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Weekly Market Recap

Weekly Recap:
Equities were mixed last week. In the US, traditional defensives rose,
including real estate, healthcare, and utilities. Technology stocks were mixed, while cyclically sensitive sectors were lower. Small and midcap indices were also down on the week, while major international indices finished higher.

Despite some day to day volatility, bond markets finished close to where
they started. Benchmark 10y US Treasury yields ended the week 1bp lower,
while 30y yields fell 2bp on the week. Investment grade credit spreads were
stable, keep corporate and muni bond prices essentially unchanged.

After setting a new pandemic-era high during the previous week, oil pulled
back on concerns that supply from Iran could return to the market if
sanctions are eased.

Cryptocurrency markets experienced wild price swings coupled with service outages at multiple exchanges after China signaled it would increase
regulatory oversight of crypto mining. Bitcoin finished the week down by
nearly 30%, and extended the selloff over the weekend.

Forward-looking economic news was positive: residential building permits
remained strong, initial jobless claims fell to fresh pandemic lows, and the
Conference Board’s Index of Leading Economic Indicators (LEI) rose to an all-time high on a y/y basis. See the Chart of the Week for a time series

Albion’s “Four Pillars”:

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

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

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

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

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Weekly Market Recap

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

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

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

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

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

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

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

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

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Weekly Market Recap

Equities finished on a softer note last week, pulling back on Friday after the S&P 500 and Nasdaq composite had set fresh all-time highs on Thursday and Monday, respectively. Sector performance was mixed, with energy, communications, and financials all rising 2% or more, while healthcare and tech were both down ~2% on the week. US small and midcap stocks also finished the week slightly lower, as did international equities.

Bucking the April trend, interest rates began to rise last week. Benchmark 10-year and 30-year Treasury yields both finished 7 basis points higher w/w, the largest weekly increase in rates since mid-March. Credit spreads compressed, cushioning the downward price movement in investment grade corporates, while riskier (and shorter duration) high yield bonds registered small gains.

Commodity prices finished April on a strong upward trajectory, with oil
(WTI) closing above $65/barrel on Thursday before pulling back a bit on
Friday. Many other commodities were up sharply during the second half of
April, including most grains, textiles, and building products.

Economic news was positive last week. Consumer confidence rose sharply in April, jobless claims remain near pandemic-era lows, durable goods orders rebounded, and home prices continued to rise. Meanwhile, the Fed reiterated its commitment to keep rates low and maintain its asset purchase programs, while welcoming signs that the economic recovery is strengthening.

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Weekly Market Recap

Equities posted solid returns last week, led by large cap technology stocks. The S&P 500 reached a new all-time high on Thursday, closing above 4,000 for the first time.

Rates were fairly subdued last week. The Treasury curve flattened modestly, pivoting around the 10-year point, with 2y yields higher by 5bp while 30y yields fell by 2bp. Credit spreads tightened in sympathy with the broader rally in risk assets, allowing corporate bonds to post solid gains.

Oil and the US dollar were both stronger on the week.

Incoming economic data was encouraging. The Conference Board’s Consumer Confidence Index rose sharply to 109.7, and the ISM Manufacturing Index surged to 64.7, both of which represent pandemic highs.

Friday’s monthly payroll report was also very strong:

* Nonfarm payrolls = +916k (largest monthly gain since August 2020)

* U-3 Unemployment = 6.0% (fell 0.2% sequentially)

* U-6 Underemployment = 10.7% (fell 0.4% sequentially)

* Labor Force Participation Rate = 61.5% (rose 0.1% sequentially)

* Average Weekly Hours Worked = 34.9 (rose 0.3 hrs sequentially)

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Weekly Market Recap

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

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

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

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

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Weekly Market Recap

Equity markets rallied last week, particularly after Wednesday’s release of consumer price inflation (CPI) data that was slightly below consensus estimates. The S&P 500 and the Dow both finished the week at fresh all-time highs, while the Nasdaq remains ~5% below its mid-February record. Small and midcap stocks continued their run of dominant performance, extending their YTD lead over large caps. International indices also finished higher.

Rates drifted lower for much of the week before abruptly moving higher on Friday. In the end, 10-year yields rose 5bp on the week to 1.62%, the highest close since February 12, 2020. 30-year yields rose 8bp to 2.38%, the highest level since late 2019. Investment grade credits spreads where largely unchanged while high yield spreads tightened, resulting in moderate price declines for high quality corporates while riskier bonds were close to flat.

Oil prices fell early in the week and then rallied; the US dollar did the reverse.

In an encouraging sign for the labor market, weekly jobless claims (new and continuing) reached their lowest levels of the pandemic in data released on Thursday. See the Chart of the Week for a time series.

Finally, in a Thursday night address to the nation, President Joe Biden announced that he would direct all US states to make vaccines available to any adult that wants one by no later than May 1st.

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Weekly Market Recap

Last week’s market action was dominated by interest rates. Treasury yields rose throughout February, at an accelerating pace that peaked on Thursday as 10-year yields briefly exceeded 1.6% intraday. The trend finally broke on Friday, with 10-year yields pulling back to around 1.4%, but interest rate volatility remains high. The CBOE Interest Rate Volatility Index (which measures implied volatility on interest rate swaptions) closed the week just shy of 78, the highest level in the past 3+ years outside of a few days in March of 2020. See the Chart of the Week for details.

The high levels of interest rate volatility are being driven by inflation concerns and questions about the forward path of Fed policy. These concerns were a headwind for stocks last week, particularly longer duration equities like large cap tech and emerging markets. Nearly all sectors in the S&P 500 finished the week lower, the lone exception being energy stocks which continued to perform well thanks to rising oil prices.

Economic news last week was positive (perhaps too much so for rates markets). The Conference Board’s Leading Economic Index and its Consumer Confidence Index both registered sequential gains, while initial and continuing jobless claims both came in lower than expected. And there was more good news on the virus front, as the FDA issued an emergency use authorization for Johnson & Johnson’s single-shot vaccine.

Albion’s “Four Pillars”:

*Economy & Earnings – The New York Fed’s Weekly Economic Index estimates real-time GDP growth to be -3.3% y/y. Growth is expected to be modest early in 2021, and pick up in the second half of the year.

*Equity Valuation – at 22x forward earnings the S&P is certainly not cheap, and long-term valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the coming decade are likely to be in the single digits. That said, lower equity returns may be justified in the context of ultra-low yields on alternatives like bonds and cash.

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

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

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Weekly Market Recap

US equities were mixed last week. Large cap cyclicals rose, including energy, financials, materials, and industrials, pushing the Dow to a record high during Wednesday’s session. However, sectors like technology, communications, and healthcare finished lower, resulting in small losses for the S&P 500 and Nasdaq Composite. Small and midcap US stocks were also down slightly, while international stock indices managed to eke out small gains.

Last week’s most prominent market action was in rates, as Treasury yields moved higher on the back of PPI inflation and retail sales figures that blew past consensus estimates. The 10-year finished the week at 1.34% (+13bp w/w), while the 30-year closed at 2.13% (+12bp w/w). Credit spreads compressed slightly, particularly in high yield, but not enough to prevent price declines across most spread-oriented sectors of the bond market.

Oil finally took a pause, finishing slightly lower on Friday after trading above $60/barrel (WTI) for most of the week. Market participants are anticipating a rise in OPEC+ production, and a short-term drop in demand as refineries take time to recover from freezing weather across much of the southern US.

In other economic news, weekly jobless claims remained range-bound, while residential building permits rose to a fresh 15-year high of 1.88 million (SAAR), a positive sign for housing and the broader economy in 2021. See the Chart of the Week for a time series.

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Weekly Market Recap

Equity markets around the world rallied once again last week, driven by continued strength in earnings, notable progress on vaccine distribution, dovish commentary by Fed Chairman Jerome Powell, and some progress towards another round of economic stimulus in the US.

On the vaccine front, Sinovac Biotech announced that its vaccine was approved for use in China, Pfizer’s vaccine was approved for use in Japan, and the Biden administration announced that the US had reached deals with both Pfizer and Moderna for another 100 million vaccine doses from each company. Dr. Anthony Fauci now expects that any American who wants a vaccine will be able to get one in the spring (possibly as early as April).

Treasury markets responded to all of this good news by sending yields higher, with the 30-year breaching 2% for the first time since Feb 19th of last year (the same day equity markets reached their pre-pandemic peak). Meanwhile the 2s10s curve reached 110 basis points, the highest level since the pandemic began. Investment grade corporate credit spreads tightened by 2bp, not enough to offset the move in rates. Muni and high yield bond spreads tightened more vigorously, pushing prices higher in those markets.

Oil extended its 2021 rally, with WTI finishing the week up another 4.6%. As a result, the energy sector extended its lead as the best-performing sector so far in 2021, while utilities were the worst performer last week.

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Weekly Market Recap

Every Monday morning, download our Weekly Market Recap for Commentary and Data, with Economy and Earnings, Equity Valuation, Interest Rates, and Inflation, including infographic charts.