November 2024 Recap:

Election:

Domestic financial markets reacted positively to the US election outcome, which saw Donald Trump earn a second term as US president while the GOP took control of both houses of Congress. US stocks rallied on the prospect of lower corporate taxes and less regulation. Rates initially moved higher on the potential inflationary impact of tariffs and tighter border controls, as well as the potential fiscal impact of unfunded tax cuts. The selection of Scott Bessent as nominee for US Treasury Secretary seemed to calm rates markets toward the end of the month.

Inflation:

Data released in November appeared to bring a measure of relief to investors amidst concerns that inflation might be ticking up again in real time. The most recent monthly prints for CPI (+2.6% y/y headline; +3.3% y/y core) and PCE (+2.3% y/y headline; +2.8% core) were right in line with consensus estimates. Meanwhile, Q3 Core PCE was revised lower by 10 basis points to +2.1% q/q annualized.

Economy:

Incoming data continues to depict a strong US economy. Jobless claims fell in November as the impact of October storms and the Boeing strike faded. Unemployment remains low, and wage gains are strong. Regional Fed surveys suggest that domestic manufacturing is still mired in a slump, but services PMIs (representing the bulk of the US economy) are solidly in expansion territory. As Q3 earnings season winds down, US corporates appear on track for high single digit y/y EPS growth in 2024.

Monetary Policy:

As expected, the FOMC cut overnight interest rates by 25 basis points at the November meeting. Futures markets imply that one more 25bp cut is probable (but by no means assured) at the December meeting, after which a pause is likely. At this point only two additional cuts (50bp total) are priced into the forward curve in 2025, a sharp deceleration in the pace of rate cuts relative to expectations from just a few months ago.

Bond Market:

Treasury yields did a round trip in November, moving higher in the immediate aftermath of the election and then falling in the last week of the month on in-line inflation data and the nomination of Scott Bessent as US Treasury Secretary. Credit spreads rallied along with equities post-election and are near all time tights. Mortgage rates remain elevated but are likely to track lower in the coming weeks, following the path of Treasuries.

Stock Market:

The impact of the election outcome and Trump’s “America First” policy agenda is readily apparent in stock prices. Domestic stocks soared, led by small caps (+11%) which tend to be more US-focused businesses. Conversely, international stocks finished lower in the aggregate, with trade-dependent emerging markets among the hardest hit.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. S&P 500 earnings are on track for high single-digit y/y growth in 2024, with consensus calling for an acceleration to double-digit y/y growth in 2025.

Valuation

The S&P 500’s forward P/E of 22x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the mid single digits.

Interest Rates

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.

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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.

Weekly Recap:

US stocks finished mostly higher in a fairly quiet week for macro news. The post-election broadening of the US equity market rally (a trend that really began back in July) continued apace, with cyclicals and small caps outperforming.

International benchmarks posted only modest gains and continue to lag far behind the US in 2024. The prospect of higher tariffs and stricter border controls under a second Trump administration has weighed on sentiment around global trade, with the effects expected to disproportionately impact the more export-oriented economies of Europe and Asia. See the Chart of the Week for a comparison of US and international equity performance since the US election on November 5th.

Tech bellwether Nvidia saw some profit-taking on Friday but finished essentially flat on the week after posting blowout Q3 earnings, including yet another quarter of triple-digit y/y EPS growth. CEO Jensen Huang noted that production of the company’s new Blackwell chips has begun ramping up, but relentless demand from data centers will still exceed available supply for the next several quarters.

On the macro front, homebuilder sentiment improved on the prospect of fewer regulatory hurdles in the future, although that optimism has yet to flow through to increased construction activity as persistently high mortgage rates continue to impact affordability and demand. Elsewhere, S&P’s US manufacturing (48.8) and services (57.0) PMIs improved sequentially in the preliminary November reading, and the US labor market remained solid with the October storms-driven uptick in jobless claims now solidly in the rearview.

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.

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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.

Weekly Recap:

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.

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.

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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.

Weekly Recap:

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.

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.

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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.

Weekly Market Recap

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)

* Misleading indicators: Conference Board LEI = -0.5% m/m; -4.8% y/y; -15.9% P-T

* Limited housing supply:  Existing Home Sales = 3.84mn SAAR (near 25y low)

* Resilient labor market:  Initial Jobless Claims = 227k (down 15k w/w)

* Well anchored inflation expectations:  U of Mich 1y = +2.7%;  5-10y = +3.0%

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.

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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.

Weekly Recap:

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

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.

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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.

Weekly Recap:

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:

* Headline CPI = +2.4% y/y; consensus = +2.3%

* Core (ex food & energy) CPI = +3.3% y/y; consensus = +3.2%

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.

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.

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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.

Weekly Recap:

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.

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.

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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.

Weekly Recap:

Last week the FOMC finally launched its much-anticipated pivot, delivering a 50 basis point cut in what will clearly be the first of several reductions in overnight interest rates. How many additional cuts will be delivered, and over what period of time, remain topics of debate amongst market participants. In the official release and during the ensuing press conference, Fed Chair Jerome Powell stressed that despite the 50bp reduction (unusual outside of crisis situations), the US economy remains on solid footing in the eyes of the committee. Notably, Fed Board of Governors member Michelle Bowman dissented, issuing a short statement summarizing her view that with inflation currently above the Fed’s 2% target, a 25 basis point cut would have been more appropriate at this time.

Equity investors largely reacted with enthusiasm, as expected. The S&P 500 and the Dow set fresh all time highs on Thursday and Friday, respectively, thanks to notable strength in cyclicals and growth stocks. Small caps also enjoyed a tailwind.

Rates across much of the curve actually rose following the announcement, rather than falling as some might have expected. 10y Treasury yields ended the week 9bp higher while 30y yields finished up by 10bp, an indication that the bond market may have already fully priced the entire upcoming rate cutting cycle. Rising yields in the belly and long end are helping to restore the curve’s natural upward slope. Normalization in many parts of the economy (growth, margins, consumer, labor, etc.) has been a theme of the post-pandemic economy. As the Fed’s rate cutting cycle unfolds over the coming months, it appears that that theme may finally be applying to rates markets as well.

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 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.

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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.

Weekly Recap:

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.

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.

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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.