Weekly Recap:
Inflation was in focus once again last week, and after a bit of a scare on Monday with PPI, the rest of the week’s data calmed investors’ nerves and allowed asset prices to further appreciate.
Monday’s PPI print looked a bit ominous at first glance, with Headline (final demand) and Core (ex food & energy) both rising +0.5% m/m, well ahead of consensus estimates. However, the prior month was revised lower to -0.1% m/m in both cases, leaving the 2-month change largely in line with expectations.
Then on Tuesday, the April print for the Consumer Price Index (CPI) was consistent with the recent trend: sticky, but not reaccelerating:
* Headline and Core CPI both rose +0.3% m/m
* Headline CPI stands at +3.4% y/y (10bp lower than the previous month)
* Core CPI stands at +3.6% m/m (20bp lower than the previous month)
In response, rates eased lower by 5-8 basis points across the curve over the course of the week, while the outlook for rate cuts remained largely unchanged. Futures markets continue to price one 25bp cut as a near certainty prior to year-end, with a second cut being a slight odds on favorite as well.
Equities enjoyed a broad-based rally, with all three US large cap benchmarks setting fresh all-time highs simultaneously on Wednesday. The S&P and the Nasdaq eased back a touch by Friday’s close, but the Dow inched forward and finished out the week by closing above 40,000 for the first time ever.
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 20.7x is above the long run average, so valuation could 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 over the next decade are likely to be in the mid single digits.
Interest Rates
Futures markets imply that the Fed will cut overnight interest rates once or possibly twice in 2024, most likely at some point in the 2nd half of the year. Rate cut expectations have been tempered recently due to sticky inflation prints.
Inflation
After falling rapidly in late 2022 and all of 2023, inflation has become sticky in the 3-4% range in early 2024. Services inflation remains somewhat elevated, in part due to heavily lagged shelter costs. Rising oil prices driven by armed conflicts in Ukraine and the middle east are also a risk to the inflation outlook.