Weekly Market Recap

Risk assets of all stripes were higher last week, as US economic data continued to point towards a strong recovery while inflation fears eased a bit. Technology and cyclical stocks saw the strongest demand, while investors pared back their exposure to traditional defensives like real estate, consumer staples, and healthcare. International stocks were higher, with emerging markets outperforming developed markets on increased risk appetite.

Treasury yields fell across the curve despite the risk-on market tone, with benchmark 10y yields lower by 3bp while 30y yields fell 4bp. Meanwhile, corporate credit spreads compressed to their tightest levels since 2007, with the average spread on the Bloomberg/Barclays US Credit Index closing at 79bp. See the Chart of the Week for a time series.

Most commodity prices rose, with oil setting a new pandemic-era high on Thursday before easing back slightly on Friday.

Economic news in the US was mostly positive. Double-digit home price appreciation continued across most of the country, with signs emerging that affordability is beginning to impact transaction volumes. Consumer confidence measures held steady at healthy levels in May, jobless claims continued to trend lower, and durable goods orders (excluding the volatile transportation component) were higher.


Weekly Market Recap

Weekly Recap: Equity markets rode a roller coaster fueled by inflation fears last week, with most stocks finishing lower. Headline inflation (as measured by CPI) rose above 4% for the first time since 2008, causing a short-lived spike in interest rates as well as widespread selling in equities as discount rates were
recalibrated. The fear of persistently higher inflation began to subside a bit
on Friday, allowing rates to fall and equities to recoup some of their losses.

Large cap tech stocks were hit the hardest, dragging down sector
performance for communications (-2.0%), information technology (-2.2%), and consumer discretionary (-3.7%). Meanwhile, cyclicals as well as traditional defensive sectors were mixed, with only consumer staples
(+0.4%), financials (+0.3%), and basic materials (+0.1%) finishing higher on the week.

Interest rates finished the week modestly higher, with benchmark 10y
Treasury yields rising 5bp while 30y yields were up 6bp. Credit spreads were mostly stable, resulting in small price declines across all sectors of the bond market on the back of the rise in Treasury yields.

Oil prices rose, with WTI closing back above the $65/barrel threshold.
Meanwhile, the national average price of gasoline rose above $3 per gallon
for the first time since late 2014. See the Chart of the Week for a time series.

Albion’s “Four Pillars”: Economy & Earnings – GDP growth was +6.4% annualized in Q1 2021, and is forecast to accelerate to +8.1% in Q2. Meanwhile, EPS for the S&P 500 turned positive y/y in Q4 2020 and will rise significantly y/y in Q1 2021 as the economy laps the onset of the pandemic.

Equity Valuation – the S&P 500’s forward P/E of 22x is above the historical average, and long-term valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the coming decade are likely to be in the single digits. That said, lower equity returns may be justified in the context of ultra-low yields on alternatives like bonds and cash.

Interest Rates – Rates remain low by historical standards despite recent
volatility, supporting equity valuations and lowering borrowing costs.

Inflation – After staving off deflation early in the pandemic, the Fed has
communicated tolerance for short periods of above-target inflation. A
cyclical bump in inflation may occur in 2021 as pent-up demand is released, testing the Fed’s resolve, but we do not expect higher inflation to persist.


Weekly Market Recap

US equities were mostly lower last week. Among large caps, a few sectors managed to finish in positive territory, including traditional defensives like communications (+0.5%), healthcare (+0.4%), and consumer staples (+0.4%).

The worst performing sector by far was energy (-7.7%), driven by falling oil prices and flagging demand as much of Europe institutes new lockdown measures to combat rising covid-19 case counts. See the Chart of the Week for a time series of YTD returns for the energy sector vs. the S&P 500.

Rates markets also continue to be in focus. After briefly stabilizing somewhat during the prior week, US Treasury yields resumed their upward march last week, with benchmark 10y yields rising 10 basis points and the 2s10s curve reaching its steepest level (+157bp) in more than five years. Credit spreads compressed slightly, but not by enough to offset the rate move, driving small price declines in USD-denominated bond markets.

Economic data was mixed last week, with retail sales (-3.3% m/m ex autos & gas), industrial production (-2.2% m/m), and housing activity (-200k bldg. permits m/m) all coming in below expectations, while jobless claims were steady. On a more positive note, the Conference Boards Index of Leading Economic Indicators (LEI) improved sequentially for the 10th consecutive month. Most importantly, the Fed reiterated its commitment to keeping interest rates low and maintaining asset purchases until substantial further progress has been made towards full employment.