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Weekly Market Recap – June 14, 2024

Weekly Recap:

In a week where an updated dot plot from the FOMC showed that consensus among committee members had moved to just one 25bp rate cut by year-end, futures markets actually increased the odds of a second rate cut from roughly 50/50 to more like 90/10.

The reason was inflation data. All three inflation metrics released last week came in well below consensus expectations, beginning with CPI data for May which hit the tape only a few hours before the conclusion of the 2-day FOMC meeting:

* Headline CPI was flat sequentially and fell to +3.3% y/y

* Core (ex food & energy) CPI rose 0.2% m/m and fell to +3.4% y/y

Then on Thursday, the Producer Price Index (PPI) showed similar softness, coming in 30bp below consensus estimates across the board:

* Headline (final demand) PPI was -0.2% m/m and fell to +2.2% y/y

* Core (ex food & energy) PPI was flat sequentially and fell to +2.3% y/y

Finally, import/export prices released on Friday showed a similar trend:

* Import prices printed at -0.4% m/m and fell to +1.1% y/y

* Export prices printed at -0.6% m/m and fell to +0.6% y/y

In response, bond prices rose as rates fell by ~20bp across the entire Treasury yield curve. On the equity side, real estate and large cap growth stocks were the biggest beneficiaries of the fall in rates, while cyclicals and small caps finished lower. The tech sector also got yet another boost from rosy A/I-driven earnings reports and forward guidance from Broadcom, Oracle, and Adobe.

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 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 cut overnight interest rates once or possibly twice in 2024, most likely at some point in the 2nd half of the year. Belly and long end rates are likely already near their post-pandemic equilibrium levels, unless the US economy enters a recession.

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. Moderating energy prices have recently been helpful in terms of the inflation outlook.


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

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Weekly Market Recap – June 7, 2024

Weekly Recap:

Stocks were higher in the aggregate (fueled by another 10% rise in NVDA) during a busy week for macro news that provided mixed signals with respect to the state of the US economy. Early in the week, some softer-than-expected updates on labor and manufacturing suggested that the economy was slowing to the point where multiple rate cuts by year-end were a probable outcome, but Friday’s stronger-than-expected monthly jobs report turned that notion around in a hurry.

On Monday, ISM’s Manufacturing PMI for May fell to 48.7 (contraction territory), with fresh weakness in new orders. Later in the week, however, ISM’s Services PMI gained more than expected, with strength in both new orders and employment. This is consistent with the pattern in the US economy for the past 2+ years, during which a strong services sector (the bulk of the US economy) has offset what has essentially been a recession in manufacturing.

Labor market data also painted a mixed picture. On Tuesday, the Job Openings and Labor Turnover Survey (aka, the JOLTS report) showed a second consecutive large m/m drop in open jobs in the US, falling to 8.06 million (the pandemic era peak was over 12 million). Weekly initial jobless claims also ticked up slightly to 229k, which is towards the higher end of the range that has persisted for the past 2+ years. But then on Friday, the month jobs report from the BLS far surpassed consensus with 272k nonfarm payrolls added (consensus = 180k), and 4.1% y/y growth in average hourly earnings (consensus = +3.9%). The strong report left traders rushing to cover their rate cut bets, leaving the odds of a second cut in 2024 at roughly 50/50 as the week drew to a close.

Chart of the Week: 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 20.7x 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. Moderating energy prices have recently been helpful in terms of the inflation outlook.


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

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Monthly Market Recap – May 2024

May Recap:

Inflation:

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

Monetary Policy:

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

Economy:

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

Bond Market:

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

Stock Market:

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

S&P 500 Total Return by Sector – May 2024

Albion’s “Four Pillars”:

Economy & Earnings

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

Valuation

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

Interest Rates

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

Inflation

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


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

Weekly Recap:

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

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

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

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

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

Albion’s “Four Pillars”:

Economy & Earnings

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

Valuation

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

Interest Rates

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

Inflation

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

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Weekly Market Recap – May 10, 2024

Weekly 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.