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Weekly Market Recap – May 10, 2024

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 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

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 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 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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Weekly Market Recap – April 12, 2024

Weekly Recap:

Sticky inflation put market participants on edge last week. For the 3rd month in a row, CPI came in slightly above expectations, and the deceleration of the disinflation trend is in danger of turning into a complete halt. Investors are slowly accepting that the last 1-2% in the journey to get back to the Fed’s 2% inflation target will not be speedy or smooth.

Immediately after the CPI print, futures markets took yet another 25bp rate cut out of the forecast for 2024, leaving only two such cuts (50bp total) implied. Markets were pricing six cuts for a total of 150bp at the start of the year; four of those have now been removed from expectations in just a few months.

In response, rates rose across the Treasury yield curve, especially in the front end. Much like last year, it has been a tough start for bonds in 2024. Tighter credit spreads have helped limit some of the price declines in corporates, but bonds of nearly all stripes are lower YTD.

Other news was also less than positive last week. Oil prices rose on escalation of the conflict between Israel and its neighbors in the middle east. And Q1 earnings reports from some large US banks included mildly disappointing guidance for 2024 net interest income. Deposit migration towards higher yielding CDs and money market vehicles continues to put pressure on funding costs, suggesting that the bank sector may have already seen peak net interest margin for this cycle.

This cocktail of challenges resulted in lower stock prices across all sectors, market caps, and geographies.

Chart of the Week: Consumer Price Index (y/y change)

Albion’s “Four Pillars”:

Economy & Earnings

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

Valuation

The S&P 500’s forward P/E of 20.6x 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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Weekly Market Recap – April 5, 2024

Weekly Recap:

Equities finished the week lower, driven in part by escalating geopolitical risk in the middle east. Oil prices rose to 6-month highs, with Brent crude breaching $90 per barrel for the first time since October of last year. Energy stocks finished the week higher, and the sector is now among the best-performing in the S&P 500 so far this year.

Bonds were lower on the week, thanks to a backup in rates. Several FOMC members made public comments during the course of the week, with a fairly consistent message: the Fed is still not in a hurry to lower overnight interest rates. Futures markets responded by shifting the first “odds on” rate cut from June to July, and Treasury yields moved higher across the curve.

Macro data released last week suggested that the US economy remains on first footing as we head into Q1 earnings season, with the manufacturing sector continuing to show signs of a recovery in activity. ISM’s US Manufacturing PMI printed at 50.3 for the month of March, the first print in expansion territory (>50) in roughly a year and a half. This echoes the move higher in S&P’s US Manufacturing PMI, which breached 50 in January and has moved a bit higher in the two months since (the final March print was 51.9).

Meanwhile, the labor market remains strong, as it has throughout the post-pandemic period:

* There are 8.75 million open jobs in the US per the JOLTS report

* 303k net new nonfarm payrolls were reported for the month of March

* U-3 unemployment fell 10bp sequentially to 3.8%

Chart of the Week: Net Nonfarm Payrolls Added

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. 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 several times in 2024, most likely beginning sometime this summer. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Weekly Market Recap – March 29 2024

Weekly Recap:

Mild weakness in large cap tech pulled the Nasdaq lower, but otherwise the holiday-shortened week was a positive one for most US stocks. The S&P 500 set a fresh record high on Wednesday and again on Thursday, the 23rd and 24th such highs reached already in 2024 (see the Chart of the Week). Meanwhile, small caps outperformed last week, closing some (but certainly not all) of the YTD relative performance gap with large caps. International stocks also posted modest gains on the week.

Fixed income was mostly stable, with yields rising slightly towards the front end of the curve and falling a few basis points in the long end. Credit spreads were stable and remain on the tight side of long run averages. Muni bonds underperformed slightly on the week, perhaps from being used as a source of funds for the upcoming tax deadline.

In macro news, there were mixed signals regarding consumer confidence in March. The Conference Board’s Consumer Confidence Index printed at 104.7 versus consensus expectations of 107.0, and the February print was revised lower across the board. However, the University of Michigan’s Consumer Sentiment gauge rose nearly 3 points to 79.4 in the final March reading versus the preliminary figure of 76.5 from two weeks ago.

Finally, PCE Deflator data for February was released on Good Friday while markets were closed, and mostly came in right in line with consensus:

* PCE Deflator rose +0.3% m/m and +2.5% y/y (consensus = +0.4%; +2.5%)

* PCE Core Deflator rose +0.3% m/m and +2.8% y/y (consensus = +0.3%; +2.8%)

Chart of the Week: S&P 500 (* Denotes Record High)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. 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 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 several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Weekly Market Recap – March 22, 2024

Weekly Recap:

Stocks and bonds of nearly all stripes enjoyed a strong week after a “goldilocks” FOMC meeting. While there was no uncertainty going into the meeting regarding the rate decision, investors were keenly focused on the committee’s outlook for the economy and future rate decisions, as reflected by the updated Summary of Economic Projections (SEP). And on that front, the committee delivered a welcome update, upgrading its consensus outlook for 2024 GDP growth while also maintaining a median projection of three 25 basis point rate cuts by year-end.

The front end of the Treasury curve breathed a sigh of relief, with 2y yields falling 14bp while 10y yields dropped 11bp. Meanwhile, credit spreads inched tighter yet again. The average OAS on Bloomberg’s US Corporate Credit Index finished the week at 88bp, a level not seen since Q4 of 2021.

Equity investors responded with enthusiasm. All three major US large cap benchmarks (the Dow, S&P, and Nasdaq) rose to fresh all time highs on Thursday. Small caps also posted solid gains, but remain well behind tech-dominated large cap benchmarks on a YTD basis. The same is true for international stocks, which continue to lag the US due to the more cyclical, less tech-heavy nature of international equity markets.

On the macro front, the most interesting development last week was the February release of the Conference Board’s Leading Economic Index (LEI). The index rose sequentially (+0.1% m/m) for the first time in nearly two years, extending what appears to be a recent stabilization after a long, protracted decline that began at the start of 2022 (see the Chart of the Week for a time series). The improvement in the LEI seemed to offer some corroboration of the Fed’s upgraded economic outlook, and was cheered by market participants.

Chart of the Week: Conference Board Leading Economic Index (Total)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. 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 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 several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Weekly Market Recap – March 15, 2024

Weekly Recap:

Financial assets struggled last week after hotter-than-expected CPI and PPI prints tempered investors’ expectations regarding the upcoming Fed pivot.

* Headline CPI rose +0.4% m/m and +3.2% y/y (consensus = +3.1% y/y)

* Core CPI rose +0.4% m/m and +3.8% y/y (consensus = +3.7% y/y)

* Headline PPI rose +0.6% m/m and +1.6% y/y (consensus = +1.2% y/y)

* Core PPI rose +0.3% m/m and +2.0% y/y (consensus = +1.9% y/y)

In response, futures markets pulled another 25bp rate cut out of 2024, reducing the total number of implied cuts from four (100bp total) to three (75bp), while repricing the odds that the first cut will come in June from ~90% down to ~60%.

Predictably, rates moved higher across the Treasury yield curve, especially in the front end. 2y yields finished the week higher by 26bp. Credit spreads tightened on the week, softening the blow to US corporates.

Meanwhile, equities struggled across most sectors, market caps, and geographies, with rate-sensitive real estate names more heavily impacted. Small and midcap benchmarks underperformed, due in part to their higher REIT concentrations as compared to large cap indices.

In contrast, energy stocks were an upside outlier. A report from the International Energy Agency predicted a global supply deficit could persist for the balance of 2024, and US stockpiles recently saw their first drawdown in nearly two months, driving WTI and Brent crude to 4+ month highs.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. 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 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 several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.