“…With the invasion of Ukraine, the disruption of the distribution of natural resources and food supply caused by that, and other supply chain factors. How should we look at the stock market, investing, and saving during this time?“
Find out by listening to Albion Partner, Doug Wells‘s interview with Albion Partner and CIO Jason Ware.
Each week Doug co-hosts the one-hour show – Mountain Money – on Park City’s NPR affiliate, KPCW Public Media.
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.
Equities were mixed last week as the world watched the Suez Canal drama unfolding. Most sectors generated positive returns allowing the S&P 500 and the Dow to finish the week higher, while price declines in some large-cap communications names pulled the Nasdaq lower. Small caps were also lower on the week, as were many international stocks.
Bond markets mostly rallied last week. Treasury yields were lower as the curve flattened modestly, while credit spreads were stable.
Oil prices gyrated day by day as investors grappled with the impact of the Suez blockage on short term global supply.
Economic news was mixed last week. On a positive note, jobless claims hit new pandemic lows, and the University of Michigan consumer sentiment index registered a large sequential index. At the same time, personal incomes & spending, capital goods orders, and home sales all fell.
Finally, in two days of testimony before the US Congress, Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen both pledged to continue supporting the economic recovery and downplayed concerns about runaway inflation caused by excessive monetary and fiscal stimulus. As the Chart of the Week shows, the Core PCE Deflator (the Fed’s preferred inflation metric) remains below its 2% target.
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