September is a notoriously difficult month for stocks, and so far 2024 has been no exception thanks to lingering concerns about the strength of the US economy. The S&P 500 fell every day last week and finished down more than 4%, while a rout in technology stocks dragged the Nasdaq to a nearly 6% decline. Small caps also struggled and continue to lag well behind large caps on a YTD basis.
Soft labor market data is partly to blame. Last week’s updates point to continued normalization of labor supply and demand, leaving open the question as to whether the Fed’s inflation-fighting campaign may yet cause the economy to overshoot to the downside. Per the JOLTS report, US job openings have fallen by roughly 1/2 million in the past two months as demand for labor weakens. The ADP employment report showed a net increase of just 99k payrolls, the lowest monthly total since January of 2021, before Covid-19 vaccines were widely available. And finally, nonfarm payrolls from the BLS (142k) came in slightly below consensus (165k), while the prior two months were revised lower by a combined 86k.
Yields fell across the curve in response, particularly in the front end as markets priced in an increasingly aggressive rate cutting campaign, including 4 or 5 cuts of 25bp prior to year-end across just 3 FOMC meetings. As a result of falling short term yields, the 2s10s curve went and stayed positive for the first time since it originally inverted in July of 2022. It is likely that over the next 18-24 months, the “normalization” theme that has applied to so much of the post-pandemic economy over the past couple years will finally begin to apply to the yield curve as well, gradually restoring its natural upward slope.
Chart of the Week: Nonfarm Payrolls Total Net Change (m/m, SA)
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.
Valuation
The S&P 500’s forward P/E of 20.6x 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 enact multiple interest rate cuts across the last three FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Employee stock options allow employees to purchase company stock at a fixed price, offering potential gains if the stock price goes up.
There are two main types of stock options: Incentive Stock Options (ISOs) with favorable tax treatment and Non-Qualified Stock Options (NQSOs) with more flexibility but less favorable tax treatment.
Key considerations for managing stock options include understanding the vesting schedule, timing of exercise, tax implications, concentration risk, market conditions, and aligning with your financial goals.
Lastly, consulting with trusted advisors is critical to making informed decisions and maximizing the benefits of your stock options.
Employee stock options are a powerful tool used by many companies to attract, retain, and motivate employees.
At a high level, they provide employees with the opportunity to purchase company stock at a fixed price, potentially leading to big gains if the stock price goes up. Many well-known companies, like Apple, Google, Microsoft, Amazon, and Tesla, use stock options, including both Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQSOs), to align employee interests with company performance.
But, it’s not just large publicly traded companies that offer stock options. Many startups and small businesses use stock options as an attractive alternative to high salaries to conserve cash and reward early employees.
If you have stock options, understanding how they work and how to manage them effectively can help you make smart decisions and maximize the benefits they can provide.
First, What are Employee Stock Options?
Employee stock options are contracts that grant employees the right to buy a specific number of shares of the company’s stock at a predetermined price, known as the exercise or strike price, after a certain period known as the vesting period. These options typically have an expiration date, by which time they must be exercised or they will expire. Stock options provide employees with the potential to become shareholders in the company and benefit from its success.
Stock Option Example:
As an example, a typical stock option might give an employee the right to purchase 1,000 shares of the company’s stock at a strike price of $50 per share. If the stock price rises above $50, the employee can exercise their options and buy 1,000 shares at that lower price, effectively making a profit. Then, employees can decide whether to hold onto the stock or sell it for a profit.
Alternatively, if the stock price drops below $50, the employee can simply choose to wait, either until the price goes up beyond the strike price, or until the options expire, avoiding any potential loss.
Incentive stock options are company stock options granted to employees that may provide tax benefits if certain conditions are met.
Tax Advantages: ISOs offer favorable tax treatment if certain conditions are met. When employees exercise ISOs, they do not have to pay regular income tax on the difference between the exercise price and the fair market value of the stock. Instead, this difference, known as the “bargain element,” is subject to Alternative Minimum Tax (AMT). Then, if the shares are held for at least one year after exercise and two years after the grant date, any gain on the sale of the shares is taxed at the more favorable long-term capital gains rate.
Eligibility: ISOs can only be granted to employees (not to directors, contractors, or consultants).
Ultimately, ISOs can be a valuable tool for both employers and employees. They can serve as a way to incentivize and reward top-performing employees, while also providing tax benefits for both parties. But, because there’s a layer of complexity involved in receiving favorable tax treatment, it’s essential to consult with a trusted advisor before executing your options.
What are Non-Qualified Stock Options (NQSOs)?
Non-qualified stock options are a type of employee stock option that allows employees to purchase company stock at a fixed price, with fewer restrictions and no special tax benefits compared to incentive stock options.
Tax Treatment: NQSOs do not qualify for special tax treatments. When employees exercise NQSOs, the difference between the exercise price and the fair market value of the stock is taxed as ordinary income at their highest marginal rate. This amount is also subject to payroll taxes. Then, any subsequent gain or loss upon selling the stock is treated as capital gain or loss.
Flexibility: NQSOs can be granted to employees, directors, contractors, and others, providing greater flexibility for the company.
Ultimately, NQSOs can be a valuable tool for companies looking to attract and retain top talent, even without the same tax benefits as ISOs. By offering employees the opportunity to purchase company stock at a discounted price, NQSOs can act as a powerful incentive for them to perform well and contribute to the company’s success.
Key Considerations for Managing Stock Options
When it comes to your stock options, planning is key. Here are some important considerations to keep in mind when managing your stock options:
Vesting Schedule: Understand the vesting schedule of your options. Vesting determines when you can exercise your options and purchase the shares. Options typically vest over a period of time, such as four years, with a portion of the options vesting each year.
Exercise Timing: Deciding when to exercise your options can have significant implications. For example, when exercising ISOs, many try to avoid exercising during a year with high income to minimize the alternative minimum tax (AMT) implications. In addition, there are certain rules to consider, such as not exercising more than $100,000 in ISOs in a given year AND the 10-year time limit to exercise your options from the grant date.
Tax Implications: Consult a tax advisor to understand the tax consequences of exercising and selling stock options. The timing of your exercise and sale, as well as the type of option (ISO or NQSO), can significantly impact your tax liability.
Concentration Risk: While stock options can provide substantial financial rewards, they also carry risk. Relying too heavily on company stock (when you already rely on them for a paycheck) can expose you to significant financial risk if the company’s stock price falls or the business falters. Diversifying your investment portfolio is crucial to managing this risk.
Market Conditions: Consider the current market conditions and the performance of your company when deciding to exercise and sell your options. While no one knows what the future holds, it’s wise to weigh everything you know about the company with what you know about the current state of the market as market volatility can affect the value of your stock options.
Financial Goals: Align your stock option strategy with your overall financial goals. Whether you plan to use the proceeds for retirement, buying a home, or other financial objectives, having a clear plan can guide your decisions.
These are just a few of the key considerations to keep in mind when it comes to managing your stock options. As always, it is important to consult with a trusted professional for personalized advice based on your unique situation.
Remember that stock options can be a valuable asset but also come with potential risks and complexities. By understanding the basics and carefully considering your options, you can make informed decisions that align with your financial goals.
Conclusion
In the end, employee stock options can be a valuable component of your compensation that can lead to significant gains if managed wisely. Understanding the different types of options, their tax implications, and the strategies for exercising and selling them is essential. By considering these factors and consulting with trusted advisors, you can make informed decisions that align with your unique goals and risk tolerance.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
The Fed was once again in focus last week, and financial markets were not disappointed. First came the minutes from the July FOMC meeting, which included the following summation of the committee’s current outlook:
“The vast majority of participants observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”
Next up was Jerome Powell’s speech at the Jackson Hole Economic Symposium on Friday, where the Fed Chair essentially declared victory in the fight against inflation, noting:
“Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic.”
Bond prices rose as rates moved lower across the curve in response to these statements, while futures markets continue to debate whether the September rate cut will be just 25 basis points (~70% implied probability) or a full 50 basis points (~30% chance).
Equities of all stripes were higher as well, with notable strength in small caps and cyclicals (ex energy) as the rally in stocks once again showed signs of broadening out beyond its mega cap tech base.
Chart of the Week: Fed Funds Target Rate (lower) with Implied Fwd Rates
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.
Valuation
The S&P 500’s forward P/E of 21x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.
Interest Rates
Futures markets imply that the Fed will enact multiple interest rate cuts across the last three FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Labor market and consumer-related data remained solid:
* Initial jobless claims eased lower for a 2nd straight week, to 227k
* Retail sales rose +1.0% m/m in July (consensus = +0.4%)
* U of Michigan consumer sentiment rose slightly to 67.8 in prelim August data
Manufacturing and housing remain challenged, but so far that has not tipped the broader economy into recession and may not derail the soft landing outcome:
* Empire manufacturing remained in contraction territory at -4.7 for August
* Industrial production fell 0.6% m/m and capacity utilization fell to 77.8% in July
* Housing starts fell 6.8% sequentially in July to a SAAR of 1,353k
* Residential building permits fell 4.0% sequentially in July to a SAAR of 1,396k
Amidst this slew of macro data, the S&P 500 registered gains each day last week, with all sectors finishing the week in positive territory. The Nasdaq outperformed on renewed strength in mega cap tech stocks. In fixed income, rates fell modestly in the belly and long end of the curve as the market finds a new equilibrium after the flight-to-safety trade in early August. Credit spreads tightened during the week on renewed risk appetite, pushing corporate bond prices higher.
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. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.
Valuation
The S&P 500’s forward P/E of 21x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.
Interest Rates
Futures markets imply that the Fed will enact multiple interest rate cuts across the last three FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Following a tense weekend where renewed concerns about the US economy collided with technicals associated with an unwind of the Japan carry trade, US stocks started out in freefall on Monday the 5th, extending a decline that had begun during the latter portion of the previous week. The S&P 500 opened more than 4% lower and the Nasdaq was down more than 5% to start the session. Most notably, the VIX (the Chicago Board Options Exchange Volatility Index) briefly spiked to more than 65, a level only reached previously during the severe market shocks associated with the pandemic in March of 2020 and the financial crisis in Q4 of 2008. See the Chart of the Day for a time series of the intraday highs on the VIX.
Thankfully, stocks stabilized during the course of Monday’s session, aided in part by the 10:00 am release of the ISM Services Index (51.4) for July, which came in better than expected across the board. The rest of the week was a gradual recovery as the panic subsided, with stocks finishing only modestly lower by Friday’s close.
Fixed income also experienced some normalization over the course of the week. Rates moved higher across the curve as the flight-to-safety trade waned, and credit spreads inched tighter day by day, in sync with the gradual recovery in equities. Mortgage rates appear to be a beneficiary of the recent fall in rates, with the national average 30-year fixed rate mortgage falling roughly 1/4 percent week over week in the most recent market survey.
Besides the ISM Services print, macro news was sparse last week. Initial jobless claims (233k) pulled back slightly, and total consumer credit outstanding grew by $8.9 billion in June, slightly lower than consensus estimates.
Chart of the Week: VIX Intraday High
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.
Valuation
The S&P 500’s forward P/E of 20.2x 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 single digits.
Interest Rates
Futures markets imply that the Fed will enact multiple interest rate cuts across the last three FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
Understanding and Navigating the 4 Phases of Retirement from Dr. Riley Moynes
Executive Summary:
Retirement involves significant financial and emotional transitions, impacting routines, identity, and purpose.
Dr. Riley Moynes’ framework of four phases helps retirees navigate these changes: the vacation phase, the loss and lost phase, the trial and error phase, and the reinvent and rewire phase.
Addressing emotional challenges is crucial to avoid depression and find fulfillment in retirement.
Engaging in meaningful activities and serving others can lead to a rewarding and purpose-driven retirement.
Lastly, understanding these phases and staying proactive ensures retirees can make the most of their golden years.
Retirement is one of the biggest financial transitions of your life, so many prepare for years or even decades in advance.
From maximizing workplace retirement plans to optimizing Social Security benefits timing, retirees-to-be invest significant time understanding the financial nuances and tradeoffs needed for a secure and lasting retirement.
But, while many prepare financially, few consider the non-financial side of retirement, specifically, the emotional and psychological transition they will experience in retirement.
And that can be hard, because the reality is that leaving behind your career, whether you were financially ready or not, can create significant challenges, ultimately leading to higher rates of divorce and depression among retirees.
Fortunately, just like you can prepare for the financial aspects of retirement, there are things you can do to smooth out the emotional and psychological ride into retirement, helping you to “squeeze all the juice out of retirement.”
The first phase of retirement is the vacation phase – a time when you enjoy your newfound freedom.
Just like being on vacation, you can wake up whenever you want and spend your time however you want – pure bliss, right? Well, just like being on vacation, there often comes a point where you’re ready to go back home, settle into your routines, and “sleep in your own bed again.”
In other words, the new, fun, and exciting feeling of being able to do anything at any time wears off, and you’re left to wonder: is this all there is?
According to Dr. Riley Moynes, the vacation phase of retirement typically lasts a year before it starts to lose its luster. He says that once you find yourself questioning if this is all there is, you have officially moved on to phase 2.
Phase 2: Loss and Lost
As the name implies, phase 2 is not a fun place to be, and in his Ted Talk, Dr. Moynes describes it for many as “feeling like getting hit by a bus.”
In this phase, retirees can experience 5 major losses:
The 5 Major Losses in Retirement
Loss of Routine: While work provides structure and routine, the newfound freedom of retirement can be unsettling for many.
Loss of Identity: Many people intertwine their identity with their work, often defining themselves by their job (e.g., “I am a doctor” or “I am an accountant”).
Loss of Relationships: Strong career relationships built over decades can suffer as you no longer interact with colleagues daily.
Loss of Purpose: Many derive their sense of purpose from their work, especially those who feel they are doing their life’s work.
Loss of Power: Retirees often lose the power and influence they once had as key decision-makers in their careers.
Ultimately, these major losses can lead to what Dr. Moynes refers to as the 3 D’s: depression, divorce, and cognitive decline. This period can be incredibly challenging as retirees struggle to find a new sense of purpose and direction without the familiar structure of their careers. Many may feel isolated and uncertain about how to move forward, which can exacerbate these feelings of loss.
Fortunately, by the time retirees decide they can’t go on like this, they have officially entered phase 3: trial and error.
Phase 3: Trial & Error
Phase 3 is all about throwing things at the wall to see what sticks.
It’s a time when retirees ask themselves a couple of powerful questions:
How can I make my life meaningful again?
How can I contribute?
Dr. Moyne’s advice is simple: do more of the things you love and the things you’re good at.
And he says if you are having trouble figuring out what that is, start with some reflection. Ask yourself: a) what are some of your greatest accomplishments and b) what do you love doing?
Where those two things overlap is where you should focus your time.
Remember, this phase is all about experimenting and finding what brings you joy and fulfillment. Interested in volunteering at your local community garden or library? Go ahead and give it a try.
And if you’re struggling to come up with ideas, here are ten activities to consider during retirement:
10 Ideas to Find Purpose in Retirement
Volunteering: Engage in volunteer work at local non-profits, schools, hospitals, or community gardens. Volunteering allows you to give back to the community, meet new people, and find a sense of fulfillment.
Mentorship: Offer your expertise and experience to mentor younger professionals in your previous field or other areas of interest. This can be done through formal programs or informal networks.
Lifelong Learning: Enroll in classes at local community colleges or online platforms. You can study subjects that interest you, ranging from history and literature to science and technology.
Hobbies and Crafts: Dive deeper into hobbies you’ve always enjoyed or pick up new ones. Whether it’s painting, woodworking, gardening, or cooking, engaging in creative activities can be very fulfilling.
Fitness and Wellness: Focus on maintaining your physical health through activities like yoga, swimming, hiking, or joining a fitness group. This can also include mental wellness practices like meditation or mindfulness.
Travel and Exploration: If you enjoy traveling, consider planning trips to places you’ve always wanted to visit. Travel can broaden your horizons and provide new experiences and memories.
Writing and Blogging: Share your life experiences, knowledge, or interests through writing. Start a blog, write a memoir, or even work on a novel. This can be a great outlet for self-expression.
Part-Time Work: Find part-time work or freelance opportunities in areas you’re passionate about. This can help maintain a sense of structure and purpose while allowing you to use your skills.
Community Involvement: Get involved in local community groups or organizations. This can include joining clubs, attending town meetings, or participating in community events.
Family and Friends: Spend quality time with family and friends. Strengthen your relationships by organizing regular get-togethers, outings, or family vacations. Being an active part of your loved ones’ lives can bring immense joy and fulfillment.
Phase 3 is all about experimenting with different activities until you find what brings you joy. Remember, this process is unique for everyone—there is no right or wrong—and it can continue to evolve throughout retirement
Last but not least, on to Phase 4: Reinvent and Rewire.
Phase 4: Reinvent & Rewire
In phase 4, retirees find answers to the most important question of them all: what’s the point?
But, in Dr. Moynes’ experience, not everyone makes it to phase 4, with some retirees bouncing back and forth between phases 2 and 3. But, for those that do, he finds that it almost always involves service to others, in some capacity.
This could involve giving back to your community through volunteer work or mentorship. In his TED Talk, Dr. Moynes mentions a retiree who found joy in delivering “piping hot pizzas to hungry humans” part-time, not for the money, but for the satisfaction of serving others.”
For Dr. Moynes, success in phase 4 came through a friendship he formed that evolved into community classes teaching other friends how to use their iPhones and iPads. He joked that it all started because he and his fellow retirees were all given various Apple products for Christmas from their kids, but half of them could barely figure out how to turn them on, let alone use them. So, he and a friend taught a class on how to use their devices that snowballed into hundreds of classes on a variety of subjects over the years: from how to repair bikes, to learning different languages.
The best part of all? Dr. Moynes has found that through Phase 4, retirees can recover many of the losses from Phase 2: routine, identity, relationships, purpose, and power. This phase not only helps retirees regain a sense of stability but can also bring renewed meaning and satisfaction to their lives.
So, knowing what you know now, where do you go from here?
Dr. Moynes’ advice is simple:
Here Are 4 Steps You Can Take to “Squeeze the Most Juice” out of Retirement
Enjoy the vacation in phase 1.
Be prepared for the losses in phase 2.
Try as many different things as possible in phase 3.
And lastly, squeeze all the juice out of retirement in phase 4.
By understanding and embracing these four phases, you can turn the challenges of retirement into opportunities for growth, fulfillment, and happiness. Whether you are just beginning your retirement journey or are already navigating its complexities, remember that each phase is a step towards a richer, more rewarding life. The key is to stay open, flexible, and proactive in finding what makes your retirement truly golden.
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.
Weak labor market data on Thursday and Friday of last week heightened fears regarding the condition of the US economy, turning what had been a rotation trade into a fear trade. Equities of all stripes were down sharply as VIX spiked to its highest level in more than a year. Defensive sectors like utilities, staples, and real estate outperformed on the week, while most growth and cyclicals companies were lower. Small caps reversed course on their recent outperformance and shed nearly 7% on the week, significantly underperforming large caps.
With some market participants suddenly clamoring for an emergency rate cut, Treasury yields fell sharply as bond prices rose. 2y yields dropped 50bp on the week, 10y yields finished 40bp lower, and Fed funds futures markets finished Friday’s session with 4 to 5 rate cuts priced in by year-end. Credit spreads leaked wider by about 10 basis points, a comparatively modest amount that could be a precursor of more widening to come.
The data driving the equity selloff largely came from the labor market, although a weaker-than-expected ISM Manufacturing print also contributed, coming in at 46.8 for July. On the labor front, initial jobless claims (a leading indicator of labor market stress) rose to 249k, the highest figure in nearly a year. Then on Friday, nonfarm payrolls fell to +114k in July from a downwardly revised +179k in June, missing consensus by a wide margin. Perhaps most importantly, U-3 unemployment rose 20 basis points to 4.3%, officially triggering the “Sahm Rule” (trailing 3m avg U3 more than 50bp greater than trailing 12m low U3) which in the past has proven to be a very reliable real-time marker for the actual start of a US recession (recession dates are officially determined after the fact by NBER).
Chart of the Week: US Unemployment Rate (U-3)
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.
Valuation
The S&P 500’s forward P/E of 21x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.
Interest Rates
Futures markets imply that the Fed will cut overnight interest rates once or twice in the 2nd half of 2024, with additional cuts in 2025. Belly and long end rates have already priced in a rate cutting cycle and are likely near their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After falling rapidly in late 2022 and all of 2023, inflation became sticky in the ~3% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
The sector rotation trade gained momentum last week, as large cap tech significantly underperformed while most other parts of the US equity market rallied. Cyclicals and defensives were almost universally higher, with energy stocks the lone exception thanks to sagging oil prices driven by soft demand from China. Small caps massively outperformed once again, with the Russell 2000 climbing 3.5% on the week to reach 10+% so far in July. International markets finished lower, particularly E/M thanks to weakness in Chinese stocks.
In fixed income, rates moved lower across most of the curve, particularly in the front end as monthly PCE data reinforced the disinflation narrative. Dovish comments from former FOMC member Bill Dudley, who surprisingly called for a July rate cut to stave off a possible recession, also helped push short rates lower. While futures markets continue to price almost no chance of a cut from the FOMC at the end of July, the implied odds of a September cut are now virtually 100%.
Macro data released last week was consistent with recent trends. The first estimate of Q2 US GDP growth came in at +2.8% (q/q annualized), with better-than-expected personal consumption (along with some inventory build) as strong income growth continues to support consumer spending. Home sales (new & existing) remain weak due to persistently high mortgage rates. The preliminary reading of S&P’s PMIs for July saw manufacturing (49.5) slip back into contraction, while services (56.0) exceeded consensus and kept the composite (55.0) in expansion territory. And finally, Core PCE (the Fed’s preferred inflation gauge) was +0.2% m/m in June and +2.6% y/y, a relief to market participants who are wary of any reacceleration in inflation ahead of the September FOMC meeting.
Chart of the Week: US GDP Growth with Consensus Fwd Estimates (q/q, ann.)
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.
Valuation
The S&P 500’s forward P/E of 21x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.
Interest Rates
Futures markets imply that the Fed will cut overnight interest rates once or twice in the 2nd half of 2024, with additional cuts in 2025. Belly and long end rates have already priced in a rate cutting cycle and are likely near their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After falling rapidly in late 2022 and all of 2023, inflation became sticky in the ~3% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
A sharp sector rotation trade played out across US equity markets for a second consecutive week, with high flying tech stocks coming under selling pressure while previously unloved areas of the market found a bid. Cyclicals, real estate, and small caps were areas of relative strength. The Dow was the winner among US large cap benchmarks, while the Nasdaq was down more than 3% and is now slightly in the red for the month of July. Meanwhile, international equity markets had a challenging week, and remain well behind the US on a YTD basis.
Bond yields moved higher by 5-6 basis points across most of the Treasury curve, pivoting midweek after a fairly strong bond rally that had seen yields fall by ~25 basis points over the previous 2+ weeks.
Macro was a mixed bag last week. Import/export prices continue to suggest that international trade is not a significant source of inflation at this point. On the positive side, retail sales in June were better than expected, and housing activity rebounded slightly, with permits and starts both up 3+% sequentially. On a more challenging note, jobless claims ticked higher once again as the labor market continues to normalize, and the Conference Board’s Leading Economic Index (LEI) fell another 0.2% m/m. The LEI is now 14.8% off of its peak from the end of 2021, and in the past, declines of this magnitude have always been followed by a US recession. See the Chart of the Week for a time series.
Lastly, despite causing significant disruption in many industries, it does not appear that Friday’s global Crowdstrike outage had any meaningful effect on most financial asset prices (CRWD is a notable exception, of course).
Chart of the Week: Conference Board LEI – Decline from Peak (%)
Albion’s “Four Pillars”:
Economy & Earnings
The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.
Valuation
The S&P 500’s forward P/E of 21x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.
Interest Rates
Futures markets imply that the Fed will cut overnight interest rates once or twice in the 2nd half of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.
Inflation
After falling rapidly in late 2022 and all of 2023, inflation became sticky in the ~3% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
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.
