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Weekly Market Recap – November 4, 2022

Weekly Recap

Last week’s main event was the November FOMC meeting, which concluded with the 75bp rate hike that everyone knew was coming. What was less obvious in advance was whether the Fed would communicate an intent to slow the pace of future rate hikes, potentially as soon as next month’s meeting. On that front, the market was initially excited about the reference to “the lags with which monetary policy affects economic activity and inflation” in the press release. Equities jumped and rates fell. But about an hour later, Fed Chair Jerome Powell stepped to the press conference microphone and made it very clear that even if the pace of hikes slows in the not-too-distant future, rates would probably rise higher and remain high for longer than the Fed and market participants had previously expected.

Once the Fed’s outlook was fully understood, markets quickly reversed course. Rates moved higher, the yield curve inversion deepened, and the “terminal” Fed Funds rate (the point at which the market expects the Fed to stop hiking) was pushed solidly above 5%. US equities fell, particularly longer duration growth stocks as the Nasdaq significantly underperformed. International benchmarks were buoyed by an 11% gain in Chinese stocks, driven by the approval of Pfizer’s mRNA vaccine for foreign residents and speculation that Beijing may reconsider its Zero Covid policy.

The week concluded with the BLS’s monthly jobs report, which had a Goldilocks feel. Job growth continues in the US, but the pace has clearly moderated relative to the first half of the year (see the Chart of the Week for a time series). Unemployment (U3=3.7%) and underemployment (U6=6.8%) ticked higher sequentially, a welcome development for a Fed that is working hard to cool an overheated labor market.

Chart of the Week – US Nonfarm Payroll Growth

Albion’s “Four Pillars”

Economy & Earnings

US GDP rebounded to +2.6% in Q3 after falling in 1H22, and corporate operating margins remain solid at ~12% on the S&P 500. 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 16x 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 this year’s P/E multiple compression has been driven by rates, rather than an expansion of the equity risk premium.

Interest Rates

Rates have risen across the curve in 2022 in response to a shift in monetary policy. Fed Fund Futures are pricing +50bp in December and 3 additional 25bp hikes in 2023, with a “terminal” Fed Funds rate above 5% for this cycle.

Inflation

Inflation is at 40yr highs as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. Headline inflation eased lower over the summer thanks to falling energy prices, but core inflation reaccelerated sequentially in August & September.

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Weekly Market Recap – October 28 2022

Weekly Recap

US equities moved sharply higher for a second straight week as investors increasingly became confident that the upcoming November FOMC meeting could represent the last of the 75bp rate hikes. The only sector in the S&P 500 to finish lower was Communications, which was dragged down by a 23.7% decline in META after very disappointing Q3 earnings. Softer digital ad revenue also impacted Alphabet (Google) in the quarter. Q3 earnings season thus far has been mixed, with y/y earnings growth running at just +2% overall (-5% excluding the energy sector).

International stocks were higher as well, with one exception: China. By the end of the 20th China Party Congress, Xi Jinping had solidified his power and made it clear that Chinese companies would continue to see strict oversight under his rule. The MSCI China Index bucked the global trend and dropped 9% on the week.

Bond markets rallied as rates fell in the belly and long end, deepening the inversion. Notably, the 3m/10y curve point finally inverted for the first time in this cycle as well, as the Fed gradually catches up to what has been priced into the Treasury curve for some time now. Credit spreads tightened marginally.

Economic news last week was mixed. Consumer confidence fell and initial jobless claims rose. Mortgage rates topped 7% in the US for the first time since early 2002, while new and existing home sales slowed and home prices fell. Durable goods orders missed expectations, while S&P’s US Manufacturing PMI slipped below 50 and into contraction territory. However, Q3 GDP came in at a robust +2.6% thanks to a rebound in net trade and a resilient US consumer.

Chart of the Week – US Annualized QoQ GDP Growth w/ Consensus Estimates

Albion’s “Four Pillars”

Economy & Earnings

US GDP rebounded to +2.6% in Q3 after falling in 1H22, and corporate operating margins remain solid at ~12% on the S&P 500. 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 16x 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 this year’s P/E multiple compression has been driven by rates, rather than an expansion of the equity risk premium.

Interest Rates

Rates have risen across the curve in 2022 in response to a shift in monetary policy. Fed Fund Futures are pricing in +75bp in November and +50bp in December, with an implied Fed Funds target rate floor of 4.25% by year end.

Inflation

Inflation is at 40yr highs as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. Headline inflation eased lower over the summer thanks to falling energy prices, but core inflation reaccelerated sequentially in August & September.

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Weekly Market Recap – October 21, 2022

Weekly Recap

Domestic financial markets adopted a strong risk-on tone last week, with the Treasury curve steepening while US equities rallied. Investors appeared to take some comfort from Q3 earnings being less bad than feared thus far, and also in comments from Fed governors that reinforced what futures markets were already predicting, namely a relatively neutral policy stance in 2023 (data permitting).

With some investors taking recession bets off the table, the Treasury yield curve steepened as 2y yields fell 3bp while 10y and 30y yields increased 20bp and 34bp respectively. By Friday’s close, slightly less than half (22 out of 45) Treasury curve points were inverted, down from nearly 65% (29 out of 45) the prior week. Interestingly, the bullish tone in Treasuries was not matched by IG credit spreads, which remained stubbornly wide at 151bp, essentially unchanged on the week.

Equities did embrace the risk-on tone, however, with US large caps rocketing higher by roughly 5% in aggregate. Small and midcap stocks registered meaningful yet slightly smaller gains. International equities lagged but still finished in the green.

Economic data released last week was mixed. Housing starts fell sharply while residential building permits ticked up a hair. Empire Manufacturing and the Philly Fed Business Outlook both fell deeper into contraction territory, but Industrial Production rose 0.4% sequentially in September, beating expectations. Initial jobless claims fell, while continuing claims rose. Lastly, the Conference Board’s Leading Economic Index fell 0.4% sequentially and reach -1.4% on a y/y basis, a level that has always presaged an oncoming recession in the past (see Chart of the Week).

Chart of the Week – Conference Board US Leading Index (LEI) – Y/Y Change

Albion’s “Four Pillars

Economy & Earnings

US GDP fell in Q1 (-1.6%) and in Q2 (-0.6%), but job creation was strong with 2.75mn NFP added in 1H22, and corporate operating margins were robust. Consensus calls for slow economic growth in 2H22, but companies have warned of inflation pressuring margins, and analysts have cut Q3 earnings estimates.

Valuation

The S&P 500’s forward P/E of 16x 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. That said, valuations for many growth companies are at or near decade-lows, suggesting forward returns in some sectors could be above average.

Interest Rates

Rates have risen across the curve in 2022 in response to a shift in monetary policy. Fed Fund Futures markets are pricing in a total of 17 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 4.25% by year end.

Inflation

Inflation is at 40yr highs as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. Headline inflation eased lower over the summer thanks to falling energy prices, but core inflation reaccelerated sequentially in August & September.

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Weekly Market Recap – October 7, 2022

Weekly Recap

Stocks moved sharply higher at the start of Q4, with the S&P 500 posting a 4% gain in just two days to kick off the month of October, although the rally fizzled after Friday’s NFP report (more on that below). Cyclical sectors posted solid gains on the week despite the Friday swoon, while defensives lagged. Energy stocks shot higher following news that OPEC+ would cut production by 2 million barrels today in an effort to shore up oil prices in the face of flagging global demand.

Labor market data was mixed last week, with the Job Openings and Labor Turnover Survey (aka, “JOLTS”) showing a drop in available jobs in the US, from 11.2mn in August to a still elevated 10.1mn last month. Then on Thursday, initial jobless claims arrested a 7-week downtrend and moved higher, to 219k. These signs of weakness were not echoed in Friday’s monthly nonfarm payrolls report, however, potentially giving the Fed wide latitude to continue its aggressive stance on inflation.

Highlights of the monthly jobs report included:

  • +263k nonfarm payrolls added (cons = +255k)
  • 3.5% unemployment (down 20bp m/m, see the Chart of the Week for history)
  • 6.7% underemployment (down 30bp m/m)

In response to the strong labor market data, futures markets have now solidly coalesced around a 4th straight 75bp rate hike at the November FOMC meeting, followed up by another 50bp at the December meeting, for a policy rate floor of 4.25% at year-end. Treasury yields also ticked higher last week as the curve steepened slightly.

Chart of the Week – US Unemployment Rate (U-3)

Albion’s “Four Pillars”

Economy & Earnings

US GDP growth fell in Q1 (-1.6%) and in Q2 (-0.6%), but job creation remained strong in 1H22 with 2.75mn NFP added. Consensus calls for slow growth in 2H22. Operating margins remained robust in 1H22, but companies have warned that inflation could pressure margins going forward and analysts have cut Q3 earnings estimates.

Valuation

The S&P 500’s forward P/E of 16x 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. That said, valuations for many growth companies are at or near decade-lows, suggesting forward returns in some sectors could be above average.

Interest Rates

Rates have risen across the curve in 2022 in response to a shift in monetary policy. Fed Fund Futures markets are pricing in a total of 17 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 4.25% by year end.

Inflation

Inflation is at 40yr highs as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. Headline inflation eased lower in July and August thanks to falling energy prices, but core inflation reaccelerated sequentially in the August print.

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Weekly Market Recap

Weekly Recap

Rates rose anew and stock prices fell globally in the wake of Wednesday’s FOMC meeting. The updated Summary of Economic Projections showed weaker growth and higher unemployment in 2023 relative to the previous SEP release from three months ago, consistent with the notion that economic pain will be necessary in order to get inflation under control. Meanwhile, the updated Dot Plot demonstrated the Fed’s resolve in keeping rates “higher for longer”, with a median year-end 2023 Fed Funds projection of 4.625% and no sign of any “dovish pivot” prior to 2024.

With investor confidence already fragile, Friday’s poorly received budget from the new UK government provided a fresh catalyst for another leg lower. The proposal featured a raft of deficit-financed tax cuts aimed at raising economic growth to a sustained 2.5% annual rate, drawing immediate comparisons to Anthony Barber’s 1972 budget that led to a highly inflationary boom/bust cycle and eventually an IMF bailout for the UK. Economic growth of that magnitude has not occurred in the UK in 15 years, and appears highly ambitious (if not outright unrealistic) given the country’s ~0.5% population growth rate and its departure from the EU.

In US economic news, incoming data continue to suggest that the probability of recession in the coming months is very high. New residential building permits fell sharply once again as the housing market slows, moving the indicator from green to yellow on Albion’s key leading indicator dashboard. Meanwhile, the Conference Board’s Leading Economic Index (LEI) fell sequentially for the 6th straight month and is now at -1% on a y/y basis, a level that historically has indicated a near certainty of imminent recession.

Chart of the Week – Conference Board US Leading Index (LEI) – Y/Y Change

Albion’s “Four Pillars”

Economy & Earnings

US GDP growth fell in Q1 (-1.6%) and in Q2 (-0.6%), but job creation remained strong in 1H22 with 2.75mn NFP added. Consensus calls for slow growth in 2H22 despite weak consumer confidence and softer housing and labor markets. Corporate operating margins remained robust in 1H22, but many companies have warned that inflation could pressure margins going forward.

Valuation

The S&P 500’s forward P/E of 16x is slightly above the long run average, and more predictive valuation 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 have risen across the curve in 2022 in response to a shift in monetary policy. Fed Fund Futures markets are pricing in a total of 17 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 4.25% by year end.

Inflation

Inflation is at 40yr highs as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. Headline inflation eased lower in July and August thanks to falling energy prices, but core inflation reaccelerated sequentially in the August print.

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Weekly Market Recap – September 16, 2022

Weekly Recap

Markets got off to a strong start last week, with equities posting modest gains on Monday while rates were relatively calm. All of that changed at 8:00 am EDT on Tuesday morning when the August CPI print hit the tape. Although headline CPI declined on a y/y basis thanks largely to falling energy prices, core CPI accelerated sequentially to +0.6% m/m (consensus was +0.3%), showing that the underlying inflation pressures within the economy remain strong.

The response of financial markets was harsh. 10y Treasury yields rose nearly 14bp instantly, and Fed Funds Futures markets abandoned any hope of a 50bp hike in September and quickly priced in an extra 25bp hike by year-end. By week’s end, 1-year Treasury yields were at nearly 4% and 10-year yields were approaching 3.5%, while mortgage rates topped 6% nationally for the first time since 2008.

With the sharp move higher in rates and yet another recalibration of expectations around the near-term path of monetary policy, equity prices had nowhere to go but lower. By the end of the week, most US benchmarks were down 4-5%, with cyclicals and growth stocks bearing the brunt of the selling pressure.

Other economic data released last week was somewhat encouraging. Weekly initial jobless claims (213k) continued to fall, extending the decline that began in August. Meanwhile, small business optimism rose in August. And finally, the U of M Consumer Sentiment rose slightly in preliminary September data, marking the third straight month of improvement. Notably, consumers’ short term (1y = +4.6%) and longer term (5-10y = 2.8%) inflation expectations also declined sequentially, an encouraging trend that the Fed is surely monitoring closely.

Chart of the Week – Core CPI ex Food & Energy (m/m change)

Albion’s “Four Pillars”

Economy & Earnings

US GDP growth fell in Q1 (-1.6%) and in Q2 (-0.6%), but job creation remained strong in 1H22 with 2.75mn NFP added. Consensus calls for slow growth in 2H22 despite weak consumer confidence and softer housing and labor markets. Corporate operating margins remained robust in 1H22, but many companies have warned that inflation could pressure margins going forward.

Valuation

The S&P 500’s forward P/E of 16x is slightly above the long run average, and more predictive valuation 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 have risen across the curve in 2022 in response to a shift in monetary policy. Fed Fund Futures markets are pricing in a total of 16 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 4.0% by year end.

Inflation

Inflation is at 40yr highs as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. Headline inflation eased lower in July and August thanks to falling energy prices, but core inflation reaccelerated sequentially in the August print.

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Weekly Market Recap

Weekly Recap

Equity markets found their footing last week despite the ongoing rise in interest rates. All sectors in the S&P 500 finished higher, with gains spread across cyclicals, defensives, and growth stocks alike. The energy sector lagged the rally as oil prices briefly dipped below pre-Ukraine invasion levels. International stocks also lagged, particularly Chinese equities which pulled emerging market benchmarks lower on the week.

Futures markets have coalesced around a 75bp September rate hike from the FOMC, with markets now pricing in an additional 50bp in November and another 25bp in December as well. As front-end expectations were recalibrated, rates also moved higher across the Treasury curve: 2y +16bp, 10y +12bp, 30y +11bp.

Credit spreads reversed course and moved tighter after widening in sympathy with equities over the past several weeks.

Economic news was limited last week. S&P Global’s US Services (43.7) and Composite (44.6) PMIs came in slightly below expectations for August, while the ISM Services Index (56.9) improved sequentially and beat consensus. Weekly initial jobless claims moved lower once again, extending the downward trend that began in August after claims had consistently moved higher in the spring and early summer.

Chart of the Week – Oil Price per Barrel (WTI)

Albion’s “Four Pillars”

Economy & Earnings

US GDP growth fell in Q1 (-1.6%) and in Q2 (-0.6%), but job creation remained strong in 1H22 with 2.75mn NFP added. Consensus calls for slow growth in 2H22 despite weak consumer confidence and softer housing and labor markets. Corporate operating margins remained robust in 1H22, but many companies have warned that inflation could pressure margins going forward.

Valuation

The S&P 500’s forward P/E of 17x is slightly above the long run average, and more predictive valuation 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 have risen across the curve in 2022 in response to a shift in monetary policy. Fed Fund Futures markets are pricing in a total of 15 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.75% by year end.

Inflation

Inflation is at 40yr highs as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. That said, core inflation has been trending lower for several months now, and headline inflation also eased lower in July data thanks to falling energy prices.

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Weekly Market Recap

Weekly Recap

US equities finished lower for a 3rd straight week as a rebound in consumer confidence and signs of renewed strength in labor markets appeared to give the Fed more latitude for aggressive tightening of monetary policy. All sectors in the S&P 500 were down, with traditional defensives (utilities, health care, and staples) posting smaller declines while cyclicals and growth stocks faced sharper selling pressure. Small caps underperformed. And finally, international benchmarks echoed
the declines in the US.

Bond prices fell as rates moved higher for most of the week, although Friday saw a partial reversal after the monthly jobs report showed a few pockets of softness. Fed fund futures had gravitated towards a 75bp September rate hike in the days following Powell’s speech, but shifted back to virtually even odds of either 75 or 50bp on Friday. Credit spreads moved wider over the course of the week as equities declined, causing corporate bonds to underperform.

It was a big week for economic news:

  • US Manufacturing PMIs from ISM (52.8) and S&P (51.5) were steady
  • Factory (-1.0%) and Durable Goods (-0.1%) orders shrank in July
  • Consumer Confidence (Conf. Board) rebounded to a 3-month high of 103.2
  • Heavily lagged home price data showed sharp deceleration in June
  • US job openings (11.2mn) rebounded while initial jobless claims (232k) fell
  • Nonfarm payroll growth of +315k exceeded consensus estimates of +298k
  • Average weekly hours worked fell slightly to 34.5 hrs
  • Unemployment (3.7%) rose on a +30bp labor force participation rate (62.4%)
Chart of the Week – Monthly Change in Nonfarm Payrolls (BLS)

Albion’s “Four Pillars”

Economy & Earnings

US GDP growth fell in Q1 (-1.6%) and in Q2 (-0.6%), but job creation remained strong in 1H22 with 2.75mn NFP added. Consensus calls for slow growth in 2H22 despite weak consumer confidence and softer housing and labor markets. Corporate operating margins remained robust in 1H22, but many companies have warned that inflation could pressure margins going forward.

Valuation

The S&P 500’s forward P/E of 16x is slightly above the long run average, and more predictive valuation 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 have risen across the curve in 2022 in response to a shift in monetary policy. Fed Fund Futures markets are pricing in a total of 14 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.50% by year end.

Inflation

Inflation is at 40yr highs as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. That said, core inflation has been trending lower for several months now, and headline inflation also eased lower in July data thanks to falling energy prices.

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Weekly Market Recap

It was another tough week for stocks as bond yields continued to rise. Growth stocks bore the brunt of the selling pressure, sending the Nasdaq down 2.6% in a holiday-shortened week. Cyclical sectors fared better thanks to solid economic data, with materials (+0.7%), industrials (+0.4%), and energy (+0.3%) all finishing in positive territory. Small caps also finished slightly higher.

Meanwhile, the Treasury yield curve steepened considerably, with 2s10s gaining 19bp to finish at +38bp after having been inverted just two weeks prior. Credit spreads widened slightly, magnifying the price declines in high quality corporates and sending the Bloomberg US Corporate Index to its lowest level of the year.

The short week also saw a surge in energy prices. Oil gained more than $8/barrel, while natural gas rocketed higher to finish at $7.30/MMBtu, an all-time record high.

There were several positive data points regarding the economy last week. March retail sales were solid despite very high gasoline prices, industrial production rose more than expected, the Empire Manufacturing Survey came in well ahead of expectations, jobless claims remained low, and the University of Michigan Consumer Sentiment index experienced a strong rebound.

Finally, core CPI cooled slightly in March data, but other inflation metrics remain hot:

  • Headline CPI was +1.2% m/m and reached +8.5% y/y
  • Core CPI (ex food & energy) was +0.3% m/m and reached +6.5% y/y
  • Headline PPI was +1.4% m/m and reached +11.2% y/y
  • Core PPI (ex food & energy) was +1.0% m/m and reached +9.2% y/y
This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!
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Weekly Market Recap

It was another tough week for stocks and bonds, prompted by hawkish commentary on Monday from FOMC member Lael Brainard regarding the potential pace of Fed balance sheet reduction. That was followed up on Wednesday by the release of the FOMC meeting minutes from March, which exacerbated investor concerns.

The result was an abrupt reversal in the flattening trend that had gripped the Treasury market this year as the curve pivoted to bear steepening: 2y yields finished higher by 5bp, while 10y yields jumped 32bp, pushing the 2s10s curve back to +19bp by Friday’s close. See the Chart of the Week for a 2s10s time series.

Equities fell as a result, with long-dated growth stocks once again bearing the brunt of the selling pressure. In a return of 2022’s familiar pattern, defensive sectors (utilities, staples, healthcare, and real estate) plus energy outperformed, while other cyclicals and especially tech shares were weaker. Small caps generally fared worse than large caps, with the Russell 2000 now trailing the S&P 500 by more than 5% YTD. International stocks also finished lower on the week.

Commodities were mixed, with oil (WTI) finishing below $100/barrel for the second straight week while natural gas rose to an all-time high on Thursday before finishing a hair lower on Friday. Non-energy commodities also finished higher on the week.

Apart from the FOMC, most economic news last week was positive: services PMIs from S&P Global and ISM remain firmly in expansion territory, initial jobless claims fell, and consumer credit surged in fresh February data.

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!