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Weekly Market Recap

Weekly Market Recap – June 11, 2021 [ PDF ]Download

Last week’s biggest headline was consumer price inflation (CPI) which registered +5.0% y/y in May, the first “five-handle” US inflation print in nearly 13 years. Under the covers, however, the report was less alarming. Core CPI, which strips out volatile food and energy prices, was just +3.8% y/y.

Moreover, more than half of the total came from just six components associated with the release of pent-up demand: food away from home, lodging, airfares, rental cars, used cars, and vehicle insurance.

Markets paid attention to these details, and as a result, inflation-sensitive asset classes rallied last week. Equities were led by technology stocks, many of which have long-dated cash flows that are especially sensitive to discount rate assumptions. The return of tech leadership in equities dates to mid-May, shortly after the previous month’s CPI report which showed similarly transitory drivers underneath an upside headline surprise.

Bond markets also rallied, as 10y Treasury yields fell 10 basis points to 1.45%, their lowest level since early March when rates were still rising quickly. Credit spreads were stable, pushing corporate and muni bonds prices higher (and yields lower) in sync with Treasuries. Mortgage rates also fell last week.

Most commodities traded in a narrow range as inflation fears eased. That said, oil ticked higher by approximately $1/barrel, pushing WTI above $70 for the first time since the outset of the pandemic.

Weekly Market Recap – June 11, 2021 [ MP3 ]Download
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Weekly Market Recap

Weekly Market Recap – June 4th, 2021 [ PDF ]Download

Prices rose across several asset classes last week, including domestic equities, international equities, bonds, and commodities. US large cap indices added roughly half of a percent to their 2021 performance, led by energy stocks. All sectors in the S&P 500 finished higher except consumer discretionary and healthcare. Meanwhile, international stocks outpaced the US, particularly in emerging markets.

Bond markets also rallied last week as yields moved lower. Benchmark 10-year US Treasury yields fell 4 basis point to 1.55%, while 30-year yields were down 5 basis points to finish at 2.23%. Credit spreads were steady, allowing muni and corporate bond prices to rise along with Treasuries.

Energy prices surged to new pandemic-era highs last week. Brent crude closed above $70/barrel for the first time in two years, while West Texas Intermediate finished slightly below $70.

Friday’s monthly jobs report came in slightly below consensus expectations, but still improved sequentially from April’s disappointing result:

  • Nonfarm payrolls = +559k in May (revised April figure is +278k)
  • Unemployment rate = 5.8% (down from 6.1% in April)
  • Underemployment rate = 10.2% (down from 10.4% in April)
  • Labor force participation rate = 61.6% (down slightly from 61.7% in April)
  • Average hourly earnings = +0.5% sequential growth
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Weekly Market Recap

Weekly-Market-Recap-2021-05-28Download

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.

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Weekly Market Recap

Weekly Market Recap 2021-05-21Download

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.

Weekly-Market-Recap-2021-05-21Download
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Weekly Market Recap

Market Recap – Week 18Download

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.

Market Recap – Week 18Download
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Weekly Market Recap

Week 17 of 2021
Rates and commodity prices moved higher last week, while most bond and equity prices moved lower. Economic news was all good, including consumer confidence, durable goods orders, home prices, jobless claims, and of course, that hefty Q1 GDP print of +6.4% q/q annualized.
Weekly Market Recap – 20210430Download

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.

Weekly Market Recap – 20210430Download
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Weekly Market Recap

Weekly Market Recap – 20210319Download

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.

Weekly Market Recap – 20210319Download