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Monthly Market Recap – May 2024

Market Recap – May 2024 [PDF]Download

May Recap:

Inflation:

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

Monetary Policy:

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

Economy:

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

Bond Market:

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

Stock Market:

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

S&P 500 Total Return by Sector – May 2024

Albion’s “Four Pillars”:

Economy & Earnings

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

Valuation

The S&P 500’s forward P/E of 20.3x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

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

Inflation

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

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.
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Weekly Market Recap – May 24, 2024

Weekly Market Recap – May 24, 2024 [PDF]Download

Weekly Recap:

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

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

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

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

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

Albion’s “Four Pillars”:

Economy & Earnings

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

Valuation

The S&P 500’s forward P/E of 20.5x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

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

Inflation

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

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Weekly Market Recap – May 10, 2024

Weekly Market Recap – May 10, 2024 [PDF]Download

Weekly Recap:

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

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

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

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

Chart of the Week: BofA MOVE Index

Albion’s “Four Pillars”:

Economy & Earnings

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

Valuation

The S&P 500’s forward P/E of 20.4x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

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

Inflation

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

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Weekly Market Recap – May 3, 2024

Weekly Market Recap – May 3, 2024 [PDF]Download

Weekly Recap:

With inflation and monetary policy still in focus, last week’s FOMC meeting and some soft macro data pushed rates lower and allowed stocks to rise.

As expected, there was no change to overnight interest rates, and Jerome Powell continued to preach patience, noting that in recent months there has been a lack of progress towards the committee’s 2% target. However, the committee did announce a significant reduction in the pace of Quantitative Tightening (“QT”), which could be viewed as a precursor to rate cuts. The committee reduced the monthly redemption cap on Treasuries from $60 billion to $25 billion, a move that appears to be aimed at arresting further upward movement in Treasury yields.

The rates market interpreted this as a mildly dovish outcome. In the ensuing sessions, the odds of a second rate cut in 2024 rose from roughly 15% pre-FOMC to 80% by the end of the week (one cut has remained priced in throughout). Yields fell by 10+ basis points across the curve, with greater declines in the front end.

Soft macro data also played a role last week. First, the monthly jobs report from the BLS saw just +175k net nonfarm payrolls which was well below consensus, while U-3 Unemployment and U-6 Underemployment both ticked higher by 10 basis points, to 3.9% and 7.4%, respectively. And a bit later on Friday morning, the ISM Services Index unexpectedly dropped into contraction territory at 49.4, the lowest reading since December of 2022. The services sector has largely kept the US economy afloat during the post-pandemic period even as manufacturing has slumped, so any protracted softness in services could be a significant challenge to growth.

Chart of the Week: Net Nonfarm Payrolls Added

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. 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 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

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

Inflation

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

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Market Recap – April 2024

Market Recap – April 2024 [PDF]Download

April Recap:

Inflation: Data released in April continued to paint a picture of sticky inflation, with most metrics coming in slightly higher than consensus expectations. Core CPI is now +3.8% y/y based on the most recent print, while the Core PCE Deflator (the Fed’s preferred inflation gauge) stands at +2.8% y/y, both of which are above the Fed’s 2% inflation target. Moreover, real time inflation data suggests that core inflation (CPI and PCE) has been running at an annualized pace of around 4.5% so far in 2024.

Monetary Policy: There were no FOMC meetings in April (technically a meeting began on April 30, to conclude with a rate decision and press conference on May 1), and thus no changes to overnight interest rates. However, sticky inflation data caused market participants to further reassess the timing and magnitude of a rate cutting cycle. At the start of April, futures markets were pricing in 2 or 3 rate cuts in 2024, most likely beginning sometime over the summer. By month end, futures markets implied only one rate cut this year, occurring in either November or December.

Economy: Data released in April was mixed. The labor market remains strong: jobless claims are low (~200k initial claims per week), open jobs are plentiful (8.75 million per the most recent JOLTS report), job creation continues (303k nonfarm payrolls added), and unemployment is low (3.8%). There have been signs of a trough in US manufacturing, which has been in recession for nearly 2 years. However, consumer confidence has wanted in recent months thanks to sticky inflation, and higher mortgage rates appear to have stalled the upward momentum in housing sector activity. Q1 corporate earnings growth has been modest so far at +3.5% y/y, roughly in line with inflation meaning that real (inflation-adjusted) growth is close to flat.

Bond Market: Treasury yields moved higher over the course of April as market participants further recalibrated their expectations regarding the so-called “Fed pivot”, resulting in lower bond prices across the board. Credit spreads remain tight by historical standards, pricing in very little default risk. Mortgage spreads tightened a bit further in April, driving a smaller increase in mortgage rates (+38bp on average for 30y fixed) compared to the move in 10y Treasury yields (+48bp).

Stock Market: After posting significant gains in Q1, most domestic and international stocks struggled in April. China was a notable exception, with the MSCI China Index posting a 6.4% gain on the month, pushing E/M benchmarks into positive territory. In the US, all sectors except Utilities finished in the red, with rate-sensitive sectors like Real Estate and Technology facing the most selling pressure.

S&P 500 Total Return by Sector – April 2024

Albion’s “Four Pillars”:

Economy & Earnings

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

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

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

Inflation

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

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Weekly Market Recap – April 26, 2024

Weekly Market Recap – April 26, 2024 [PDF]Download

Weekly Recap:

Risk appetite returned to financial markets last week as equities experienced a broad-based rally. All sectors in the S&P 500 finished higher, led by a strong post-earnings rebound in several large cap technology stocks that pushed the Nasdaq to a 4.2% gain on the week. Small caps and international stocks also fared well.

Rate volatility eased back a bit, particularly in the front end which has come to grips with the reality of a very patient Fed. Belly and long end yields inched higher by a few basis points, but the 2y finished the week right where it began: just shy of 5%. Futures markets are now pricing in only one 25bp rate cut by year-end, down from six at the start of the year.

Meanwhile, credit spreads compressed a bit last week on the uptick in risk appetite, keeping high quality corporate bond prices flat despite the mild backup in parts of the Treasury yield curve.

Macro data was mostly fine last week – not too hot, and not too cold. The first estimate of Q1 GDP came in lower than consensus expectations, but real-time GDP estimates (like the Atlanta Fed’s GDPNow) suggest that the final figure could eventually be revised higher. Consensus estimates call for continued slow growth for the balance of 2024 (see Chart of the Week).

Finally, PCE inflation data for March came in largely in line with expectations. Headline and Core PCE both expanded by +0.3% m/m in March, as they both had the previous month. Core PCE (the Fed’s preferred inflation gauge) remained at +2.8% on a y/y basis, above the Fed’s 2% target.

Chart of the Week: US GDP Growth (q/q, annualized)

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 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

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

Inflation

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

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Weekly Market Recap – April 19, 2024

Weekly Market Recap – April 19, 2024 [PDF]Download

Weekly Recap:

It was a tough week for stocks and bonds as market participants began to debate whether 2024 might see zero cuts to overnight interest rates, rather than multiple cuts as had been assumed in the early part of the year. As of Friday’s close, futures were still pricing in two 25bp rate cuts by year-end, with July being the first “live” meeting where a rate cut was roughly a 50/50 proposition. Sticky inflation and hawkish commentary from FOMC members have undermined what was previously a consensus view that a relatively aggressive rate cutting cycle would begin over the summer.

As a result of the less dovish outlook for monetary policy, Treasury yields have moved higher across the curve. Last week saw a parallel shift higher by 8-10 basis points, putting yet another dent in YTD fixed income performance. Mortgage rates have moved wider in sync with Treasury yields, with the national average for 30y fixed rate back above 7% according to Freddie Mac’s weekly mortgage market survey.

Stocks had a difficult time staying afloat amidst the backup in rates. Rate-sensitive sectors were the hardest hit, including real estate and technology. The recent selloff in large cap tech has pushed the Nasdaq back behind the S&P 500 on a YTD basis.

In macro news, last week’s most significant release was the Conference Board’s Leading Economic Index (LEI), which resumed its downward trajectory in March after a brief uptick in February. The index is now 13.7% off its year-end 2021 cycle peak (see the Chart of the Week). In the past, declines of this magnitude and duration have always been followed by a recession.

Chart of the Week: Conference Board LEI – Percent 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 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

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

Inflation

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

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Quarterly Letter Excerpt: From John Bird’s Desk

Thanks to all of you who were able to join us at our annual Albion ski day. As most of you know our roots as a firm are in Alta, Utah. We began our investment management and financial advising journey in the basement of the Alta Lodge in 1982 and through the rest of the 1980’s officed up at the end of Little Cottonwood Canyon. While we’ve long since moved down into the Salt Lake valley our hearts are still attached to that mountain oasis. On to this quarters’ musings.

Money Laundering. Shell games. Hiding the true owner of assets for nefarious purposes. These are a handful of reasons behind one of Washingtons’ efforts; the Corporate Transparency Act (“CTA”), a part of the Money Laundering Act of 2020. Turns out rulemakers believe our current system of LLC’s, Partnerships, and Corporations allow the actual humans who own these entities to hide behind a nearly impenetrable wall of structures to mask their ownership. And perhaps through these opaque structures engage in illegal activities with very little risk of being discovered. The purpose of this law is to pierce that veil.

Unfortunately this will apply to many of our clients. Those with closely held businesses, family partnerships and/or limited liability companies, and closely held entities will find themselves subject to the reporting requirements.

The provided information is not public. Rather, the gathering entity – the Financial Crimes Enforcement Network (“FinCEN”) is authorized to disclose information to U.S. federal law enforcement agencies, with court approval to certain other agencies, to non-US law enforcement agencies upon request of a US federal law enforcement agency, and with consent of the reporting company to financial institutions and their regulators.

Prior to this act the burden of collecting beneficial ownership information fell on financial institutions. This shifts the burden to the entities themselves.

None of us are happy about additional reporting requirements and what feels like further intrusion of the federal government into our affairs. And this note could wax philosophic for paragraphs on the topic. But we’ll spare you such a soliloquy. And focus instead on who this applies to and what you must do to comply. To be clear we are not attorneys and nothing here should be considered legal advice. We encourage every reader to consult with counsel to determine if they have a reporting requirement under the act and if so to ensure reports are filed in a timely manner.

There are twenty-three exempt categories which can be summarized in a few categories. First are financial institutions; for example banks, securities issuers, credit unions, bank holding companies, broker-dealers, money services businesses, securities exchanges and clearing companies, investment companies and investment advisors, venture capital fund advisers, insurance companies, state licensed insurance producers, entities registered with commodity exchanges, accounting firms, pooled investment vehicles. These entities already have stringent reporting requirements.

The next significant category is made up of governmental entities. This includes federal, state and tribal entities and includes political subdivisions which means counties, cities, towns and school districts.

The final category are “large” operating companies. For this law “large” is considered to be companies with over twenty employees, over $5,000,000 in gross receipts from US customers, and with an operating presence at a physical office within the United States.

Know that the entities as outlined above are but an approximate summary of exempt organizations. It’s essential to dive into the details and if there is any question to retain counsel to determine whether or not your entity is exempt. Fines for non-compliance are punitive and run up to $500 per day of non-compliance which can accumulate up to $10,000. None of us want to get this wrong.

So what types of entities will be subject to the reporting requirements? Unfortunately many of the small family partnerships, LLC’s, trusts, and corporations we and our clients work with on a daily basis are subject to this law.

The information required with the reporting includes the legal name, any trade names, DBA’s or trading as names, the current street address and principal place of business, the jurisdiction of formation or registration, and the tax ID number. Beneficial owners must report their name, date of birth, residential address, an ID from an acceptable document (passport, US driver’s license), and the name of state or jurisdiction issuing the document. An image of the document must be provided and it cannot be expired.

Businesses in existence prior to January 1, 2023 must file by January 1, 2025. Businesses formed during calendar year 2024 must report within 90 days of creation of the entity and businesses formed after January 1, 2025 must file within 30 days of creation of the entity.

More information can be found through your legal counsel and online at fincen.gov/boi.

This quarterly note differs from the usual fare. However given the circumstances we believe it’s important to front and center with all of you regarding this new requirement as year end (and the risk of non-compliance) will be here in the blink of an eye.

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.

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Quarterly Letter Excerpt: Economy and Markets

If something cannot go on forever, it will stop. Economist Herbert Stein articulated this principle nearly forty years ago when discussing growing trade deficits with lawmakers. This humble insight can be applied to many situations. These days it feels as though post-pandemic economic strength will go on forever. Yet, we know that it won’t. It can’t. Our central theme of “normalization” is evident over the past eighteen months, and eventually the business cycle will overcorrect causing recession (not to be feared entirely as contractions cleanse the system). But that day isn’t today. Indeed, as we exit the first quarter the US economy is doing fine. Better than fine really, it’s quite robust. Consumer spending is resilient, jobs are plentiful, businesses are investing, and government budgets are expansionary. Real GDP grew by +2.5% in 2023, accelerating from the previous year, and estimates for Q1 sit around +2%. While these are backward-looking figures, more current information – like spending data from credit and debit card companies, retail sales, services PMIs, jobless claims, and even (recently) improving consumer confidence – suggests that momentum has carried into 2024.

But why the potency? The simple truth is economic strength is closely tied to jobs, which remains solid. And because the economy is strong that keeps the labor market strong as business profits support employment and wages. It’s a virtuous loop. And while signs of normalization (there’s that word again) in the labor are present, like softer demand for workers and increased supply, layoffs are low and hiring is steady. This balance is beneficial nurturing a more secure foundation. Until this situation changes, economic expansion should continue. The critical question is now, can we successfully move from too tight to well-adjusted in the jobs market without the pendulum swinging negative? Time will tell.

Inflation’s stride has also cooled over the past 20 months, from over 9% to roughly 3%. While much progress has been made, Jerome Powell asserts more work and greater confidence in the trend is needed to declare victory. We agree. The Fed’s target is ~2% and the “last mile” won’t be easy. Still, our long-held view endures – the contemporary war against inflation will be won.

Speaking of the Fed, last July we opined that the central bank was done hiking interest rates. Be it lucky or good, that view proved correct. We continue to reason that the Fed won’t need to raise rates further. We’ve gone from 0% to ~5.5%, a ton of credit tightening, and without a jump in unemployment. Job well done. The new Wall Street parlor game centers on how long the Fed will maintain its current stance before lowering rates. The answer hinges on the trajectory of the economy, employment, and inflation. Our best guess is the first cut will occur in the second half of this year.

All told, “soft landing” odds have increased compared to a year ago, a time when our preferred forward indicators signaled maximum caution. Several indicators have improved, meaning there’s been considerable diminution of risk over the past year. At this point we see recession odds at about a coin toss (down from over 80%). Historically, in any given year it’s ~15%.

In bonds, the action will likely be on the front end of the yield curve as big moves further out have mostly occurred. While things can move cyclically based on data and mood, structurally speaking longer duration securities appear sensibly priced for the current environment.

Meanwhile, firms are in good shape with profits holding steady in 2023. Despite “no growth”, revenues were higher last year due to an advancing economy and increasing prices. But so too were costs, in many cases more than revenues, resulting in compressed operating margins and inert profits. Looking ahead, analysts predict energetic earnings growth of +11% in 2024 and +13% for 2025, driven by a healthy economy and margin re-expansion. Those are high bars. From our perch, margins may have indeed bottomed if we can avoid a downturn. Thus the near-term direction of profits will largely hinge on the macroeconomy. Regardless, our primary attention is the longer-term outlook. Especially for those investments we own on your behalf. And here, we are optimistic for the years ahead.

For its part, the stock market has continued its momentum, driven by expectations of no recession and Fed rate cuts. Despite unease over the looming election, investor attitudes are (unsurprisingly) cheerful on the back of impressive recent performance. Moreover, the inflation problem is under control and geopolitics, while tense, sit more at a simmer than a boil. Yet risks remain if fundamentals, including lofty earnings expectations, fail to deliver.

On valuation, there’s some level of enthusiasm to be sure, particularly in areas like AI. However, at this juncture, this verve is probably more rational than irrational (paging Alan Greenspan and Bob Shiller!). As declared, the economy is sound, inflation is falling, the 10-year Treasury yield is off its peak, the Fed has finished raising rates, corporate earnings are ample, and technology is bliss. Given this backdrop, although the stock market is not exactly cheap, it is also not overly expensive when you consider where key factors like inflation, interest rates, and profits are expected to be in the coming years. Moreover, there is still approximately $6 trillion in cash “on the sidelines,” mainly in money market funds, a portion of which (not all, but some) will likely seek higher returns when the Fed eventually begins to ease.

Bottom line: while short-term estimates vary, our longer run outlook for US equities remains wildly bullish.

As always, there is perpetual motion in economics and financial markets, so it’s vital to make decisions based on the available information. We find great joy in this important vocation. Which I suppose leads us back to where we began, with Mr. Stein’s observation … but with a twist. What happens if something, like the work of a steadfast financial advisor, can go on forever? Thanks for your unrelenting trust.

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.

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Quarterly Letter Excerpt: Planners Corner

Retirement planning in America is constantly transforming. The widely accepted concept that everyone can retire is only a few generations old. In such a rapidly changing world, how we achieve such a feat will also continue to evolve, which means that traditional approaches to securing retirement income need to be revised. Longevity is on the rise, traditional pensions (defined benefit plans) are becoming relics of the past, and the onus of retirement planning now squarely rests on the individual.


Given the statistical likelihood of living well into our 90s, especially for non-smokers and those of higher socioeconomic status, the necessity for robust and foolproof retirement planning strategies has never been more apparent. This reality drives us to rethink and innovate in how we protect your financial future.


When creating comprehensive retirement plans for clients, it is important to identify and address some of the potential hurdles future retirees face. I often return to a list that author Larry Swedroe coined as the “Five Horsemen of the Retirement Apocalypse.” One of these five included “historically low bond yields,” which is no longer as relevant today, but I still find this list useful when trying to understand how to best plan for our clients’ futures. So, the following Four Horsemen remain top of mind for retirement planning in 2024:

  • Historically High Equity Valuations: With the U.S. stock market’s long bull run, it is wise to adjust expectations and prepare for potential downturns in equity investments.

  • Increased Longevity: As life expectancy rises, retirement planning must account for potentially longer retirement periods, necessitating a portfolio that can last 30+ years.

  • Long-Term Care Costs: With the likelihood of needing long-term care increasing with age, planning for these costs is essential to avoid financial burden and ensure quality of life.

  • Social Security and Medicare Benefits: There’s a chance that benefits could be reduced or taxes might go up to support these programs. We need to plan for multiple outcomes.

All we have to do is look at annuity sales in 2023 to see that consumers and advisors alike are turning to insurance contracts for peace of mind in the face of these headwinds. In ways, it’s unfortunate to see a record 25% increase in year-over-year annuity sales, as often, it’s primarily the agents who benefit from these products. Most annuity sales tactics use the same general concerns discussed above to incite fear and force quick action at the client’s own peril. My general thought process for insurance and annuities is straightforward: insurance is a great risk transfer tool but an expensive way to invest. If an annuity contract cannot be clearly explained, including all fees and market-based outcomes, I’m not interested.


A critical, yet often missed, step in sound financial planning is customizing withdrawal strategies to suit individual needs. This should usually be the first move in crafting a tailored retirement income strategy. When done in concert with a comprehensive financial plan, customized retirement withdrawal strategies can provide greater financial security because they allow for flexibility. None of us know what the future holds and unlike an annuity contract that locks you into a particular set of terms with possible penalties for making changes, customized income strategies allow you to make adjustments at the margins or pivot when necessary as your retirement years unfold.


As we consider the often jarring transition from saving to spending, it is essential to understand the various withdrawal strategies for portfolio assets available in retirement, which broadly fall into four categories:

  • Constant-Dollar Withdrawal: Start with a fixed percentage, then adjust annually for inflation. It can suit those needing a consistent income to cover fixed expenses.
  • Constant-Percentage Withdrawal: Withdraw a consistent percentage of your portfolio each year. Nice for those with flexible spending needs and lower fixed costs.
  • Variable-Percentage Withdrawal: The withdrawal percentage adjusts based on your portfolio’s annual value. Suitable for flexible spenders without the aim to leave a significant inheritance.
  • Spend Only the Income: This approach only spends dividends and interest, preserving the principal. It suits individuals with low expenses compared to their portfolio size or those wishing to use their current asset base for legacy planning.

Note that none of these strategies are a set-it-and-forget-it approach. They are part of a constant discussion about how we can help you most efficiently and comfortably spend the money you have worked so hard to earn.

Morgan Housel’s “The Psychology of Money” emphasizes the personal nature of financial decisions, reminding us of the wide variance in how people view and manage money. This diversity points to the absence of a one-size-fits-all approach to retirement planning. The goal is to find a strategy that aligns with your needs, ensures stability, and adapts to life’s uncertainties.


As your financial planners, we’re dedicated to navigating the complex landscape of retirement planning with you. If you have friends or family who require sound advice and a comprehensive review of retirement income planning options, please reach out and refer them to our team. Our goal is to ensure that our client’s retirement strategies are not only robust and tailored to their needs but also flexible and ready to adjust to the constantly evolving financial world.

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.