Consumer Confidence Hits Two-Year Low as Inflation and Job Fears Rise” — Associated Press, Mar. 28, 2025 
  • “Wall Street Tumbles, and S&P 500 Drops 2% on Worries About Slower Economy, Higher Inflation” — Associated Press, Mar. 28, 2025 

Each moment felt unique: the worst economy since the Great Depression, a global pandemic, a war in Europe. And each time, the market—and headlines—reacted. Yet the market recovered. 

  • The S&P 500 took about 4.5 years to recover from the March 2009 low during the GFC. 
  • The COVID crash recovery took under five months. 
  • After Russia’s invasion of Ukraine in February 2022, it took only a month for markets to bounce back. 

The point is: markets recover. Stocks go higher. While each situation truly was different, those who stayed the course were rewarded. 

The core principles of sound investing haven’t changed: stay disciplined, remain diversified, and stay focused on long-term goals. Emotional reactions to uncertainty are among the greatest threats to building lasting wealth. 

Our approach remains rooted in evidence, not emotion. We build durable portfolios designed to weather a wide range of possibilities—always with an eye on the big picture and the most probable long-term outcomes: humanity will progress, economies will grow, markets will rise. And within that reality, asset allocation, diversification, behavior, and planning are what matter most. 

The Wall Street Journal from March of 2020. The coronavirus outbreak fanned new fears of a worldwide recession, as well as an all-out oil price war, sending stock markets spiraling down to new record lows not seen since the financial crisis of 2008.

Economy and Markets by Jason Ware

The first quarter of 2025 is in the books, and it was a bumpy one. While it never feels like it at the time, corrections are normal – even healthy – in a bull market. Since 1928, the S&P 500 has experienced 103 such corrections, occurring about once every 13 months, with an average drawdown of -13.5%. The latest decline of about -10% follows an extended stretch of relative calm as the previous correction (September-October 2023) was roughly 16 months ago. Put differently, in a way, markets were sort of due. We certainly recognize that pointing to historical patterns offers little comfort when portfolios are under pressure. But history is clear on how most corrections end: by avoiding recession. The majority don’t turn into full-blown bear markets. When they do, it’s almost always tied to economic contractions or sudden, unexpected shocks. 

Consequently, the critical question now is: where do we stand on recession risk? Let’s unpack.  

Underneath the volatility – both in the markets and the headlines – the US economy remains on pretty good footing, though with some shifting undercurrents. Growth is moderating from last year’s pace, but not stalling. The labor market, while cooling at the margins, is still adding jobs, layoffs are low, and wage growth continues to outpace inflation supporting real household incomes. Meanwhile, business investment runs apace, with AI, automation, software, and infrastructure spending leading the way. 

That said, some pockets of weakness are emerging. Higher borrowing costs continue to weigh on certain industries, particularly interest-rate-sensitive sectors like commercial real estate, housing, and manufacturing. Consumer spending, while resilient, is showing more divergence between higher-income households (who are still spending freely) and lower-income consumers, who are feeling the pinch of tighter credit conditions, a lower savings cushion, and elevated uncertainty. However, with pro-growth fiscal deficits still in place (despite ‘DOGE’), productivity improving, and a generally healthy jobs market underwriting robust services activity (by far the largest piece of GDP), we continue to believe the post-Covid economic expansion endures. 

Meanwhile, the inflation story has largely played out as we’ve expected. The supply shocks and demand surges of 2021-23 have faded, and price pressures have eased. While we’re unlikely to see inflation sustainably at 2% any time soon, the mid-to-high-2s look like a reasonable resting place. That’s a world away from the 9.1% peak of 2022, and as long as inflation stays contained the Fed has room to maneuver. Moreover, as we’ve past highlighted, inflation at 3% or less is constructive for both the economy and stock market.  

After holding rates steady for much of 2024, the Fed finally pivoted to rate cuts late last year. The goal? A “soft landing” where inflation stays in check without tipping the economy into recession. The Fed’s definition of “neutral” policy – where rates neither stimulate nor restrict growth – coupled with the economy’s structural underpinnings as we see them suggest a terminal fed funds rate somewhere around 3.5%. With inflation easing, the Fed had begun moving in that direction, but the path forward remains uncertain. Markets are pricing in multiple rate cuts ahead, but the Fed is keeping its options open, and we see “sticky” inflation restraining them for now – unless unemployment begins to rise meaningfully. 

Bond yields have settled into a more predictable range. If neutral rates are around 3.5% and term premiums are historically normal, then long-term Treasury yields should hover in the 4.0-5.0% range. Of course, fiscal deficits, geopolitical events, US economic growth and inflation, as well as investor sentiment will keep things volatile at times. But in general, this is a favorable environment for long-term investors with a balance asset allocation looking to lock in attractive yields. 

Turning to stocks, notwithstanding the acute volatility since late-January, US equities remain well-supported by fundamentals. Corporate earnings are growing at a healthy pace. S&P 500 earnings-per-share (EPS) finished 2024 at $243, with estimates for 2025 approaching $270 (that’s double-digit growth!) and 2026 potentially reaching $300. For context, EPS was about $138 at the Covid low and $162 in 2019, reinforcing the ever-present resiliency and dynamism that defines American business … a vigor we never wish to bet against.  

While earnings growth remains strong, valuation is a key consideration. As of this writing, the S&P 500 trades at ~20.5x this year’s earnings – not “cheap” per se, but certainly not extreme. Much of the premium remains concentrated in a handful of technology (AI) stocks, while other areas of the market, such as healthcare, industrials, REITs, financials, and small / mid-caps, offer more attractive valuations. Many of the mega cap stocks, or “Mag 7”, also look more attractive amid the market pullback. Portfolio positioning remains key, as leadership may continue to broaden beyond the handful of dominant winners. In everything we do, the mantra own great companies and diversify reigns supreme.   

In sum, as noted in our last missive, we’re calling 2025 “A Year of Three-Twos.” That is, a US economy growing at roughly +2%, core inflation settling into the mid-2s, and a Fed that may cut rates two times. It’s a backdrop supportive of continued, if more moderate, market gains. Indeed, we don’t need multiple expansion. Rather, merely sustaining nourishment from a salubrious business cycle and profits should do the trick. Of course, risks remain. Geopolitics, tariffs, government austerity, the level of inflation and bond yields could each or in concert introduce volatility. But overall, the foundation, at present, remains solid from our perch. 

As always, we remain resolutely focused on navigating the ever-evolving landscape while keeping our true north, the long-term, firmly as our guide. Thank you for your continued trust! 

Mind The (Behavior) Gap

Anders Skagerberg, CFP®, EA

As the first quarter of 2025 comes to a close, a few things stand out to me.

First and foremost, as an advisor, I’m reminded that one of the best parts of my job is the privilege of walking alongside my clients—through market ups and downs, life’s milestones, and all the thoughtful decisions in between. This is meaningful, important work.

Second, periods like these highlight just how powerful human behavior is. Recently, markets have been bumpy and headlines unsettling, affecting how we feel as investors—and ultimately, how we behave.

Like it or not, we’re wired to feel losses more intensely than gains and to focus more on negative information than positive. These behavioral biases—known as loss aversion and negativity bias—are built-in features of the human brain.

Now, don’t get me wrong—these biases aren’t inherently bad. Think of them like a well-meaning friend who always ‘speaks their mind.’ They’re survival mechanisms, hardwired to protect us from danger. If we rewind a few hundred thousand years, early humans lived in a world filled with physical threats, where losing essential resources like food, shelter, or safety could literally mean life or death. That harsh reality shaped our brains to prioritize avoiding losses and taking fewer risks—because back then, one wrong move could have serious consequences.

Fast forward to today, and those same instincts often lead to unintended, sometimes costly, outcomes. What once protected us can now get in the way, pushing us toward decisions that undermine our long-term financial well-being.

In our industry, we call this impact The Behavior Gap.

At Albion, this concept is so central to how we think about investing that we’ve made “Behave Yourself” one of our Four Pillars of Investing. It’s something our Chief Investment Officer, Jason, reminds us of regularly: “Investor behavior will determine success or failure more than anything else.”

Popularized by financial writer Carl Richards and quantified in Dalbar’s annual Investor Behavior Report, the behavior gap refers to the difference between what an investment should return and what an investor actually earns. Simply put, it’s the gap between potential returns and actual results.

And it turns out, there’s quite a gap. 

Dalbar’s most recent study, published in April 2024, shows the average investor underperformed the market by 5.5% in 2023—the third-largest gap in the past decade. Looking at the long-term data, since 1988 the market has averaged a 10% annual return, while investors earned just 4.1%. That’s nearly a 6% shortfall per year!

This is why, as investors, managing our own behavior is one of the most crucial ingredients for growing wealth.

Of course, that’s easier said than done. If it were easy, everyone would do it—and the gap would disappear. But it’s worth the effort. And ultimately, this is where we strive to add the most value as your advisors. We understand it’s scary. We understand how it feels (we’re investors too). And we understand what’s at stake.

If nothing else, I hope this gives you a glimpse behind the curtain at how we think about our work. To us, the most meaningful thing we can do is be there—through the good times and the bad—to help you make the best decisions for yourself and your family, even when they don’t feel like the easiest.

But before I go, in true advisor fashion, I want to leave you with some practical steps. Here’s how to mind the (behavior) gap:

Step 1: Be aware of the gap.

If you’ve read this far, you’re already ahead—you’re now aware of the gap that exists between investment returns and investor returns. Awareness is the first, crucial step.

Step 2: Understand the role of volatility.

You’ve likely heard the term, but volatility simply measures how much and how quickly an asset’s price moves over time. Here’s the key: volatility isn’t something to avoid—it’s something to expect. It’s the price we pay for long-term growth. As financial writer Morgan Housel puts it, “Volatility is the price of admission. The prize inside is superior long-term returns. You have to pay the price to get the returns.”

But here’s the part you can control: how much volatility you feel.

Consider two investors who both started 30 years ago, invested the same way, and never sold. One checks their account once after 30 years. The other checks daily.

Both end up with the same financial result—but their experiences are vastly different.

The first investor might think, “Wow, investing is simple. Look how much my account grew.” The second, having lived through every dip—the dot-com crash, the 2008 financial crisis, the COVID crash—might feel like they barely made it through.

This is an extreme example, but the point stands: volatility is unavoidable, but how intensely you experience it is within your control. The more you check, the more you’ll feel the bumps. The volatility exists either way—but you decide how much of it affects you.

Step 3: Focus on what really matters.

At the end of the day, investing isn’t just about numbers or market performance—it’s about your life, your family, your dreams, and your legacy. When headlines feel overwhelming and markets feel uncertain, it helps to come back to what truly matters.

Think about the goals we’ve planned for together—whether it’s retirement, supporting your kids or grandkids, or contributing to causes close to your heart. Keeping these front and center brings clarity and perspective when doubt creeps in.

As your advisors, we’re here to keep you grounded in those objectives. It’s not always easy, but the most important decisions rarely are. We’re grateful for your trust and partnership as we navigate these moments—always keeping your bigger picture in mind.

Read the full quarterly letter with the Community segment here.

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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Are You Retiring In The Next 5 Years? Here Are 3 Critical Steps To Help You Prepare

Executive Summary:

  • As you approach retirement, it’s important to take steps to help ensure a smooth transition. This article highlights three critical steps you can take to get you ready for your work-free years.
  • First, figure out what you’re retiring to: Beyond financial readiness, it’s essential to plan for how you’ll spend your time in retirement, ensuring you maintain a sense of purpose, fulfillment, and connection.
  • Second, review your investments and adjust as needed: Assess your current asset allocation and make necessary adjustments to align with your risk tolerance and income needs as you near retirement.
  • Third, plan your retirement paycheck: Develop a detailed strategy for how you’ll draw income from your retirement accounts, considering the frequency of payments and the tax implications of withdrawals.

Retirement is one of the biggest financial transitions there is, marking a major shift from your working years to your work-free years. As such, it’s critical to prepare, often decades in advance, for this big moment.

But, while many start preparing for retirement in advance by funding retirement accounts and paying off debt, there are a few critical (and timely) steps that can easily get overlooked. In this article, we will cover three critical steps to prepare for retirement in the next five years.

Let’s dive in.

Step #1: Figure Out What You’re Retiring To

It’s natural to view retirement readiness as a math equation: you figure out how much money you need to stop working (adjusted for inflation), hit that number, and then sail off into the sunset. But, the reality is that financial readiness is just one piece of the puzzle, and for many, it’s the simple part.

The more challenging piece of the puzzle is figuring out a) what you’ll do every day and b) how you’ll maintain a sense of purpose. For many soon-to-be-retirees, this may sound silly, as people often imagine filling their free time will be a piece of cake, especially when they’ve had such little free time outside of their careers.

But, the truth is that retirement is a major lifestyle change so it’s important to have a plan in place for how you’ll spend your time.

So, as you approach retirement, take some time to think about what you want your retirement day-to-day to look like. Do you want to travel? Volunteer? If so, where will you travel, and where will you volunteer? Will you pursue a hobby or passion project? Again, get specific: what hobby or hobbies will you focus on?

Zooming in even further, what will an average day look like for you? What time will you wake up? How will you start your day? Answering each of these questions can help prepare you to make the transition as smooth as possible.

Additionally, consider how much physical activity and social interaction you will need.

Unfortunately, many retirees struggle with depression, stress, and anxiety, so finding activities that keep you active and engaged with others can greatly enhance your overall retirement experience. Also consider that, for many, work not only filled the majority of their time but also provided a sense of friendship and community through their coworkers. In addition, many received a sense of purpose through work as they were continually working toward and achieving goals and improving their craft. So, it’s essential to be mindful of the different areas of your life that work impacts and have a plan for how you will recreate that in retirement.

Ultimately, remember that planning for retirement goes beyond just financial readiness—it’s about designing a life that brings purpose and fulfillment. By considering how you’ll spend your time and maintaining connections, you can create a truly rewarding retirement.

For more insights on navigating the complexities of retirement, check out our previous post: Struggling in Retirement? How to Make the Most of Your Golden Years by Understanding and Navigating the 4 Phases of Retirement from Dr. Riley Moynes.

Step #2: Review Your Investments & Adjust As Needed

Next, as you approach retirement, it’s critical to review your investments and adjust as needed, specifically review and adjust how your investments are allocated.

But First, What is ‘Asset Allocation?’

Put simply, asset allocation is the process of dividing your investments among different types of assets, like stocks, bonds, and cash, to balance risk and reward based on your financial goals and risk tolerance.

In other words, your asset allocation is the mixture of stocks and bonds within your investments.

For many, when they are young and have a long time until retirement, their assets will be allocated more aggressively, often ranging anywhere from 100% stocks to 80% stocks and 20% bonds. Alternatively, those approaching or in retirement often dial down their stocks, adding more bonds to help limit the swings within their portfolio. This often ranges anywhere from 70% stocks and 30% bonds to a more balanced portfolio, with 50% stocks and 50% bonds.

All that said, the interesting thing about asset allocation is there’s really no one-size-fits-all.

For example, there are young people with a long time horizon who simply aren’t interested in the volatility that can come with a more aggressive investment portfolio, so they dial back their stock allocation early on. Alternatively, some retirees are comfortable taking more risk or simply have such significant assets that they can weather any volatility that could come their way without the impacting their financial plan. So, they may opt for a more aggressive asset allocation, realizing that they will have a more volatile portfolio over time, but they can often expect greater returns over time, though nothing is guaranteed.

The point is, while there’s no standard portfolio for every retiree, it is critical to review your investments and adjust as needed.

Here are some things to consider as you review and adjust:

  • Your Risk Tolerance: As you approach retirement, it’s important to assess how comfortable you are with the possibility of losing money in the short term. If the idea of seeing your investments drop in value keeps you up at night, you might want to consider shifting to a more conservative asset allocation. On the other hand, if you’re confident in your ability to ride out market ups and downs, you may decide to maintain a higher percentage of stocks.
  • Your Income Needs: Consider how much income you’ll need to generate from your investments once you retire. If you’ll be relying heavily on your portfolio for income, a more conservative allocation with a higher percentage of bonds or dividend-paying stocks could provide more stability and predictable income. However, if you have other sources of income, such as a pension or Social Security, you might be able to take on more risk in your investments.
  • Rebalancing: Over time, as different parts of your portfolio grow at different rates, your asset allocation can drift from your original plan. Regularly reviewing and rebalancing your portfolio ensures that it stays aligned with your goals and risk tolerance. This might mean trimming some of your winners and buying assets that haven’t performed as well to bring your portfolio back into balance.
  • Tax Implications: Keep in mind that selling investments to adjust your asset allocation can have tax consequences in certain accounts like trust accounts or taxable brokerage accounts. Be sure to factor in any potential capital gains taxes when making changes to your portfolio.
  • Consulting a Financial Advisor: Lastly, if you’re unsure about the best asset allocation for your situation, or if you’re finding it challenging to make these decisions on your own, consulting with a financial advisor can be invaluable. They can provide personalized advice based on your unique financial situation and help you create a plan that aligns with your retirement goals.

Ultimately, taking the time to carefully review and adjust your investments as you near retirement can help ensure that your portfolio is positioned to support your lifestyle and goals in the many years to come.

Step #3: Plan Your Retirement Paycheck

Lastly, as you approach retirement, it’s time to plan your retirement paycheck.

One of the biggest shifts you’ll experience from working to not working is that you’ll no longer receive a paycheck from your employer. And while this may seem obvious, it’s important to spend some time planning how you will create your new retirement paycheck.

In other words, what accounts will you distribute funds from each week, month, quarter, or year to cover your living expenses? How much do you need? What account will the money go into? How will you handle one-off expenses?

As you create a plan, get as detailed as possible by answering these three questions below:

1. How much do you need? One of the big questions to answer in retirement is how much money you will need to cover your lifestyle. For many it can be fairly simple: take what you were earning before retirement, add any new retirement expenses (think: bigger travel budget), subtract out any retirement savings or contributions you were making during your working years, and subtract out any expenses that fall off during retirement (think: paid off mortgage). That’s the amount you will need to generate with your retirement paycheck.

It’s also important to consider any one-off expenses that may come up during retirement, such as buying a new car or home renovations. When creating a retirement plan, be sure to factor in these potential expenses so you can have a cushion for these expenses that fall outside your normal ‘retirement paycheck.’

2. How often will you get paid? Next, when planning for retirement, it’s important to consider the frequency of your income. For many people, sticking with a payment schedule they are used to is the best option. This could mean receiving payments every two weeks, as they did during their working years. However, it’s also important to note that certain types of retirement income, such as pensions and social security, are typically paid monthly. In addition, depending on how your investments are set up and allocated, you may not like the extra work that comes with creating your own retirement paycheck each month or every couple of weeks (selling investments, raising cash, etc) so you may decide that quarterly or even annually feels like a better fit. Whatever the case, the important thing is to get specific about how often you’ll be getting paid so you have a plan.

3. Where will the money come from? Lastly, spend some time planning the breakdown of your retirement paycheck. In other words, if you need $10,000 per month, where will that money come from? If you’ve got pensions and Social Security that total around $5,000 per month then you’re already halfway there.

As you create a plan, consider all the different types of investments you have and the tax implications of each. For example, many retirees have a mixture of tax-deferred (often called pre-tax or “Traditional” assets), tax-free (often called after-tax or “Roth” assets), and taxable accounts. As you create your retirement paycheck, remember that taking money from each of these different investment accounts will have different tax implications.

  1. Traditional assets will be taxed as ordinary income at your highest marginal tax rate.
  2. Roth assets will be completely income tax-free.
  3. Taxable assets will have a mix of ordinary income rates (at your highest marginal tax rate) and more favorable long-term capital gains rates, ranging from 0 to 20%.

So, as you create your plan, be mindful of where you are each year from a tax perspective.

If you have the opportunity to fill lower tax brackets with ordinary income, that can be a great plan. Alternatively, if your income for the year is pushing you into a higher tax bracket than you want, consider utilizing your Roth accounts to create tax-free income. In the end, while this step will likely take some time and planning, it can be well worth it to create a tax-efficient retirement paycheck.

Conclusion: Wrapping Up Your Retirement Readiness

Ultimately, preparing for retirement in the next five years requires careful planning and thoughtful adjustments to ensure a smooth transition into this new chapter of life.

By taking the time to understand what your retirement will look like, reviewing and adjusting your investments, and planning your retirement paycheck, you can position yourself for a financially secure and fulfilling retirement. Remember, the key is to start now and stay proactive, so you can enjoy your golden years with confidence and peace of mind.

This blog post was also published as an article on LinkedIn

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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2025 Tax Planning Guide

2025 Tax Planning Guide [PDF]Download

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 – January 24, 2025

Weekly Market Recap – January 24, 2025 [PDF]Download

Weekly Recap:

Stocks finished higher and bond yields fell slightly during a holiday-shortened week that was light on macro data, but long on executive orders and policy pronouncements from the new Trump administration. Notably absent was the immediate enactment of tariffs on Mexico, Canada, and China, which had been repeatedly promised by Donald Trump on the campaign trail. Markets breathed a sigh of relief that perhaps tariffs would be used more thoughtfully by the Trump administration than many had feared.

The rise in stocks was broad-based, with 10 out of 11 sectors in the S&P 500 finishing higher on the week. Energy was the lone exception thanks to a $3/barrel pullback in oil prices. International benchmarks finished higher and largely outperformed the US, in large part due to relief that a punitive tariff regime was not immediately enacted by President Trump.

In fixed income, interest rate volatility subsided for the time being despite public pronouncements from Donald Trump that rates “need to be lowered immediately.” Credit rallied and spreads finished tighter by 2 basis points, in sync with the gains in equities.

In macro news:

* S&P’s US Manufacturing PMI just barely rose into expansion territory at 50.1

* S&P’s US Services PMI unexpectedly fell 4 points to 52.8

* The U of Mich. Consumer Sentiment index fell 2 pts to 71.1 in the final January print

* Existing home sales rose 2.2% in December to a SAAR of 4.24 million

Chart of the Week: University of Michigan Consumer Sentiment

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 for full-year 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 22.2x 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.

Publisher’s Note: This is the final Weekly Market Recap from Michael Kessler after five years of writing this article every week. Michael is leaving Albion Financial Group this week. We thank him for his contributions over the years and wish him the best in his future endeavors!

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 – January 10, 2025

Weekly Market Recap – January 10, 2025 [PDF]Download

Weekly Recap:

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.

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Quarterly Letter – Fourth Quarter 2024

4th Quarter 2024 – Quarterly Letter [PDF]Download

INTRODUCTION

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:

  1. 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.
  1. 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. 
  1. 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.

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2024 Market Recap

Market Recap – 2024 [PDF]Download

2024 Recap:

Economy:

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.

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Weekly Market Recap – December 27, 2024

Weekly Market Recap – December 27, 2024 [PDF]Download

Weekly Recap:

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.

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Weekly Market Recap – December 20, 2024

Weekly Market Recap – December 20, 2024 [PDF]Download

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.

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Weekly Market Recap – December 6, 2024

Weekly Market Recap – December 6, 2024 [PDF]Download

Weekly Recap:

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.

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