Categories
Learn

Weekly Market Recap

Weekly Recap

Last week featured a very strong rebound in US equities, particularly after the release of the May FOMC meeting minutes on Wednesday and encouraging PCE data on Friday. Prior to Wednesday’s 2:00 pm release of the FOMC minutes, the S&P 500 had risen roughly 1.4% on the week. It then rose another 5.1% in the 2+ trading days thru Friday’s close. Investors took comfort that rate hikes in excess of 50bp were probably off the table for June & July, and were also encouraged by Friday’s release which showed a 2nd straight monthly decline in the core PCE deflator.

All sectors in the S&P 500 finished the week higher, led by consumer discretionary stocks (+9.3% at the sector level) that had more or less been left for dead just a week earlier. Energy stocks (+8.2%) had another strong week as oil and natural gas prices rose, while tech and financials also produced returns in excess of 8% on the week. Defensives lagged the rally after leading the way for much of the year.

Rates continued to stabilize as Treasury yields fell slightly across the curve. Credit spreads compressed, pushing corporate and muni bond prices higher. Economic news was mixed last week:

  • S&P Global’s US manufacturing and services PMIs missed expectations
  • New home sales fell rapidly in April data released last week
  • Durable and capital goods orders also missed expectations
  • Initial jobless claims ticked lower while continuing claims rose
  • Personal spending (+0.9%) rose more than incomes (+0.4%) in April
  • April PCE was in line with consensus: Core = +0.3%; Headline = +0.2%
Chart of the Week – Core PCE Deflator (y/y change)

Albion’s “Four Pillars”

Economy & Earnings

Annualized US GDP growth fell to -1.5% in Q1 on headwinds from trade, private investment, and government spending. Personal consumption remains strong, however, suggesting growth should resume for the balance of the year. Consensus 2022 GDP stands at +2.6%.

Valuation

The S&P 500’s fwd P/E of 17x is above the historical average, and longterm valuation metrics like CAPE (cyclically adjusted P/E ratio) suggest that compound annual returns over the next decade are likely to be in the single digits. That said, many growth stock valuations are at multi-year lows after the recent selloff, suggesting future returns in some sectors could be above-average.

Interest Rates

Rates have risen across the curve in early 2022 as the market prices in a number of Fed Funds rate hikes. Fed Fund Futures markets are currently pricing in a total of ten 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 2.50% by year end.

Inflation

Inflation is currently high as supply chain disruptions, labor shortages, and rising energy prices have impacted input costs for many businesses. The Fed has begun raising overnight interest rates in order to tame inflationary pressures.