Categories
Uncategorized

Weekly Market Recap

Weekly Recap

Markets fell sharply last week, particularly after consumer price inflation (CPI) data came in above consensus across the board:

  • Headline CPI was +1.0% sequentially in May (consensus was +0.6%)
  • Headline CPI reached +8.6% y/y (consensus +8.3%)
  • Core (ex food and energy) CPI was +0.6% sequentially in May (consensus +0.5%)
  • Core (ex food and energy) CPI reached +6.0% y/y (consensus +5.9%)

Stocks finished lower across the board, with technology, financials, and real estate feeling the worst of the selling pressure. Energy stocks were the most resilient once again, thanks to rising oil prices as US crude benchmark West Texas Intermediate closed above $120/barrel for the first time since early March.

The real action last week was in bond markets, particularly in the front end of the yield curve as investors significantly ratcheted up their expectations for additional rate hikes from the Fed. By Friday’s close 2y yields had risen 41bp and Fed Funds Futures markets were pricing nearly 10 additional 25bp rate hikes (13 total) by the end of 2022, implying a target rate floor of 3.25% in December.

Other economic news was not especially encouraging last week. Initial jobless claims ticked higher, mortgage applications fell, and the University of Michigan’s Consumer Sentiment gauge fell to its lowest level in history.

Finally, gasoline prices at the pump rose sharply again last week, with the US national average for unleaded gas finishing at exactly $5.00/gallon.

Chart of the Week – Headline and Core CPI (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 thirteen 25bp rate hikes in 2022, with an implied Fed Funds target rate floor of 3.25% 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.