Weekly Recap:

Benign macro data, low rate volatility, a solid outlook from Taiwan Semiconductor (TSM), and some commodity relief in the form of falling oil prices combined to create a constructive backdrop for US equities. The S&P 500 and the Dow both finished the week at fresh all time highs, while the Nasdaq Composite remains just a hair below the record high set on July 16th. TSM rose 9.8% on Thursday after bolstering revenue guidance, reinforcing the upward trend in A/I theme stocks.

International equities were weaker, due in part to a second straight week of declines in China after disappointing comments from President Xi Jinping regarding the scope and magnitude of Beijing’s monetary and fiscal stimulus measures.

Rates barely budged last week and remain 40-50 basis point higher across most of the curve relative to levels immediately prior to the Fed’s 50bp rate cut in mid-September.

Oil prices dropped by more than $6 per barrel over the course of the week after Israel elected not to target Iran’s nuclear and oil production capabilities as part of its retaliatory response to the recent missile attack.

Macro data released last week was mostly constructive outside of housing:

* Import (-0.3% m/m) and export (-0.7%) prices fell sequentially and are down y/y

* Retail sales (+0.4% m/m; +0.5% ex-autos) surprised to the upside in September

* Initial jobless claims (+241k) pulled back from recent storm driven highs

* Housing starts (-0.5% m/m) and building permits (-2.9%) remain subdued

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. S&P 500 earnings are on track for high single-digit or low double-digit y/y growth in 2024, provided that the economy continues to expand.

Valuation

The S&P 500’s forward P/E of 22x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the low-to-mid single digits.

Interest Rates

Futures markets imply that the Fed will deliver 25 bp interest rate cuts in each of the last two FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After becoming sticky in the 3-4% range in the first half of 2024, more recent data has reinforced the disinflationary trend, and the Fed has expressed confidence in the path to its 2% target. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

Domestic stocks posted gains last week despite rising bond yields and slightly higher oil prices. Inflation and monetary policy were in focus. First, the minutes from the September FOMC meeting showed a nearly even split between committee members favoring 25bp vs. 50bp rate cuts. Fed Chair Jerome Powell’s personal preference for a 50bp cut appears to have been the deciding factor.

Then on Thursday, fresh CPI data appeared to undermine the wisdom of a 50bp cut, as headline and core inflation both came in slightly hotter than expected:

* Headline CPI = +2.4% y/y; consensus = +2.3%

* Core (ex food & energy) CPI = +3.3% y/y; consensus = +3.2%

In response to a divided committee and warmth in inflation, Treasury yields rose and the curve steepened. Futures markets continue to reprice the magnitude and pace of the rate cutting cycle, settling for now on 25bp cuts at the November and December FOMC meetings, following by 4 or 5 additional 25bp cuts in 2025.

Through it all though, US equity benchmarks finished higher on the week, with notable strength returning to Nvidia on comments from CEO Jensen Huang that demand for the company’s new Blackwell chip is “insane”, while production is now fully ramped. Other semiconductor companies and A/I theme stocks benefitted from a read-thru, causing the tech sector to outperform on the week.

The biggest laggard last week was Chinese stocks, which gave back some of their recent extraordinary gains after investors were left disappointed by a speech from President Xi Jinping regarding the upcoming monetary and fiscal stimulus.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. S&P 500 earnings are on track for high single-digit or low double-digit y/y growth in 2024, provided that the economy continues to expand.

Valuation

The S&P 500’s forward P/E of 21.4x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.

Interest Rates

Futures markets imply that the Fed will deliver 25 bp interest rate cuts in each of the last two FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After becoming sticky in the 3-4% range in the first half of 2024, more recent data has reinforced the disinflationary trend, and the Fed has expressed confidence in the path to its 2% target. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

Fresh inflation data was supportive of the Fed’s decision to cut overnight interest rates by 50 basis points earlier this month. Headline and core PCE rose just 0.1% m/m in August, slightly below consensus expectations in both cases. Core PCE (the Fed’s preferred inflation gauge) now stands at 2.7% y/y and remains on a disinflationary path towards the Fed’s 2% target.

US stock prices continue to benefit from the combination of falling inflation and healthy economic growth. The Dow closed at a fresh record high on Friday, while the S&P finished the week just a hair off an all-time high set on Thursday. The Nasdaq remains almost 3% off the highs set in early July. Meanwhile, small cap performance remains inconsistent as the market rally broadens in fits and starts.

Rates and credit spreads were stable last week, resulting in limited movement in bond prices. The MOVE Index (a measure of interest rate volatility) finished the week in the low-90s, near the bottom end of the 2+ year trading range that has persisted since the Fed began raising rates in early 2022.

In international news, Chinese stocks finished the week 4.5% higher after the announcement of aggressive monetary and fiscal stimulus from Beijing, aimed at countering the country’s flagging economic growth. The People’s Bank of China cut rates on existing mortgages by 0.5% and lowered the reserve requirement ratio by 0.5% in an effort to inject liquidity into the banking system. Meanwhile, the central government plans to issue special sovereign bonds worth 2 trillion yuan, to be spent on various subsidies meant to stimulate consumer spending.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. S&P 500 earnings are on track for low double-digit y/y growth in 2024, provided the economy continues to expand at its current rate.

Valuation

The S&P 500’s forward P/E of 21.4x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.

Interest Rates

Futures markets imply that the Fed will deliver interest rate cuts in each of the last two FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or below what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After becoming sticky in the 3-4% range in the first half of 2024, more recent data has reinforced the disinflationary trend, and the Fed has expressed confidence in the path to its 2% target. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

Last week the FOMC finally launched its much-anticipated pivot, delivering a 50 basis point cut in what will clearly be the first of several reductions in overnight interest rates. How many additional cuts will be delivered, and over what period of time, remain topics of debate amongst market participants. In the official release and during the ensuing press conference, Fed Chair Jerome Powell stressed that despite the 50bp reduction (unusual outside of crisis situations), the US economy remains on solid footing in the eyes of the committee. Notably, Fed Board of Governors member Michelle Bowman dissented, issuing a short statement summarizing her view that with inflation currently above the Fed’s 2% target, a 25 basis point cut would have been more appropriate at this time.

Equity investors largely reacted with enthusiasm, as expected. The S&P 500 and the Dow set fresh all time highs on Thursday and Friday, respectively, thanks to notable strength in cyclicals and growth stocks. Small caps also enjoyed a tailwind.

Rates across much of the curve actually rose following the announcement, rather than falling as some might have expected. 10y Treasury yields ended the week 9bp higher while 30y yields finished up by 10bp, an indication that the bond market may have already fully priced the entire upcoming rate cutting cycle. Rising yields in the belly and long end are helping to restore the curve’s natural upward slope. Normalization in many parts of the economy (growth, margins, consumer, labor, etc.) has been a theme of the post-pandemic economy. As the Fed’s rate cutting cycle unfolds over the coming months, it appears that that theme may finally be applying to rates markets as well.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.

Interest Rates

Futures markets imply that the Fed will deliver interest rate cuts in each of the last two FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or below what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After becoming sticky in the 3-4% range in the first half of 2024, more recent data has reinforced the disinflationary trend, and the Fed has expressed confidence in the path to its 2% target. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

September is a notoriously difficult month for stocks, and so far 2024 has been no exception thanks to lingering concerns about the strength of the US economy. The S&P 500 fell every day last week and finished down more than 4%, while a rout in technology stocks dragged the Nasdaq to a nearly 6% decline. Small caps also struggled and continue to lag well behind large caps on a YTD basis.

Soft labor market data is partly to blame. Last week’s updates point to continued normalization of labor supply and demand, leaving open the question as to whether the Fed’s inflation-fighting campaign may yet cause the economy to overshoot to the downside. Per the JOLTS report, US job openings have fallen by roughly 1/2 million in the past two months as demand for labor weakens. The ADP employment report showed a net increase of just 99k payrolls, the lowest monthly total since January of 2021, before Covid-19 vaccines were widely available. And finally, nonfarm payrolls from the BLS (142k) came in slightly below consensus (165k), while the prior two months were revised lower by a combined 86k.

Yields fell across the curve in response, particularly in the front end as markets priced in an increasingly aggressive rate cutting campaign, including 4 or 5 cuts of 25bp prior to year-end across just 3 FOMC meetings. As a result of falling short term yields, the 2s10s curve went and stayed positive for the first time since it originally inverted in July of 2022. It is likely that over the next 18-24 months, the “normalization” theme that has applied to so much of the post-pandemic economy over the past couple years will finally begin to apply to the yield curve as well, gradually restoring its natural upward slope.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20.6x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.

Interest Rates

Futures markets imply that the Fed will enact multiple interest rate cuts across the last three FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

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Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

The Fed was once again in focus last week, and financial markets were not disappointed. First came the minutes from the July FOMC meeting, which included the following summation of the committee’s current outlook:

“The vast majority of participants observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”

Next up was Jerome Powell’s speech at the Jackson Hole Economic Symposium on Friday, where the Fed Chair essentially declared victory in the fight against inflation, noting:

“Inflation has declined significantly. The labor market is no longer overheated, and conditions are now less tight than those that prevailed before the pandemic.”

Bond prices rose as rates moved lower across the curve in response to these statements, while futures markets continue to debate whether the September rate cut will be just 25 basis points (~70% implied probability) or a full 50 basis points (~30% chance).

Equities of all stripes were higher as well, with notable strength in small caps and cyclicals (ex energy) as the rally in stocks once again showed signs of broadening out beyond its mega cap tech base.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.

Interest Rates

Futures markets imply that the Fed will enact multiple interest rate cuts across the last three FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

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Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

Macro data released last week, while somewhat mixed, was generally supportive of the soft landing narrative.

Inflation data came in below expectations, bolstering rate cut confidence:

* PPI dropped to +2.2% y/y (consensus = +2.3%; prior month = +2.7%)

* CPI dropped to +2.9% y/y (consensus = +3.0%; prior month = +2.9%)

Labor market and consumer-related data remained solid:

* Initial jobless claims eased lower for a 2nd straight week, to 227k

* Retail sales rose +1.0% m/m in July (consensus = +0.4%)

* U of Michigan consumer sentiment rose slightly to 67.8 in prelim August data

Manufacturing and housing remain challenged, but so far that has not tipped the broader economy into recession and may not derail the soft landing outcome:

* Empire manufacturing remained in contraction territory at -4.7 for August

* Industrial production fell 0.6% m/m and capacity utilization fell to 77.8% in July

* Housing starts fell 6.8% sequentially in July to a SAAR of 1,353k

* Residential building permits fell 4.0% sequentially in July to a SAAR of 1,396k

Amidst this slew of macro data, the S&P 500 registered gains each day last week, with all sectors finishing the week in positive territory. The Nasdaq outperformed on renewed strength in mega cap tech stocks. In fixed income, rates fell modestly in the belly and long end of the curve as the market finds a new equilibrium after the flight-to-safety trade in early August. Credit spreads tightened during the week on renewed risk appetite, pushing corporate bond prices higher.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.

Interest Rates

Futures markets imply that the Fed will enact multiple interest rate cuts across the last three FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

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Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

Following a tense weekend where renewed concerns about the US economy collided with technicals associated with an unwind of the Japan carry trade, US stocks started out in freefall on Monday the 5th, extending a decline that had begun during the latter portion of the previous week. The S&P 500 opened more than 4% lower and the Nasdaq was down more than 5% to start the session. Most notably, the VIX (the Chicago Board Options Exchange Volatility Index) briefly spiked to more than 65, a level only reached previously during the severe market shocks associated with the pandemic in March of 2020 and the financial crisis in Q4 of 2008. See the Chart of the Day for a time series of the intraday highs on the VIX.

Thankfully, stocks stabilized during the course of Monday’s session, aided in part by the 10:00 am release of the ISM Services Index (51.4) for July, which came in better than expected across the board. The rest of the week was a gradual recovery as the panic subsided, with stocks finishing only modestly lower by Friday’s close.

Fixed income also experienced some normalization over the course of the week.  Rates moved higher across the curve as the flight-to-safety trade waned, and credit spreads inched tighter day by day, in sync with the gradual recovery in equities. Mortgage rates appear to be a beneficiary of the recent fall in rates, with the national average 30-year fixed rate mortgage falling roughly 1/4 percent week over week in the most recent market survey.

Besides the ISM Services print, macro news was sparse last week. Initial jobless claims (233k) pulled back slightly, and total consumer credit outstanding grew by $8.9 billion in June, slightly lower than consensus estimates.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20.2x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.

Interest Rates

Futures markets imply that the Fed will enact multiple interest rate cuts across the last three FOMC meetings of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the 3-4% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

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Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

The sector rotation trade gained momentum last week, as large cap tech significantly underperformed while most other parts of the US equity market rallied. Cyclicals and defensives were almost universally higher, with energy stocks the lone exception thanks to sagging oil prices driven by soft demand from China. Small caps massively outperformed once again, with the Russell 2000 climbing 3.5% on the week to reach 10+% so far in July. International markets finished lower, particularly E/M thanks to weakness in Chinese stocks.

In fixed income, rates moved lower across most of the curve, particularly in the front end as monthly PCE data reinforced the disinflation narrative. Dovish comments from former FOMC member Bill Dudley, who surprisingly called for a July rate cut to stave off a possible recession, also helped push short rates lower. While futures markets continue to price almost no chance of a cut from the FOMC at the end of July, the implied odds of a September cut are now virtually 100%.

Macro data released last week was consistent with recent trends. The first estimate of Q2 US GDP growth came in at +2.8% (q/q annualized), with better-than-expected personal consumption (along with some inventory build) as strong income growth continues to support consumer spending. Home sales (new & existing) remain weak due to persistently high mortgage rates. The preliminary reading of S&P’s PMIs for July saw manufacturing (49.5) slip back into contraction, while services (56.0) exceeded consensus and kept the composite (55.0) in expansion territory. And finally, Core PCE (the Fed’s preferred inflation gauge) was +0.2% m/m in June and +2.6% y/y, a relief to market participants who are wary of any reacceleration in inflation ahead of the September FOMC meeting.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or twice in the 2nd half of 2024, with additional cuts in 2025. Belly and long end rates have already priced in a rate cutting cycle and are likely near their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the ~3% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

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Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Weekly Recap:

A sharp sector rotation trade played out across US equity markets for a second consecutive week, with high flying tech stocks coming under selling pressure while previously unloved areas of the market found a bid. Cyclicals, real estate, and small caps were areas of relative strength. The Dow was the winner among US large cap benchmarks, while the Nasdaq was down more than 3% and is now slightly in the red for the month of July. Meanwhile, international equity markets had a challenging week, and remain well behind the US on a YTD basis.

Bond yields moved higher by 5-6 basis points across most of the Treasury curve, pivoting midweek after a fairly strong bond rally that had seen yields fall by ~25 basis points over the previous 2+ weeks.

Macro was a mixed bag last week. Import/export prices continue to suggest that international trade is not a significant source of inflation at this point. On the positive side, retail sales in June were better than expected, and housing activity rebounded slightly, with permits and starts both up 3+% sequentially. On a more challenging note, jobless claims ticked higher once again as the labor market continues to normalize, and the Conference Board’s Leading Economic Index (LEI) fell another 0.2% m/m. The LEI is now 14.8% off of its peak from the end of 2021, and in the past, declines of this magnitude have always been followed by a US recession. See the Chart of the Week for a time series.

Lastly, despite causing significant disruption in many industries, it does not appear that Friday’s global Crowdstrike outage had any meaningful effect on most financial asset prices (CRWD is a notable exception, of course).

Albion’s “Four Pillars”:

Economy & Earnings

The US economy has been resilient despite the higher interest rate environment. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x is well above the long run average, so valuations are likely to be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns from current levels over the coming decade are likely to be in the single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates once or twice in the 2nd half of 2024, with additional cuts in 2025. Belly and long end rates are already at or near what are likely to be their post-pandemic equilibrium levels, unless the US economy enters a recession.

Inflation

After falling rapidly in late 2022 and all of 2023, inflation became sticky in the ~3% range in the first half of 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Volatile energy prices driven by geopolitical conflicts could present a risk to the inflation outlook.

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Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.