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Weekly Market Recap – April 21, 2023

Weekly Recap:

Stocks were mixed and bonds were lower last week, as somewhat hawkish comments from regional Fed presidents (and FOMC members) Raphael Bostic and James Bullard outweighed a clear weakening in incoming economic data.

Starting with the economy, most forward-looking metrics deteriorated last week. After a sharp rebound in activity in February, housing starts and new residential building permits fell sequentially in March, calling into question whether the nascent housing recovery is sustainable. Initial jobless claims continued to drift higher, extending the trend that began in March. And finally, the Conference Board’s Leading Economic Index (LEI) fell sequentially for the 12th month in a row, to a level that historically has been consistent with the onset of recession within a few months.

However, unlike earlier periods this year when a softening economy was met with optimism that the Fed may soon pivot to rate cuts, the comments from Bostic and Bullard served as a reminder that the Fed is firmly committed to the inflation fight. In response, Fed Fund Futures lowered the odds of any rate cuts happening in the back half of the year and yields rose across the Treasury curve, pushing bond prices lower.

The impact on equity prices was mixed as there was a discernable rotation across styles and sectors. Longer-dated growth stocks underperformed, causing the Nasdaq to lag the Dow and S&P. Defensives (staples, real estate, and utilities) held up better, to the benefit of small and midcap benchmarks with greater exposure to those sectors.

Chart of the Week: Conference Board LEI (y/y change)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy enjoyed a strong second half of 2022, but corporate operating margins have been gradually falling as labor and input cost pressures bite. Albion’s base case expectation is that the US economy will enter recession in 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 18x is above the long run average. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits.

Interest Rates

Rates rose in 2022 in response to a sharp pivot in monetary policy, but have mostly fallen (except for the very front end) so far in 2023. Futures markets are currently pricing in one additional 25bp rate hike in May, followed by a pause with the possibility of rate cuts in the back half of the year.

Inflation

After reaching 40yr highs in spring of 2022, inflation moderated in the second half of the year. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.

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Weekly Market Recap – April 14, 2023

Weekly Recap:

It was a strong week for equities after inflation data for March came in slightly below expectations, although rates markets did not share in the enthusiasm after fresh survey data revealed that consumers’ near-term inflation expectations are rising.

Fresh inflation data was abundant last week. First, headline CPI was +0.1% m/m in March and fell to +5.0% y/y, while core CPI was +0.4% m/m and increased slightly to +5.6% y/y. Meanwhile, headline PPI was -0.5% m/m and fell to +2.7% y/y, the first time aggregate input price inflation has been below 3% since early 2021. Finally, import (-0.6% m/m) and export (-0.3% m/m) prices both fell sequentially.

Despite these clear disinflationary (or in some cases outright deflationary) trends, the University of Michigan’s monthly consumer sentiment survey showed a sharp uptick in 1-year forward inflation expectations, jumping from a final print of +3.6% in March to a preliminary April reading of +4.6%.

Knowing that the Fed has heightened sensitivity to inflation expectations, bond investors responded to the U of M survey by pushing yields higher across the curve on Friday, resulting in price declines for most high quality fixed income.

Equities also gave back some of their WTD gains on Friday after the U of M survey release, but key US benchmarks still managed to finish in the green for the week. Somewhat surprisingly, cyclicals were the biggest winners, despite the mid-week release of FOMC minutes containing a staff economic outlook that included a mild recession later this year.

Chart of the Week: Headline and Core CPI (y/y change)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy enjoyed a strong second half of 2022, but corporate operating margins have been gradually falling as labor and input cost pressures bite. Albion’s base case expectation is that the US economy will enter recession in 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 18x is above the long run average. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits.

Interest Rates

Rates rose in 2022 in response to a sharp pivot in monetary policy, but have mostly fallen (except for the very front end) so far in 2023. Futures markets are currently pricing in one additional 25bp rate hike in May, followed by a pause and then multiple rate cuts in the back half of the year.

Inflation

After reaching 40yr highs in spring of 2022, inflation moderated in the second half of the year. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged.

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Weekly Market Recap – April 7, 2023

Weekly Recap:

US equities were mixed last week, with energy and most defensives higher while other sectors were lower. Small caps extended their recent run of under-performance relative to the S&P 500. Energy stocks were buoyed by a surprise production cut from OPEC+ that sent oil prices higher by roughly $5 per barrel.

In contrast to the recent softness in equities, bonds continued to rally last week on safe haven buying, at least until Friday’s nonfarm payroll report halted the move lower in yields. Meanwhile credit spreads have been largely stable over the past two weeks after initially widening in the aftermath of the March bank failures.

Economic data released last week was mixed. ISM’s Manufacturing Index (46.3) sank further into contraction territory in the March print, while its Services Index (51.2) weakened sequentially but remains in expansion territory for now. The monthly JOLTS report showed early signs of a move towards better balance in the labor market, with job openings falling to 9.9 million, the lowest such print in nearly 2 years (albeit still elevated by historical standards).

That said, the March jobs report from the Bureau of Labor Statistics continues to show robust job creation in the US economy:

  • 236k nonfarm payrolls added
  • U-3 Unemployment fell 10bp to 3.5%
  • U-6 Underemployment fell 10bp to 6.7%
  • Average hourly wages rose +0.3% m/m and +4.2% y/y (below consensus)
  • Labor force participation rose to 62.6%, the highest since March of 2020
Chart of the Week: US Nonfarm Payrolls Added

Albion’s “Four Pillars”

Economy & Earnings

The US economy enjoyed a strong second half of 2022, but corporate operating margins have been gradually falling as labor and input cost pressures bite. Albion’s base case expectation is that the US economy will enter recession in 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 17x is above the long run average. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits. The equity risk premium has expanded slightly over the past few weeks on concerns regarding the financial system.

Interest Rates

Rates rose in 2022 in response to a sharp pivot in monetary policy, but have fallen signficantly (except for the very front end) so far in 2023. Futures markets are currently pricing in two 25bp cuts to overnight rates by year-end.

Inflation

After reaching 40yr highs in spring of 2022, inflation moderated in the second half of the year. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged. Real-time inflation data ticked higher sequentially in early 2023.

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Weekly Market Recap – March 24, 2023

Weekly Recap:

Stocks, bonds, and commodities all finished higher last week as authorities worked to contain the fallout from recent bank failures. The week began with news that UBS would absorb rival Credit Suisse in somewhat controversial fashion, with Credit Suisse AT1 bondholders facing a total write-down of their principal value while the company’s common shareholders received 3 billion Swiss francs in the transaction (~$3.2 billion). Faced with the prospect of a buyer’s strike in the AT1 market, the ECB and the Bank of England both immediately issued communiques indicating that any future bank resolutions in their jurisdictions would be handled in accordance with the established order of capital structure seniority, meaning common shareholders would be wiped out before subordinated bondholders took losses.

With that as a backdrop, the FOMC announced a 25bp rate hike at the conclusion of its March meeting on Wednesday afternoon. Tweaks to the language in the press release opened the door to a pause in the hiking cycle as soon as the next meeting in early May, and during the ensuing press conference Fed Chair Jerome Powell acknowledged that the real economy had slowed significantly while also reiterating that the US banking system is “sound and resilient.”

However, Powell also stated emphatically that the Fed does not anticipate cutting rates at all in 2023, and on that point the market clearly disagrees. As of Friday’s close, the Fed Fund Futures market was pricing in at least three 25bp rate cuts by year-end, in stark contrast to the Fed’s own “dot plot” projections (see Chart of the Week). This dichotomy suggests that market participants believe there is significant risk of a US recession in 2023, a scenario that could force the Fed’s hand on rates.

Chart of the Week: FOMC “Dot Plot”

Albion’s “Four Pillars”

Economy & Earnings

The US economy enjoyed a strong second half of 2022, but corporate operating margins have been gradually falling as labor and input cost pressures bite. Albion’s base case expectation is that the US economy will enter recession in 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 17x is above the long run average. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits. The equity risk premium has expanded slightly over the past few weeks on concerns regarding the financial system.

Interest Rates

Rates rose in 2022 in response to a sharp pivot in monetary policy, but have fallen significantly (except for the very front end) so far in 2023. Futures markets are currently pricing in three 25bp cuts to overnight rates by year-end.

Inflation

After reaching 40yr highs in spring of 2022, inflation moderated in the second half of the year. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged. Real-time inflation data ticked higher sequentially in February of 2023.

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Weekly Market Recap – March 17, 2023

Weekly Recap:

Market remained on edge last week as investors digested the unfolding drama in the financial sector. The week began with several announcements aimed at staving off contagion from Silicon Valley Bank and Signature Bank. By Tuesday, however, it was clear that Credit Suisse, the giant Swiss bank with more than $500 billion in assets, was also facing a crisis of confidence amongst clients and counterparties and would not survive intact. Swiss officials raced to find a solution, but the sheer size of the institution meant there was really only one viable option – a shotgun marriage with longtime rival UBS, which was finally arranged on Sunday the 19th.

Domestic equity markets were mixed, with noncyclical large caps posting modest gains. Most cyclicals (financials, energy, materials, and industrials) and small caps were lower, as investors priced in a higher chance of a US recession.

Bond markets rallied for the second week in a row, as yields fell on safe haven demand. High yield corporates were the exception thanks to rapidly widening credit spreads, consistent with an increase in perceived recession risk.

Economic data was mixed last week. Core CPI (+0.5% m/m) came in slightly higher than expected, but Core PPI was flat m/m in a sign that upstream price pressures continue to moderate. Housing showed renewed signs of activity, with residential building permits (1.52mn) and housing starts (1.45mn) both rising sharply m/m. Initial jobless claims fell back below 200k in a clear sign of labor market strength. However, the Conference Board’s Leading Economic Index (LEI) fell sequentially for the 11th month in a row, and several gauges of manufacturing activity (Philly Fed, New York Fed, and Empire Manufacturing) remain in contraction territory.

Chart of the Week: Conference Board Leading Economic Index (y/y change)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy enjoyed a strong second half of 2022, but corporate operating margins have been gradually falling as labor and input cost pressures bite. Albion’s base case expectation is that the US economy will enter recession in 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 17x is above the long run average. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits. The equity risk premium has expanded slightly over the past two weeks on concerns regarding the financial system.

Interest Rates

Rates rose across the curve in 2022 in response to a dramatic pivot in monetary policy. Fed Fund Futures are pricing in one more 25bp hike in March, followed by a pause and then several rate cuts in the back half of the year.

Inflation

After reaching 40yr highs in spring of 2022, inflation moderated in the second half of the year. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged. Real-time inflation data ticked higher sequentially in February of 2023.

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Weekly Market Recap – March 10, 2023

Weekly Recap:

Last week was calm at the start, with rates relatively stable through Wednesday’s close while equities were only slightly lower. That all changed on Thursday, however, as market participants watched the rapid descent of Silicon Valley Bank into receivership. In the span of barely 24 hours, investors went from worrying about inflation and Fed policy to wondering how many small technology firms might suddenly have liquidity challenges and grappling with the possibility of a wider crisis of confidence within the banking system.

Asset price changes were consistent with a broad-based increase in risk aversion:

  • Treasuries rallied
  • Credit spreads widened
  • Commodities fell
  • Equity prices moved lower

Predictably, financials were the worst performing sector, while defensives such as staples and utilities were less impacted. Small caps underperformed, as one might expect given their greater dependency on banks for liquidity and financing.

This episode has radically altered investor expectations regarding the forward path of Fed policy, under the assumption that the Fed is less likely to further tighten policy if the banking system appears wobbly. One week ago, futures markets were pricing in 3 or 4 additional rate hikes in 2023, and no rate cuts prior to year-end. Futures now suggest that the Fed will hike 25bp in March and then stop, and that as many as three rate cuts could occur by December. As a result, the implied year-end Fed Funds rate has fallen nearly 150bp, from 5.56% to 4.10%, in just three days.

Chart of the Week: Futures-Implied Fed Funds Rate at Year-End 2023

Albion’s “Four Pillars”:

Economy & Earnings

The US economy enjoyed a strong second half of 2022, but corporate operating margins have been gradually falling as labor and input cost pressures bite. Albion’s base case expectation is that the US economy will enter recession in 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 18x is above the long run average. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits. Most or all of 2022’s P/E multiple compression was driven by rates, rather than an expansion of the equity risk premium.

Interest Rates

Rates rose across the curve in 2022 in response to a dramatic pivot in monetary policy. Fed Fund Futures are pricing in one more 25bp hike in March, followed by a pause and then several rate cuts in the back half of the year.

Inflation

After reaching 40yr highs in spring of 2022, inflation moderated in the second half of the year. Goods inflation has fallen due to softening demand and excess inventory, while services inflation remains elevated, in part due to shelter costs which are somewhat lagged. Real-time inflation data ticked higher sequentially in February.

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Weekly Market Recap – February 24, 2023

Weekly Recap

The holiday-shortened week was a tough one for financial markets thanks to recent trends in inflation, which does not appear to be cooling as quickly as market participants had hoped. The January print of US PCE (personal consumption expenditures, the Fed’s preferred inflation gauge), was higher than expected and showed sequential increases across the board:

  • Headline PCE Deflator: +0.6% m/m, +5.4% y/y
  • Core PCE Deflator: +0.4% m/m, +4.7% y/y

In response, rates continued to rise across the curve, particularly in the front end as the yield curve inversion deepened. Futures markets are now pricing in 25bp rate hikes at each of the next three FOMC meetings (March, May, and June), with very low odds of any rate cuts happening before the end of the year. Rising rates in February have erased most of the gains enjoyed by bond investors during January, leaving fixed income close to flat on the year.

Equities were not spared the selling pressure either. The S&P 500 was down for the 3rd week in a row, while the more rate-sensitive Nasdaq underperformed on weakness in longer-duration technology stocks.

Other economic data released last week showed a resilient US economy. Initial jobless claims remain below 200k/week, S&P Global’s Composite PMI rebounded into expansion territory (as did several regional Fed surveys), new home sales rose for the 2nd straight month, and the University of Michigan’s consumer sentiment index rose slightly in the final February print, with a notable gain in the future expectations component.

Chart of the Week – Core PPI and CPI (m/m change)

Albion’s “Four Pillars”

Economy & Earnings

The US economy enjoyed a strong second half of 2022, but corporate operating margins have been gradually falling as labor and input cost pressures bite. Albion’s base case expectation is that the US economy will enter recession in 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 18x is above the long run average. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits. Most or all of 2022’s P/E multiple compression was driven by rates, rather than an expansion of the equity risk premium.

Interest Rates

Rates rose across the curve in 2022 in response to a dramatic pivot in monetary policy. Fed Fund Futures are pricing in a total of four 25bp hikes in 2023, with a “terminal” Fed Funds policy rate slightly above 5% for this cycle.

Inflation

After reaching 40yr highs in spring of 2022, inflation moderated in the second half of the year. Headline inflation eased over the summer on falling energy prices, and core inflation followed suit in Q4. Goods inflation has fallen due to softening demand and excess inventory, while heavily lagged housing data is one factor keeping reported services inflation elevated, at least for now.

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Weekly Market Recap – February 17, 2023

Weekly Recap

It was a mixed bag for financial markets last week after fresh US inflation data for January came in somewhat higher than expected. Core CPI rose very slightly on a m/m basis, the second such sequential increase, while the m/m change in Core PPI rose for the 4th consecutive time. See the Chart of the Week for a time series.

The moderate uptick in real time inflation data coupled with the extremely strong January NFP report had market participants recalibrating their Fed expectations. After the February 1st rate hike of 25bp, futures markets suggested that only one more such hike would like occur at the March meeting, after which the Fed was expected to pause. Fast forward just two weeks, and futures now suggest that three more 25bp hikes are likely, one in each of March, May, and June. As a result of the shift in expectations for the Fed, bond investors saw rising yields and lower prices for the second week in a row, particularly towards the front end of the curve.

Equities were mixed last week. The Nasdaq outperformed, a rare occurrence with rising rates. Meanwhile, falling oil prices pulled down the energy sector, keeping the Dow flat and pushing the S&P slightly into the red. International markets were mixed as well, with weakness in Chinese stocks pulling E/M benchmarks lower.

Other economic data released last week showed stabilization in housing starts and building permits, and perhaps some cautious optimism (or at least less pessimism) on the part of homebuilders. Unemployment claims remain low, most gauges of manufacturing activity remain weak, and strong retail sales from January suggest the US consumer remains resilient despite inflation.

Chart of the Week – Core PPI and CPI (m/m change)

Albion’s “Four Pillars”

Economy & Earnings

The US economy enjoyed a strong second half of 2022, but corporate operating margins have been gradually falling as labor and input cost pressures bite. Albion’s base case expectation is that the US economy will enter recession in 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 18x is above the long run average. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits. Most or all of 2022’s P/E multiple compression was driven by rates, rather than an expansion of the equity risk premium.

Interest Rates

Rates rose across the curve in 2022 in response to a dramatic pivot in monetary policy. Fed Fund Futures are pricing in a total of four 25bp hikes in 2023, with a “terminal” Fed Funds policy rate slightly above 5% for this cycle.

Inflation

After reaching 40yr highs in spring of 2022, inflation moderated in the second half of the year. Headline inflation eased over the summer on falling energy prices, and core inflation followed suit in Q4. Goods inflation has fallen due to softening demand and excess inventory, while heavily lagged housing data is one factor keeping reported services inflation elevated, at least for now.

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Weekly Market Recap – February 10, 2023

Weekly Recap:

Financial markets had a challenging week after the previous Friday’s blowout Nonfarm Payroll report (+517k) caused investors to recalibrate their expectations for addition rate hikes this year. Going into the report on the morning of February 3rd, futures markets were pricing in just one additional 25bp hike at the March meeting. Afterwards, investors immediately priced in another 25bp hike at the May meeting, as well as roughly 50/50 odds of one more over the summer.

Bond yields rose across the curve in response, making it a challenging week for fixed income. Credit spreads were largely stable, resulting in similar performance between Treasuries and US corporates.

Equity markets responded in predicable fashion. The prospect of additional rate hikes in combination with somewhat lackluster Q4 earnings (in the aggregate, at least) sent stock prices lower over the course of last week, with more rate-sensitive growth sectors feeling the greatest selling pressure.

In the aftermath of the previous Friday’s NFP report, incoming economic data was fairly sparse last week. Initial jobless claims remained below 200k for the 4th straight week. Meanwhile, the University of Michigan’s Consumer Sentiment gauge rose to 66.4 in the preliminary February print (from 64.9 in January), with the gains driven by improvements in the current conditions component. Long term (5-10y) consumer inflation expectations remain well anchored at 2.9%.

Chart of the Week – US Nonfarm Payrolls Added (m/m net change)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy enjoyed a strong second half of 2022, but corporate operating margins have been gradually falling as labor and input cost pressures bite. Albion’s base case expectation is that the US economy will enter recession in 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 18x is above the long run average. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits. Most or all of 2022’s P/E multiple compression was driven by rates, rather than an expansion of the equity risk premium.

Interest Rates

Rates rose across the curve in 2022 in response to a dramatic pivot in monetary policy. Fed Fund Futures are pricing in a total of three 25bp hikes in 2023, with a “terminal” Fed Funds policy rate of roughly 5% for this cycle.

Inflation

After reaching 40yr highs in spring of 2022, inflation has begun to moderate in recent months. Headline inflation eased over the summer on falling energy prices, and core inflation followed suit in Q4. Goods inflation has fallen due to softening demand and excess inventory, while heavily lagged housing data is one factor keeping reported services inflation elevated, at least for now.

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Weekly Market Recap – January 27, 2023

Weekly Recap:

US equities had another strong week, particularly the Nasdaq which has benefitted from a sharp rebound in mega-cap technology stocks. After posting a 4.3% return last week, the Nasdaq is already up more than 11% so far in 2023. From a sector standpoint, 2023 returns have been clustered by style: growth sectors (tech, consumer discretionary, and comms) have outperformed, while traditional defensives (utilities, staples, and healthcare) have been used as a source of funds and have underperformed as investors have looked to add risk.

Bond markets were relatively quiet last week. The Treasury yield curve pivoted slightly, with short rates rising a few basis points while yields in the belly and long end fell by a similar amount. Credit spreads continued their slow grind tighter, pushing corporate bond prices higher. IG spreads have now tightened by roughly 40bp since peaking above 150bp in October of last year (see the Chart of the Week for a time series).

Economic data released last week reinforced existing trends: slowing manufacturing activity, moderating inflation, strong labor markets, and a resilient consumer.

  • S&P’s US Mfg (46.8) and Svcs (46.6) PMIs remain in contraction territory
  • Fed surveys (Philly, KC, Richmond, and Chicago) also remain in contraction
  • Headline (+0.1% m/m) and core (+0.3% m/m) PCE deflators were modest
  • Initial jobless claims fell to 186k, the lowest level since April of 2022
  • U of M consumer sentiment (64.9) was revised slightly higher for January
  • U of M inflation expectations were revised lower (1y = 3.9%; 5-10y = 2.9%)
Chart of the Week – US Investment Grade Credit Spreads (Index Average)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy enjoyed a strong second half of 2022, but corporate operating margins have been gradually falling as labor and input cost pressures bite. Albion’s base case expectation is that the US economy will enter recession in 2023, putting downside pressure on earnings.

Valuation

The S&P 500’s forward P/E of 18x is slightly above the long run average. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the single digits. Most or all of 2022’s P/E multiple compression was driven by rates, rather than an expansion of the equity risk premium.

Interest Rates

Rates rose across the curve in 2022 in response to a dramatic pivot in monetary policy. Fed Fund Futures are pricing in two additional 25bp hikes in 2023, with a “terminal” Fed Funds rate slightly below 5% for this cycle.

Inflation

After reaching 40yr highs in spring of 2022, inflation has begun to moderate in recent months. Headline inflation eased over the summer on falling energy prices, and core inflation followed suit in Q4. Goods inflation has fallen due to softening demand and excess inventory, while heavily lagged housing data is one factor keeping reported services inflation elevated, at least for now.