Weekly Market Recap

Risk assets of all stripes were higher last week, as US economic data continued to point towards a strong recovery while inflation fears eased a bit. Technology and cyclical stocks saw the strongest demand, while investors pared back their exposure to traditional defensives like real estate, consumer staples, and healthcare. International stocks were higher, with emerging markets outperforming developed markets on increased risk appetite.

Treasury yields fell across the curve despite the risk-on market tone, with benchmark 10y yields lower by 3bp while 30y yields fell 4bp. Meanwhile, corporate credit spreads compressed to their tightest levels since 2007, with the average spread on the Bloomberg/Barclays US Credit Index closing at 79bp. See the Chart of the Week for a time series.

Most commodity prices rose, with oil setting a new pandemic-era high on Thursday before easing back slightly on Friday.

Economic news in the US was mostly positive. Double-digit home price appreciation continued across most of the country, with signs emerging that affordability is beginning to impact transaction volumes. Consumer confidence measures held steady at healthy levels in May, jobless claims continued to trend lower, and durable goods orders (excluding the volatile transportation component) were higher.


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.