Bond yields rose and equity markets gave back some of their post-election gains after fresh inflation data cast additional doubts on whether the Fed would cut overnight interest rates in December.
Consumer Price Index (CPI) data for October was released on Wednesday and showed little change sequentially, with core (ex food & energy) inflation still well above the Fed’s target at +3.3% y/y. See the Chart of the Week for a breakdown of CPI.
Later in the week, Producer Price Index (PPI) data showed a sequential increase in upstream inflation pressures, with core PPI inflation rising 30 basis points sequentially to +3.1% y/y. Import/export prices also rose sequentially, although trade is not currently a significant driver of inflation in the US.
By Friday’s close, futures markets were pricing in only slightly better than 50/50 odds of a rate cut in December. Meanwhile, rates moved higher across the curve last week, with 10y Treasury yields briefly touching 4.5% for the first time in five months.
Against this backdrop of sticky inflation and rising rates, equities were unable to sustain their post-election gains. The healthcare sector was particularly hard hit after President-elect Trump nominated RFK Jr. to head up the US Department of Health and Human Services. Small caps were also weaker last week after outperforming significantly in the first few days following the election.
Chart of the Week: Consumer Price Index by Component (y/y change)
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. S&P 500 earnings are on track for high single-digit or low double-digit y/y growth in 2024, with consensus calling for double-digit y/y growth in 2025 as well.
Valuation
The S&P 500’s forward P/E of 22x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the mid single digits.
Interest Rates
Futures markets imply that the Fed may deliver another 25 bp interest rate cut at the FOMC meeting in December of 2024, with additional cuts possible in 2025. Belly and long end rates are already near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After the disinflationary trend resumed over the summer, more recent inflation data has shown some renewed signs of stickiness. Services inflation in particular remains somewhat elevated, in part due to heavily lagged shelter costs.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
US stocks moved sharply higher in the wake of Tuesday’s election outcome, which saw Donald Trump reclaim the White House while the Republican party achieved majorities in the House and Senate. Cyclicals and small caps were the biggest beneficiaries, as the prospect of deregulation and lower taxes gave investors greater confidence to invest in economically sensitive sectors. Meanwhile, international markets moved lower in the immediate aftermath of the US election and finished close to flat in the aggregate on the week, as Trump’s “America First” agenda and the prospect of significant tariffs weighed on foreign stocks.
Rates initially moved higher across the curve on the election result, but then drifted lower in the back half of the week. As expected, the FOMC delivered a 25 basis point rate cut on Thursday. Fed Chair Jerome Powell struck a balanced tone during the ensuing press conference, noting that the committee is attempting to find the “middle path” between moving too quickly and undoing the progress on inflation, and moving too slowly and allowing the labor market to weaken too much.
Also of note during the press conference, Powell indicated that he would serve out his full term as Fed Chair, even if asked to resign by President-elect Trump. He also noted that the committee would not speculate on the potential impact of Trump’s policy priorities (tariffs, stricter border control, deportation of undocumented immigrants, etc.) on inflation or the economy, and would not enact monetary policy changes in anticipation of any such policies. Rather, the committee will continue to assess incoming economic data in real time, and recalibrate monetary policy as needed in order to fulfill its dual mandate of price stability and full employment.
Chart of the Week: Fed Funds Target Rate (Lower Bound)
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. S&P 500 earnings are on track for high single-digit or low double-digit y/y growth in 2024, with consensus calling for double-digit y/y growth in 2025 as well.
Valuation
The S&P 500’s forward P/E of 22x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the mid single digits.
Interest Rates
Futures markets imply that the Fed will deliver another 25 bp interest rate cut at the FOMC meeting in December of 2024, with additional cuts in 2025. Belly and long end rates are already near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After becoming sticky in the 3-4% range in the first half of 2024, more recent data has reinforced the disinflationary trend, and the Fed has expressed confidence in the path to its 2% target. 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.
Rates continued to drift higher and stocks pulled back in the final full week of trading ahead of the US election. Treasury yields finished the week 10-15 basis points higher across the curve, and are now a total of 60-80 basis points above where rates were trading immediately prior to the jumbo 50bp rate cut from the September FOMC meeting. The ICE BofA MOVE Index (a measure of implied volatility in Treasury yields) rose another 5 points last week to finish at 132.58, the highest print in over a year.
As rates and rate volatility have climbed over the past few weeks, stocks have struggled despite a reasonably good start to Q3 earnings season from a company fundamentals standpoint. Last week was no exception, as weakness in large cap tech stocks pulled the Nasdaq Composite and the S&P 500 lower. Nevertheless, 2024 remains a very good year for equities: most domestic and international benchmarks have delivered YTD total returns that are well into the double digits, albeit with two months remaining.
From a macro standpoint, the biggest surprise last week was the lower-than-expected nonfarm payroll print which saw net gains of just +12k m/m, while consensus had called for +100k. Also, the prior two months were revised lower by a combined 112k, suggesting that recent payroll growth has not been quite as strong as the market believed (see the Chart of the Week for an updated time series). That said, storm- and strike-related distortions played a significant role in the October data, and those effects should recede going forward. Meanwhile, wage growth (+4.0% y/y, up 10bp sequentially) and average weekly hours worked (flat sequentially at 34.3) suggest that demand for labor remains strong (a weakening labor market typically features falling wage growth and fewer hours worked per employee as schedules are cut back).
Chart of the Week: Nonfarm Payrolls Net Change (thousands)
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. S&P 500 earnings are on track for high single-digit or low double-digit y/y growth in 2024, provided that the economy continues to expand.
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 mid single digits.
Interest Rates
Futures markets imply that the Fed will deliver 25 bp interest rate cuts in each of the last two FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After becoming sticky in the 3-4% range in the first half of 2024, more recent data has reinforced the disinflationary trend, and the Fed has expressed confidence in the path to its 2% target. 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.
Rising rates, and rising rate volatility, took a bite out of most equities last week. The tech sector was an exception and finished modestly higher, and Tesla (consumer discretionary) posted large gains after an upbeat Q3 earnings call that featured strong (if somewhat vague) growth projections from Elon Musk, allowing the Nasdaq to post a small gain on the week. Otherwise, domestic and foreign equity benchmarks were almost universally lower, with pronounced weakness in small caps and cyclicals.
Rates across most of the curve extended their march higher last week, a trend that has been in place ever since the 50bp cut to overnight interest rates at the September FOMC meeting. The ICE BofA MOVE Index (a measure of volatility in interest rates) rose 5 points on the week to finish at 128.4, near the top end of the 2024 trading range and nearly 40% higher from levels in the first few days post-FOMC. With bond yields moving higher, YTD returns for taxable investment grade fixed income have fallen by 2-3% so far in October.
Macro data released last week painted a familiar picture, including:
* Weakness in manufacturing: S&P US Manufacturing PMI = 47.8 (contraction)
* Strength in services: S&P US Services PMI = 55.3 (expansion)
* Well anchored inflation expectations: U of Mich 1y = +2.7%; 5-10y = +3.0%
Chart of the Week: Existing Home Sales (SAAR, millions)
Albion’s “Four Pillars”
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. S&P 500 earnings are on track for high single-digit or low double-digit y/y growth in 2024, provided that the economy continues to expand.
Valuation
The S&P 500’s forward P/E of 22x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the mid single digits.
Interest Rates
Futures markets imply that the Fed will deliver 25 bp interest rate cuts in each of the last two FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After becoming sticky in the 3-4% range in the first half of 2024, more recent data has reinforced the disinflationary trend, and the Fed has expressed confidence in the path to its 2% target. 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.
Benign macro data, low rate volatility, a solid outlook from Taiwan Semiconductor (TSM), and some commodity relief in the form of falling oil prices combined to create a constructive backdrop for US equities. The S&P 500 and the Dow both finished the week at fresh all time highs, while the Nasdaq Composite remains just a hair below the record high set on July 16th. TSM rose 9.8% on Thursday after bolstering revenue guidance, reinforcing the upward trend in A/I theme stocks.
International equities were weaker, due in part to a second straight week of declines in China after disappointing comments from President Xi Jinping regarding the scope and magnitude of Beijing’s monetary and fiscal stimulus measures.
Rates barely budged last week and remain 40-50 basis point higher across most of the curve relative to levels immediately prior to the Fed’s 50bp rate cut in mid-September.
Oil prices dropped by more than $6 per barrel over the course of the week after Israel elected not to target Iran’s nuclear and oil production capabilities as part of its retaliatory response to the recent missile attack.
Macro data released last week was mostly constructive outside of housing:
* Import (-0.3% m/m) and export (-0.7%) prices fell sequentially and are down y/y
* Retail sales (+0.4% m/m; +0.5% ex-autos) surprised to the upside in September
* Initial jobless claims (+241k) pulled back from recent storm driven highs
* Housing starts (-0.5% m/m) and building permits (-2.9%) remain subdued
Chart of the Week: Import/Export Prices (y/y change)
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. S&P 500 earnings are on track for high single-digit or low double-digit y/y growth in 2024, provided that the economy continues to expand.
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 low-to-mid single digits.
Interest Rates
Futures markets imply that the Fed will deliver 25 bp interest rate cuts in each of the last two FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After becoming sticky in the 3-4% range in the first half of 2024, more recent data has reinforced the disinflationary trend, and the Fed has expressed confidence in the path to its 2% target. 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.
Creating a lasting financial legacy involves more than just wealth; it requires instilling values, open communication, and comprehensive planning to avoid the common “shirtsleeves to shirtsleeves in three generations” cycle.
Key strategies include early and frequent communication, recognizing that a legacy is more than money, establishing a robust estate plan, educating the next generation on financial literacy, and empowering rather than entitling heirs.
By focusing on these areas, families can ensure their wealth continues to benefit future generations while preserving the values that matter most.
After securing your own financial success, it’s natural to look to the next generation and consider the financial legacy you will leave behind.
And for most, that financial legacy is more than just money; it’s the impact they have, the opportunities they create, and the values they instill.
But, unfortunately, while many hope their legacy and wealth will provide lasting benefits for generations to come, that’s rarely the case, writes Courtney Pullen, author of Intentional Wealth: How Families Build Legacies of Stewardship and Financial Health. Instead, Pullen writes that roughly 90% of affluent families lose their wealth by the end of the third generation—a phenomenon referred to as going from “shirtsleeves to shirtsleeves in three generations.”
In his book, he attempts to answer the critical question: What are the other 10% doing? And more importantly, how can you apply this to your family? To that end, here are five essential strategies to prevent the shirtsleeves to shirtsleeves in three generations cycle that plagues many wealthy families.
Strategy #1: Communicate Early and Often
Communication is key, especially when it comes to your financial legacy.
Through open, honest, and clear communication, you can create an environment of understanding, clear expectations, and continuity between generations. Alternatively, without it, you can end up with confusion, unclear or unmet expectations, and worst of all, family members fighting amongst themselves over who gets what.
But, as Pullen writes, good communication doesn’t mean you discuss everything and of course, no family is going to be perfect, but successful families practice what he calls skillful communication. That is: they talk about the issues that need to be talked about and they do so without putting each other down.
To highlight the importance of communication, Pullen uses the example of The Mitchells, a couple in their 60s who owned a successful manufacturing business and consulted Pullen over concerns about their son. Ultimately, Pullen discovered that their son, who had started his own manufacturing business but was running it into bankruptcy, “hated the business”, but was in it because he felt it was “the only way to get his parent’s approval.”
But, when Pullen discussed this with his parents, they replied, “We don’t care what business he’s in as long as he’s happy. In fact, we’d just as soon he tried some other field that’s less risky.” Ultimately, this knowledge led their son to sell his business, go back to school for an advanced degree in history, and pursue a rewarding career as a professor at a community college.
Pullen goes on to explain that he’s seen many similar situations when working with wealthy families, especially when there’s a family-owned business involved, and often, he can trace the roots of these long-term challenges back to failed communication.
To avoid this, here are some practical tips to consider:
Practical Tips:
Schedule Regular Family Meetings: Set up regular family meetings to discuss the family’s financial situation, goals, and plans. These meetings can be a platform for educating younger family members and addressing any concerns.
Encourage Questions: Foster an environment where family members feel comfortable asking questions and seeking clarity on financial matters. This builds their confidence and understanding over time.
Involve Multiple Generations in Planning: Include younger generations in financial discussions and legacy planning. This not only educates them about financial management but also ensures that they understand the values and intentions behind the legacy, leading to better stewardship in the future.
Strategy #2: Realize That Your Financial Legacy Is More Than Money
Next, it’s important to keep in mind that a financial legacy isn’t just about passing on money; it’s about passing on the core values and ethics that will guide how that money and opportunity are used. In other words, it’s about passing on what your family stands for.
But, before you can do that, families must first identify what they stand for.
And the beauty of this is that there is no one-size-fits-all for every family, every generation, or every individual. So, Pullen recommends that families first work to establish what is important to them and create their own family culture by defining their core values.
Some examples of core values could include:
Intentionality: Making deliberate and thoughtful decisions about how wealth is managed and utilized.
Work Ethic: Valuing hard work and dedication as key components to sustaining and growing wealth.
Responsibility: Understanding the importance of stewardship and being accountable for financial decisions.
Humility: Recognizing that wealth is a tool, not a measure of self-worth, and staying grounded in one’s values.
Philanthropy: Committing to using wealth to give back to the community and support causes that align with family values.
One of my favorite lines in Pullen’s book comes from a “second-generation owner of a flourishing family business” who said that one of their core family values is: “We don’t go around acting like rich folks.” To their family, being humble with their wealth was critical to their family identity.
Again, these are just examples, and it’s up to each family to identify the core values that are important to them to ensure they are part of their legacy. At the end of the day, the most lasting financial legacies are those that carry forward the values and beliefs that make your family unique, making sure that the money isn’t just preserved, but used in ways that matter to everyone involved.
Strategy #3: Establish a Comprehensive Estate Plan
Next, one of the most effective ways to preserve wealth across generations is with a well-structured estate plan.
Done right, a comprehensive estate plan ensures your assets flow directly to who you want, when you want, according to your exact wishes. Alternatively, failing to create a comprehensive estate plan can lead to confusion, assets being distributed based on what the court decides, and even disagreements among family members about what your wishes may have been.
Estate planning tools like wills, trusts, and powers of attorney are critical elements of your estate plan. These documents allow you to get very specific about who gets what, when they receive it, and any potential requirements or conditions they must meet to become eligible for an inheritance.
Of course, the details of each plan will vary based on the specific circumstances of each family and their overall goals and desires with wealth, but the point is that these documents are the best way to ensure your wishes are carried out and avoid any confusion about how you want your wealth to be transferred to the next generation.
Practical Tips:
Professional Guidance: Work with a financial advisor and estate attorney to create or update your estate plan. These professionals can help you navigate the complexities of estate planning and ensure that your plan is tailored to your specific needs and goals.
Regular Reviews: Regularly review and adjust your estate plan as circumstances change, such as the birth of new family members, marriage or divorce, or shifts in financial goals. A good rule of thumb to consider is that if you’ve had a birthday that ends in a 5 or a 0, it’s a good time to review and potentially update your estate plan as needed.
Discuss your Plan: Lastly, going back to the importance of communication – consider discussing your estate plan with the next generation. Of course, this doesn’t mean you need to share the details of who gets what or how much they get, but rather, this is an opportunity to explain why you’ve structured things the way you have, who will be in key roles, and any important decisions you’ve made. This can help avoid any confusion or conflicts down the line and ensure that your wishes are understood and respected.
By proactively establishing a comprehensive estate plan and regularly reviewing it, you can ensure your wealth is preserved and transferred according to your wishes, minimizing the risk of confusion or conflict among your heirs.
Strategy #4: Educate the Next Generation on Financial Literacy
Even with the best estate plan, generation wealth will not last if the next generation lacks the knowledge and skills to manage it effectively. That’s why financial literacy is a critical component of preserving and growing wealth across generations.
The Role of Education
Providing your heirs with a strong foundation in financial literacy equips them to make informed decisions and avoid common financial pitfalls. This education should go beyond the basics of saving and investing; it should include an understanding of the family’s financial goals, the responsibilities that come with wealth, and the tools available to manage it effectively.
For many affluent families, this expertise can be enhanced with the help of trusted financial professionals, like financial advisors, accountants, and attorneys. That said, it’s essential that each family member still have a baseline level of financial education, even if they work with trusted professionals. This ensures that they have the knowledge and skills to oversee their team of professionals and ensure their wealth is positioned to last for many generations to come.
Practical Tips:
Formal Education: Consider providing formal financial education for your heirs, whether through courses, workshops, or seminars. This can help them build a solid understanding of financial concepts and strategies.
Practical Experience: Encourage your heirs to gain practical experience by managing smaller family funds, engaging in philanthropic activities, or overseeing specific investments. This hands-on experience can be invaluable in building their financial acumen.
By equipping the next generation with financial literacy and practical experience, you empower them to make informed decisions and maintain the family’s wealth for generations to come.
Strategy #5: Empower, Don’t Entitle
Last but not least, it’s critical to take steps to empower the next generation, not entitle them.
One of the interesting points that Pullen makes in his book is that it’s no surprise so many affluent families end up with an entitlement problem. In fact, he points out that entitlement is a pretty normal part of being human as he writes: “No matter what comforts, indulgences, or rewards we get, or whatever lifestyle we become accustomed to, it doesn’t take long for us to start assuming we’re entitled to that lifestyle and have a right to keep it.”
The challenge is that those in affluent families typically don’t come up against many of the common financial limitations that others face as Pullen writes “money dissolves many limits.” As a result, Pullen explains that it’s common for kids in affluent families to grow up thinking things like:
“I deserve it and I should have it.”
“I should always get everything I want.”
“My needs and wants should always come first.”
So how can you avoid this? Fortunately, Pullen highlights five key factors that successful families incorporate to shift from entitlement to empowerment:
Be intentional: Accept the responsibility and advantages of wealth and create an intentional plan for how you will use your wealth.
Focus on future generations: Educate the next generation on financial literacy.
Communicate Openly: Again, successful families talk about the issues that need to be talked about and do so without putting each other down.
Create a family identity: Remember that financial legacy is more than just wealth and spend time discussing the core values that will make up your family identity.
Redefine success: Lastly, keep in mind that “success” will look different for each generation. For example, success for the first generation is often defined by the businesses they’ve built or the wealth they have created. But, for second and third generations, success could mean ensuring that the wealth is managed effectively and each member of the family is realizing their full potential.
By focusing on intentionality, education, open communication, and a strong family identity, you can shift from entitlement to empowerment, ensuring that each generation is prepared to uphold and build upon the family legacy.
Conclusion: How to Build a Legacy That Lasts
In the end, creating a lasting financial legacy requires more than just accumulating wealth; it involves careful planning, open communication, and a commitment to instilling values and educating the next generation. By taking these steps, you can help ensure that your wealth not only endures but also continues to benefit your family for generations to come.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Domestic stocks posted gains last week despite rising bond yields and slightly higher oil prices. Inflation and monetary policy were in focus. First, the minutes from the September FOMC meeting showed a nearly even split between committee members favoring 25bp vs. 50bp rate cuts. Fed Chair Jerome Powell’s personal preference for a 50bp cut appears to have been the deciding factor.
Then on Thursday, fresh CPI data appeared to undermine the wisdom of a 50bp cut, as headline and core inflation both came in slightly hotter than expected:
In response to a divided committee and warmth in inflation, Treasury yields rose and the curve steepened. Futures markets continue to reprice the magnitude and pace of the rate cutting cycle, settling for now on 25bp cuts at the November and December FOMC meetings, following by 4 or 5 additional 25bp cuts in 2025.
Through it all though, US equity benchmarks finished higher on the week, with notable strength returning to Nvidia on comments from CEO Jensen Huang that demand for the company’s new Blackwell chip is “insane”, while production is now fully ramped. Other semiconductor companies and A/I theme stocks benefitted from a read-thru, causing the tech sector to outperform on the week.
The biggest laggard last week was Chinese stocks, which gave back some of their recent extraordinary gains after investors were left disappointed by a speech from President Xi Jinping regarding the upcoming monetary and fiscal stimulus.
Chart of the Week: Consumer Price Index Components (y/y change)
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. S&P 500 earnings are on track for high single-digit or low double-digit y/y growth in 2024, provided that the economy continues to expand.
Valuation
The S&P 500’s forward P/E of 21.4x 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 deliver 25 bp interest rate cuts in each of the last two FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After becoming sticky in the 3-4% range in the first half of 2024, more recent data has reinforced the disinflationary trend, and the Fed has expressed confidence in the path to its 2% target. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
As the leaves change color and fall, John Bird, our CEO, reflects on past lessons while eyeing the future. Then CIO Jason Ware notes the signs of post-pandemic normalization emerging, though challenges persist in fiscal policy and market uniformity. As investors navigate this evolving landscape, Financial Planner Anders Skagerberg describes practical measures that can safeguard financial identities. This autumn as nature changes, investors must be vigilant and adaptable in a dynamic financial ecosystem.
Beyond these informative articles, read through to the Community Update for information about our final Conference Call of the year and to meet the newest members of our growing team.
From John Bird’s Desk
When we started Albion in 1982, the era of the “Nifty Fifty” had drawn to a close and much ink was spilt describing their rise and…the several following years when they were just average. For those of you who may not have experienced it, the Nifty Fifty was a moniker for a group of large and fast-growing companies in the1960’s and into the 1970’s. Names included General Electric, IBM, Sears Roebuck, Xerox, Proctor and Gamble, and Coca-Cola. Many investors considered them one decision stocks – companies you could buy and own forever. Investors bought them by the truck load. By the end of 1972 the group as a whole had a price-earnings ratio of 43 while the S&P 500 as a whole had a ratio of 18. For those who are unfamiliar with a price-earnings ratio (PE ratio or just “PE”) it is the price you pay for a dollar of corporate earnings. A PE of 18 means you pay $18 for a dollar of corporate earnings while a PE of 43 means you pay $43 for a dollar of corporate earnings.
All things being equal we’d rather pay less for a dollar of corporate earnings. However rarely are things equal. In the five years leading up to the end of 1972 the Nifty Fifty stocks had as a group averaged 22% annual earnings growth (compared to 4% for the S&P 500) and 30% earnings growth in 1972 alone (13% for the S&P 500). Investors were willing to pay up for growth they expected to continue well into the future.
Alas parties all must eventually end. By 2001 only one Nifty Fifty company – Walmart – had continued to outperform the S&P 500. Another item of note is how the composition of the stock market has changed over time. The following graph shows market sectors from 1807 through 2017.
There are several takeaways from this including the observation that the best performing sector in the future may not yet exist. It’s also worth noting that none of the sectors wholly disappeared. In fact all sectors continued to grow. For most sectors their representation on the graph shrunk because they grew far slower than other sectors and thus represent a smaller percentage of the overall economy.
This graph shows the evolution off the 12 sectors that make up the American economy over the past 200 years. The graph illustrates the capitalization of each sector based upon stocks included in the U.S. Stocks Database.
These days we hear about the magnificent seven – seven companies that have grown far faster than the S&P 500. We note that in 2023 these magnificent seven delivered as a group 101% returns while the equal weighted S&P 500 index delivered 2.5%. Meaning the average stock in the S&P 500 returned 2.5%. There is logic to this. The hardware, software, energy and intellectual property investment required to make Artificial Intelligence and Large Language Models favors those companies with the ability to raise enormous amounts of capital and effectively put that capital to work. The magnificent seven have those resources.
Note that this concentration – where a handful of companies have an outsized influence on market index returns – has a precedent. The following graph shows the weight of the ten largest stocks in the S&P 500 – currently around 32%. While high it’s not record setting. Prior to 1973 the Nifty Fifty had more concentration in the top ten companies than we see today.
The weight of the 10 largest S&P 500 stocks is now 33.1% of the total $SPX, the highest level in almost 5 decades.
It’s weak comfort knowing concentration among a few names has been greater in the past than it is today given that following peak concentration the Nifty Fifty trailed the broader market. We are well aware of this. We are also aware of the reality that much of technology today requires vast investments to remain at the leading edge and the companies that have so far succeeded in staying out front have a significant advantage. The depth and breadth of their existing capacity and the free cash flow they generate gives them the position and the resources to reinvest and stay in the drivers seat.
We will ride our winners, trim them from time to time to avoid being over exposed, and carefully study market dynamics to increase the odds that we will have even further reduced our exposure to highfliers before they fly too close to the sun. Because there is no such thing as a one decision stock.
Economy & Markets by Jason Ware
For over three years in these pages (and elsewhere) we’ve spoke of “normalization” both economic and social. Normalization is the process of, well, getting back to normal. Across so many areas – GDP growth, consumer spending (the how and how much), supply chains, inflation, jobs, corporate earnings, oh, and the vaccines that gave us our lives back – this has happened. Now it’s interest rates. With the Fed’s -0.50% “jumbo cut” on September 18th a new easing cycle is underway. And with it, an oxymoronic feeling that perhaps somehow we’re now reaching … er … “peak normalization.” Wait, is that possible? Can that even be a thing? We’ll leave that philosophical question for another day. What seems quite clear is that there are few major chiropractic adjustments left on the post-pandemic economy. Normal is good, yet there are other areas where stuff is out of whack. The big ones being a more uniform equity market and fiscal policy. More on these in a moment. For now, let us review where things currently stand.
Our economic outlook has been uncharacteristically cautious for several quarters. A host of troubling leading indicators, Volcker-esque Fed tightening, shrinking money supply, a massive inflation surge, and downbeat consumer attitudes informed this view. Recession risks were high, have since diminished, but remain elevated. Through it all the US economy has stayed on a growth course, running a gauntlet that would make Churchill proud (“if you’re going through hell, keep going”). Total output (GDP) paced at roughly +2.25% in the first half of the year and is presently running about +3% for the third quarter. This stride may slow as we exit the year, though probably not to recessionary levels. The expansionary impact of large fiscal spending, abundant real wage growth, impressive business profits, and colossal capital formation (i.e., spending and investment) on AI has offset headwinds. As we opined in our last quarterly epistle, it’s a “growth at all costs” backdrop paired with an animal spirits redux in technology driving the business cycle. The fabled “soft landing” is possible; we all hope it occurs.
On the inflation front, an area of focus since 2022 and one where we’ve consistently offered an out of consensus sanguine view (don’t fret, it’ll sort itself out), it seems that Jerome Powell finally feels content giving the nod that it’s successfully been whipped. “WIN” buttons back into the drawer! To be fair, when assessing all manner of inflation details swirling about it is sensible to conclude that price stability has been achieved and underlying pressures have quieted. Still we reason that structural inflation falling much further is unlikely. Prior to the pandemic core inflation reliably ran at 1-2%. For many reasons, today and over the next few years it’ll probably run between 2-3%. Framed another way, from 2008-2021 the Fed’s 2% target was a ceiling; in the 2020s it will probably be a floor. This isn’t a bad thing. The economy and financial markets can do well in a 2-3% inflation regime.
Speaking of financial markets, US stocks continue apace. It’s been a fruitful year. One item that has changed since our last letter, albeit it’s early days, is the character of those returns. It’s no secret that a small group of lopsided winners account for the lion’s share of gains in this bull market. It’s been a “skinny bull” as we’ve coined it, but that might be shifting. The third quarter was the first time in the contemporary bull run where growth stocks, especially of the mega cap variety, did not lead the way. Instead, other areas like value, cyclicals, defensives, and small caps (eureka!) logged superior advances when compared to their big siblings. At last, Nvidia and AI wasn’t the only story worth discussing. On Wall Street it’s said that “trees don’t grow to the sky.” Translation: nothing lasts forever, future returns get pulled forward, analysts catch up to the story, and lofty expectations become harder to beat. The notion of a resilient economy coupled with Fed rate cuts is just what the doctor ordered for other parts of the equity market that aren’t the “Mag 7.” Finally, it’s been the “493’s” (500 S&P stocks minus 7) day in the sun as participation broadens out. This is a positive development for both your well diversified portfolio and the overall health of the bull market. To be clear, we expect good results from the mega cap stocks going forward. A more uniform market doesn’t have to mean they falter. Rather, we suppose a truly rising tide can lift more boats and the once yawning performance gap enjoyed by the few will better include the many. Stay tuned.
OK, “big fiscal” was cited as the other area that has evaded normalization’s grasp. Out of respect for our collective blood pressure we’ll skip the details. Deficits continue to run at ~6% of GDP, a high spot outside of war, crisis, or economic slump. Full employment and giant deficits are, historically speaking, strange bedfellows. What’s more, interest costs are now larger than total military spending. Just about everyone (including your humble wealth manager) agrees something must be done while simultaneously acknowledging the discouraging political realities in the Beltway. Forecasts from CBO, GAO, and professional economists alike aren’t uplifting. Sigh. But it isn’t all dire. Interest expense aside, much of the current outsized spending is flowing to productive uses, like the first true “US industrial policy” in decades. We’re investing in our future and putting money to work on our own soil bestowing an assortment of longer run economic and national security benefits.
Bigger picture, 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 generations to come. We concur. Although improved fiscal restraint is needed, an exercise with observable levers we can pull, forecasting any such fiscal normalization is difficult (too grand an ask for this author). Importantly, the path between here and there doesn’t have to be, and shouldn’t be, calamitous. And so our belief is that stock prices will continue to do what they’ve always done – track the general path of labor force demographics, economic growth, and business profits, all of which move up over time taking with them the enterprising long-term oriented investor.
Thanks for your continued trust in us.
Planners Corner by Anders Skagerberg
Should You Freeze Your Credit? A Simple Guide to Protecting Your Identity and Your Wealth
At a time when data breaches feel common, it’s natural to wonder if there’s anything you should do to protect your personal information and your hard-earned wealth. If you’ve ever heard about freezing your credit, you’re not alone—many people are asking whether it’s a good idea, especially with the recent data breach that may have included the personal records (names, addresses, Social Security numbers, and more) of up to 2.9 billion people.
So, if you’re wondering whether you should freeze your credit or not, read on to decide if it’s the right move for you.
But First, What Does Freezing Your Credit Mean?
Freezing your credit means putting a lock on your credit reports.
This stops identity thieves from opening new accounts in your name because creditors can’t check your credit report unless you “unfreeze” it. It’s like putting a padlock on a file—someone might try to access it, but unless they have the key, they won’t succeed.
Next, here are some of the key benefits to consider when freezing your credit:
The Upsides of Freezing Your Credit
A Strong Defense Against Fraud: If your credit is frozen, thieves can’t open new credit lines, loans, or credit cards under your name.
Peace of Mind: Knowing your credit is locked up can help you sleep better at night, especially if you’re already concerned about your financial security.
No Harm to Your Credit Score: Freezing your credit doesn’t affect your score, so it’s a no-strings-attached way to add a layer of protection.
Easy and Free: It’s free to freeze and unfreeze your credit with all three major bureaus—Equifax, Experian, and TransUnion. And doing so is relatively simple and can be done online.
While freezing your credit offers a solid defense against fraud, peace of mind without harming your score, and is both easy and free, it’s important to consider the potential downsides.
The Downsides of Freezing Your Credit
A Bit of a Hassle: If you’re planning on taking out a loan, mortgage, or even a new credit card, you’ll need to lift the freeze temporarily. It’s not hard, but it is one more thing to think about.
Can Slow Down Some Transactions: Some things like getting utilities set up may require a credit check, so you’ll need to remember to unfreeze your credit for those too.
Not a Cure-All: A credit freeze doesn’t stop all types of identity theft. It’s great for blocking new lines of credit but won’t protect you from other issues like tax fraud or someone getting into your existing accounts.
So, while freezing your credit is a proactive step to protect against identity theft, it can be somewhat inconvenient, may slow down certain transactions, and does not guard against all forms of fraud.
So, Should You Freeze Your Credit?
Ultimately, whether or not you should freeze your credit depends on your financial situation, your personal risk tolerance, and whether or not you’ve been involved in a security breach. Here are some questions to consider:
Have you been involved in a security breach?
If Not: Freezing your credit may not be a top priority. That said, even if you aren’t aware of a security breach involving your personal information, that doesn’t mean it hasn’t happened.
If Yes: Freezing your credit can be a great step to help protect you from identity thieves.
Are You Applying for New Credit?
If Not: Freezing your credit might be a smart move, especially if you don’t foresee needing a new loan or credit card anytime soon.
If Yes: You’ll want to consider the hassle factor, especially if you’re in the middle of a major financial move like buying a new home.
What Other Protections Do You Have?
If you already have identity theft insurance or monitoring (or both) then freezing your credit can either be a great addition to your existing protection, or, you may decide it’s unnecessary, depending on your situation.
How Much Protection Do You Want?
Just like investing, everyone has a different comfort level with risk. That comfort level will guide your decision on whether to freeze your credit. But unlike investing, there’s really no advantage to taking extra risk by leaving your credit unlocked. Since freezing your credit is simple and comes with no downside, it’s often a smart move to just take the time and lock things down for peace of mind.
Part of a Bigger Picture
At Albion Financial Group, we believe that making smart decisions over time is key to securing your financial future. Freezing your credit can be one of those good decisions, but it should fit into a broader plan that includes monitoring your accounts, maintaining solid cybersecurity habits, and keeping tabs on your bigger financial picture, either on your own, or with the help of a trusted advisor.
Now, if you’ve decided that freezing your credit is the right choice, here’s what you need to do:
Meet the Three Major Credit Bureaus
When you decide to freeze your credit, you’ll need to do it with the three main credit bureaus:
Equifax: One of the oldest and most recognized credit reporting agencies. Freezing your credit with Equifax is simple and can be done online.
Experian: Known for their credit monitoring services, Experian also allows easy credit freezes. Their website walks you through the process stepby-step.
TransUnion: Like the others, TransUnion’s freeze can be done quickly online.
Once you’ve got your credit freezes in place, just remember that you’ll need to unfreeze your credit when applying for any new loans, and then you can always refreeze it when you’re finished.
Important note: Freezing your credit with just one or two bureaus won’t fully protect you, as lenders can check any of the three major bureaus when reviewing credit applications. For complete protection, you should freeze your credit with all three agencies. In addition, while smaller agencies like Innovis, ChexSystems, and NCTUE may also hold some of your information, the majority of credit applications are processed through the three main bureaus, so freezing your credit with them will cover most scenarios.
Wrapping It All Up
In the end, deciding whether to freeze your credit is like deciding whether to put extra locks on your doors. It’s not necessary for everyone, but for those who want that extra peace of mind—especially with the recent data breach—it can be a wise choice.
ALBION COMMUNITY UPDATE
Conference Call: Scheduled for Tuesday, November 12th at 10 AM MT. Our expert panelists from the Advisor and Investment teams will discuss key issues and provide insights on the current economic and market landscape.
We highly value these moments to connect and share ideas with you. We encourage your participation and welcome any questions you may have—either live during the call or in advance by sending us an email. A recording of the call will be available on our blog and YouTube channel afterwards, and a copy will be emailed to you. We hope you can join us. www.albionfinancial.com/events
New Faces
We are delighted to announce that Briana Mofhitz-Faieta and Leticia Chetty have both joined the firm as Associate Wealth Advisors. Both of them will be working closely with Liz Bernhard and Patrick Lundergan.
Briana is an alumna of the University of Oregon, while Leticia has degrees from both Brigham Young University – Hawaii and from Utah Valley University.
Also joining the Albion family, as a Financial Planner, is Heath Heavy. Heath is a graduate of Western Michigan University (Go Broncos!) and is a CFP®.
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.
Fresh inflation data was supportive of the Fed’s decision to cut overnight interest rates by 50 basis points earlier this month. Headline and core PCE rose just 0.1% m/m in August, slightly below consensus expectations in both cases. Core PCE (the Fed’s preferred inflation gauge) now stands at 2.7% y/y and remains on a disinflationary path towards the Fed’s 2% target.
US stock prices continue to benefit from the combination of falling inflation and healthy economic growth. The Dow closed at a fresh record high on Friday, while the S&P finished the week just a hair off an all-time high set on Thursday. The Nasdaq remains almost 3% off the highs set in early July. Meanwhile, small cap performance remains inconsistent as the market rally broadens in fits and starts.
Rates and credit spreads were stable last week, resulting in limited movement in bond prices. The MOVE Index (a measure of interest rate volatility) finished the week in the low-90s, near the bottom end of the 2+ year trading range that has persisted since the Fed began raising rates in early 2022.
In international news, Chinese stocks finished the week 4.5% higher after the announcement of aggressive monetary and fiscal stimulus from Beijing, aimed at countering the country’s flagging economic growth. The People’s Bank of China cut rates on existing mortgages by 0.5% and lowered the reserve requirement ratio by 0.5% in an effort to inject liquidity into the banking system. Meanwhile, the central government plans to issue special sovereign bonds worth 2 trillion yuan, to be spent on various subsidies meant to stimulate consumer spending.
Chart of the Week: US Personal Consumption Expenditure Index (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 low double-digit y/y growth in 2024, provided the economy continues to expand at its current rate.
Valuation
The S&P 500’s forward P/E of 21.4x 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 deliver interest rate cuts in each of the last two FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or below what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After becoming sticky in the 3-4% range in the first half of 2024, more recent data has reinforced the disinflationary trend, and the Fed has expressed confidence in the path to its 2% target. 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.