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Weekly Market Recap

Risk assets were whipsawed last week by shifting sentiment around omicron and US monetarily policy. While it is increasingly clear that omicron is already widespread in the US, there is growing optimism that existing vaccines will provide protection against severe disease and death, AND that omicron may be more likely to cause milder cases of covid-19 in the first place. Meanwhile, Fed Chair Jerome Powell’s pivot towards inflation fighting has cooled some investors’ appetite for stocks, sending most US benchmarks lower. Traditional defensive sectors held up the best last week, with only utilities and real estate registering small gains.

Treasury investors responded to Powell’s hawkish turn by flattening the yield curve, under the assumption that more aggressive inflation-fighting in the near term should mean lower inflation and bond yields in the long term. Fed Fund futures are now pricing in ~2.5 rate hikes by the end of 2022. Meanwhile, investment grade credit spreads widened slightly to 95bp, equaling their widest level of the year, while high yield spreads moved in the opposite direction after having widened dramatically when omicron was first reported the day after Thanksgiving.

The BLS released its monthly payroll report. The change in nonfarm payrolls of +210k missed expectations, but all other aspects of the report were encouraging:

* U-3 Unemployment fell to 4.2%

* U-6 Underemployment fell to 7.8%

* Labor Force Participation rose to 61.8%

* Y/Y Growth in Avg Hourly Earnings cooled to 4.8%

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!
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Weekly Market Recap

News of the omicron variant sent stocks tumbling on Friday, pushing all major equity indices into the red for the week. The Nasdaq was the worst performer, as concerns about rising rates had dented longer-duration growth stocks even before Friday’s move. Small and midcap stocks underperformed large caps, while international stock underperformed the US.

In a classic flight-to-safety trade, US Treasuries rallied as yields fell and the curve flattened. Credit spreads widened, particularly in high yield where bond prices fell in sympathy with equities. Investment grade corporate bonds and high quality munis were close to flat on the week thanks to the offsetting moves in rates and spreads.

Commodity prices plunged on Friday, particularly oil which endured its largest oneday selloff since the early days of the pandemic last year. US benchmark West Texas Intermediate fell more than $10/barrel to close at $68.15, while non-energy commodities were off a more modest ~2% in aggregate. See the Chart of the Week for a time series of oil prices.

Apart from concerns regarding the omicron variant, economic news was mostly positive last week. Initial jobless claims fell below 200k for the first time since the onset of the pandemic, while the University of Michigan Consumer Sentiment index rose slightly more than expected in the final November print.

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!
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Albion Financial Group Conference Call Replay

From November 16th, 2021

To watch the Zoom video recording, please click on the below button:

To listen to the audio only version, please click play below:

Skip to a section of the call:

  • 00:02:27 – John Bird
  • 00:07:54 – Albion’s ESG Portfolio offering
  • 00:12:28 – Jason Ware on the Economy & Markets in 2021
  • 00:19:08 – Looking Ahead to 2022
  • 00:22:15 – Liz Bernhard
  • 00:26:48 – Year-End Planning Items
  • 00:35:03 – Q&A
  • 00:58:49 – John Bird Closing Remarks
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Weekly Market Recap

Most US equity indices finished the week slightly lower, due in large part to a higher-than-expected consumer price inflation (CPI) print for the month of October. Core inflation (ex food and energy) rose to 4.6% y/y, while headline inflation exceeded 6% for the first time since 1990. See the Chart of the Week for a time series of headline and core CPI.

Sector performance was mixed: basic materials (+2.6%) significantly outperformed, and four other sectors (healthcare, industrials, financials, and tech) finished with positive returns on the week. Other sectors finished lower on the week, with energy (-1.3%) and consumer discretionary (-3.2%) trailing by the widest margin. International stocks were mixed, with MSCI’s developed market index easing lower while its emerging markets index posted solid gains due to strength in Chinese equities.

Bond yields moved higher in the wake of the inflation print, particularly in the front end and belly of the curve: 2y and 10y yields both rose 11bp on the week, while 30y yields were up a more modest 4bp. Credit spreads were mostly stable, passing the price declines in Treasuries through to higher quality corporate bonds.

Commodity markets were mixed last week. Energy prices eased lower, while prices rose on many other commodities, including wheat, corn, copper, and gold.

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!
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Weekly Market Recap

Tapering is upon us at last. In a move that surprised no one, the US Federal Reserve announced on Wednesday that it would begin tapering its monthly purchases of Treasuries and MBS by approximately $15 billion per month, beginning immediately. Given the previous run rate of $120 billion per month, it would take 8 months for the tapering process to finish if done in linear fashion, meaning that the Fed’s asset purchase program would reach $0 in new purchases in June of 2022.

In other news, Friday’s payroll report exceeded expectations for job growth with 531k nonfarm payrolls added. The unemployment rate sank to 4.6% while underemployment dropped to 8.3%, both of which are new pandemic lows.

US stocks rallied in response to the news flow, with all three major US large cap indices finishing the week at all-time record highs. Small and midcap stocks were up even more sharply following the jobs report. International equities were mixed, with D/M higher while E/M in aggregate was flat.

Bond markets wobbled in the immediate aftermath of the tapering announcement but soon joined stocks in rally mode, with yields falling across the curve. Credit spreads remained stable as investment grade corporates clawed their way back very close to breakeven on the year.

Inflation-sensitive assets were mixed last week: oil prices fell, gold prices rose, and bitcoin finished lower.

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!

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Weekly Market Recap

Large cap technology stocks led the market higher last week thanks in large part to stellar earnings results from tech bellwethers like Alphabet (Google) and Microsoft. The rally pushed the Dow, S&P 500, and Nasdaq Composite to fresh record highs on the final day of October, with the S&P and Nasdaq both delivering a return of over 7% for the month. Cyclicals lagged somewhat as inflation concerns eased and energy prices edged lower. Meanwhile, international stocks were mixed, with developed markets close to flat while emerging markets were once again pulled lower by a selloff in Chinese equities.

Growth stocks also got a boost from falling Treasury yields last week. The curve flattened considerably, with 2y yields hitting 50bp (+5bp on the week) while 10y yields fell 8bp and 30y yields were lower by 14bp. Fed funds futures markets are now pricing in a >75% chance of a rate hike occurring by June of 2022, much earlier than current consensus expectations from sell side economists.

Not all of the news was good last week, however. Q3 GDP came in lower than expected at +2.0% annualized, while Apple and Amazon both missed consensus earnings estimates, citing severe supply chain constraints that impacted revenues as well as input cost inflation that put pressure on operating margins. Starbucks also cited a 600bp impact to operating margins from rising wages and other inflationary pressures. As a result of these and other reports, sell side analysts have already begun lowering their earnings estimates for the balance of the year.

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!
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Highlights from the American Families Tax Proposal

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Third Quarter 2021 – Quarterly Letter

October 25, 2021

The autumnal equinox made it official and now the changing colors of the tree leaves strongly confirm that we have arrived in the final season of the year.

This quarter’s letter contains uniquely global observations from our CEO & co-founder John Bird’s recent experience in the United Kingdom. Then on the Economy and Markets, learn the narrative of this summer’s deceleration and how it relates to short and long-term inflation. Financial Planner Patrick Lundergan outlines the fundamental process of making a financial plan including the critical step of re-engaging in the process at major life events.

Read through to the end for community updates, including an introduction to our newest team member and information about our year-end conference calls!

The Albion Team

From John Bird’s Desk

An unusual blend of nationalism and populism is impacting countries around the world. A few examples of which are an increasingly assertive China, a tilt toward populist authoritarianism in Turkey, Hungary and Brazil, the assertion of national interest through Brexit in Great Britain, and of course our own tilt in the United States toward nationalist and populist ideologies. Often the tenets of these ideologies make strange bedfellows. For example the frustrations of citizens who feel left behind in the economic boom now stand alongside those who argue unfettered capitalism is the only route to sustainable prosperity.

Layered on top has been the devastating impact of Covid. Some of us have been fortunate to remain employed with our lives inconvenienced rather than disrupted. Meanwhile others have found themselves chronically out of work and struggling to make ends meet. This is particularly acute in the travel and entertainment industries that rely on person-to-person connections to thrive.

I recently returned from a Covid delayed trip to Scotland where my family and I spent a few weeks tromping around the Highlands. I’ll preempt the question some of you may have; no, I didn’t golf. The bright side is I didn’t lose a single golf ball… In addition to the usual things I find intriguing when travelling I was curious to see if I could get a sense of whether and how the impact of Covid was waning and how Brexit was impacting Scotland.

The airlines have made a tremendous effort to make overseas travel Covid safe. Airports and airlines require masks and destination countries require both proof of vaccination and a recent negative Covid test. Further, we were required to take an additional Covid test after being in Britain two days. We were also required to take a Covid test prior to returning to the United States.

Great Britain has an indoor mask requirement with an exception for eating and drinking. We avoided tightly packed pubs – much to the chagrin of my young adult children. Compliance with Covid protocols was both widespread and consistent. The people I spoke with were relieved to have travelers back and felt that mask mandates and distancing protocols were a small price to pay to avoid another shutdown. Hotels were full but unfortunately many restaurants were closed as a single positive Covid test with a staffer required the restaurant to shut down for several days while all staff self-quarantined. Yet despite these challenges there was widespread enthusiasm to be open and back to work among everyone we spoke with.

Great Britain in general and Scotland in particular have higher vaccination rates than we do in the U.S. In Scotland 89% of people over 12 have received at least one dose while over 81% have received two. This broad acceptance – combined with vaccine requirements and testing of visitors coming to the country – seems to have helped them open up their travel and entertainment economies without generating spikes in new Covid cases. For comparison here in Utah just under 52% of the population is fully vaccinated while nationwide just under 57% of the population is fully vaccinated.

There were only a few areas where we as transient tourists noticed Brexit having an impact though unfortunately both were negative. As a reminder, Brexit refers to the removal of Great Britain from the European Union which occurred in January of 2020.

Great Britain is currently in the midst of a Brexit induced fuel crisis. A prime motivation of Brexiteers was displeasure with the fact that open borders of the European Union allow any citizen of the Union to work in any country in the Union which meant there were a lot of non-British individuals living and working in Great Britain. Brexit solved that by eliminating the right of other Europeans to work in Britain without British work visas. Now Britain finds itself without enough truck drivers to deliver gasoline and diesel to service stations. British politicians are floating the idea of expanding the pool of available work visas to overcome this challenge yet there is resistance as resentment of foreign labor was a prime reason for Brexit in the first place. The second impact was labor in the service industries. In addition to Covid generated labor shortages, the usual flow of non-Brits to seasonal tourism jobs in Great Britain no longer exists.

The implementation date of Brexit coincided with the beginning of Covid shutdowns which likely masked the impact Brexit would ultimately have on the British economy as the shutdown greatly reduced economic activity and the need for non-British workers. Now that Britain is opening up they are starting to see the impact of the policy. While no one I spoke with in Scotland was pleased with the impact Brexit is already having, we as humans have a way of adapting to our circumstances and I am sure Brexit will be no different. It will cause pain for some, benefit for others, and life will go on.

My takeaways from the trip were that with sensible precautions and a healthy respect for the damage uncontrolled Covid creates travel is not only possible but enjoyable. Additionally while the experiments in populist nationalist ideologies around the world are troubling, the individuals I spoke with were thoughtful and grounded which gives me confidence that ultimately sensible policies will carry the day. Finally and most importantly the trip reinforced how valuable and rewarding it is to step away from daily distractions and be present with those we love. Memories of the time spent with my family and close friends, connecting over drives, hikes, castles, and meals will keep a smile in my heart for a long time.

Economy & Markets

 In our last missive we discussed acceleration … on nearly everything. Across the economy, its reopening, vaccinations, falling Covid infections, corporate earnings, inflation – you name it and the second quarter was a story of things picking up in a proper direction. But as famed economist Herbert Stein observed, “if something cannot go on forever, it will stop.” Simple. Even obvious. Also correct. Another quarter has come and gone, and Stein’s Law has kicked in. Count us as unsurprised, however, right alongside regular audiences of our frequent media work and readers of this quarterly parchment. To wit, in this last letter – after ticking off a laundry list of statistics illustrating almost unbelievable growth and improvements – we soberly declared:

Though at some level, even economics cannot escape Newton’s iron laws. In what we’re calling ‘peak everything’, this acceleration should begin to modulate by year’s end. Across inoculations, the economy, earnings, sentiment, and inflation this incredible momentum simply cannot last.”

After growing a whopping +6.6% in the April through June period, accumulating information imply the US economy lost steam over the summer. As of this writing we cannot know the exact level of growth for the third quarter (initial GDP estimates won’t be released until October 28th then will face future revisions). Nevertheless, real-time component data that feeds into GDP math leave little question that the pace of growth has softened. We could spill a ton of ink (err … font) in these pages pouring over specifics – jobs, sentiment, consumption, industrial production, new orders – but let’s cut straight to the chase, the economy’s growth rate was likely marked down by about half in the third quarter.

Meanwhile, daily vaccinations dropped from a peak of ~3.5M to approximately 800K. Our intent is certainly not to denigrate the laudability of that figure, but the -77% decrease is notable. Especially juxtaposed with the number of Americans left unvaccinated. As for Covid-19, the more transmissible Delta variant took hold this summer pushing a steep rise of infections and slowing the economic reopening. For their part, third quarter corporate earnings reports are now beginning to hit. While we anticipate yet another strong set of results, here too the rate of change will be reduced (likely in the mid-30% range against +63% in Q2). Again, we could go on, but the point is accelerationhas succumbed to deceleration. This is natural. Walk up a hill, and you must ultimately walk down the other side in order to advance forward. Same is true in economics, markets … and pandemics. We stay optimistic.

Given its present sizzling focus, it is probable you noticed that missing from this whole deceleration theme is inflation. How could you not notice? Supply chains are snarled. Delivery times, unknown. There aren’t enough workers. Commodities are soaring. Prices across the board are elevated. What gives? It’s the question du jour (for now) and everyone’s paying attention. To help answer this, we prefer to think about inflation on three timelines: short, medium, and long-term. Bear with us. 

Over the short run, we’ve long said that inflation would rise well above the pre-pandemic norm for much of 2021 and into 2022 primarily due to a cyclical boom in demand running up against Covid-forced lower productive capacity. We further posited that conditions would be magnified statistically because of “base effects.” This has proven accurate.

Looking forward, after a few quarters of these short-term inflationary pressures, post-pandemic demand will “normalize” slowing general activity just as new supply begins its ramp. Sounds hopeful, but regrettably reestablishing shuttered productive capacity isn’t a light switch you flip. It takes time. Meaning demand and supply curves do ultimately cross paths but with some gaps and lag. This is classic economic theory where the marketplace searches and finds better equilibrium. Too, “base effects” next year will be less severe. Together, these forces should with time cause inflation to cool from spicier levels. To be crystal clear – not instantly back to ordinary levels, as ports and the like don’t unclog easily. New supply growth will be lumpy and vary by industry. Patience here will be virtue.

We then reason that this middle phase runs headlong into the secular disinflationary forces that have gripped inflation for the past ~15 years. First, the rise of technology which at its core is deflationary. Second, impacts from aging global demographics on consumption. Third, lower structural global growth rates. Finally, basic changes in consumer shopping habits (think Amazon, Costco, off-price retailers, mobile) continuing to pressure prices. All of which were unchanged through the pandemic and should thus build upon inflation’s renewed cyclical course lower, eventually settling into a fundamental 2%-plus zone (slightly higher than the 2%-minus zone, pre-Covid). 

The Fed should remain patient as this unfolds. Their policy tools are ill-suited to address supply side inflation shocks. They know it, though taper will begin soon. Tapering is not tightening however, and rates remain low.

As we turn the page to the fourth quarter, our outlook remains sanguine. Lest a vaccine evading SARS2 variant develop, expect further pandemic progress as we inch ever closer to population-level immune protection while new therapeutics like Merck’s “molnupiravir” Covid pill bolster our capacity to battle this disease. Expect the economy to continue its expansion, with new jobs added, rising spending, investment, resilient confidence, and swelling business profits – though also expect this to occur at a normalizing (slower) speed. But we needn’t be alarmed; modest growth is sufficient. Bear in mind, conditions from 2009-2019 saw average annual GDP growth just over +2% and an +11% stride for profits. Not bad. Although not +6% and +50% either. And yet stocks did just fine. We don’t need hyper growth. We just need healthy growth moving in the right direction. Don’t let the pundits tell you otherwise. Goldilocks knew better. Either way, know that our work in finding and owning sound investments on your behalf while thinking and acting long-term will endure. Thank you for your trust in us. We cherish our continued relationship.

Planners Corner

As with any complex system, it is crucial to understand how it can fail. When it comes to planning for one’s financial future, the process of understanding what can go wrong is often the first step in determining the right thing to do.

A good financial plan always contains numerous knowns and unknowns. At Albion, we say planning is a process and not a product – it’s something to be adjusted in real-time based on current circumstances and realistic assumptions. Ultimately, some variables will remain unknown and dynamic but are crucial when stress testing a financial plan. We boil these down to four categories: 1.) spending/savings, 2.) inflation and market assumptions, 3.) life expectancy, 4.) health events.

All four of the above categories are used as “what-if” statements when planning for any goal. For those who have gone through the planning process with Albion, these will sound familiar. “What if I have a long-term care event, what if I get laid off, what if there is a recession when I retire, what if I live to age 100, what if I outlive my partner, what if inflation spikes?” All these situations are worth planning for regardless of your situation. They can happen independently or at the same time. Having a plan is paramount to success and peace of mind.

Identifying possible worst-case scenarios isn’t fun, but it is part of any reliable system. Stress testing a financial plan is practical for determining what things we should be doing that are in our control and help manage expectations about the future, so we are not caught off guard. We can’t fully control any of the four categories discussed above. We can, however, implement reasonable spending and savings goals, address gaps in insurance coverage, make sure portfolio risk is in line with short and long-term goals, and identify, manage, and prioritize said goals and milestones.

Financial planning is a process that we would recommend for everyone and is a complimentary service for any Albion client. Please inquire with your advisor about starting or re-engaging the planning process. We all look forward to helping you to continue making a lifetime of good decisions.

Albion Community

In August we welcomed Daymian Vajda as our newest Associate Wealth Advisor. He has joined Senior Wealth Advisor Devin Pope’s team. A native of Southern California, Daymian recently graduated from Westminster College with a Bachelor of Science in Finance. Historically, he is the firm’s sixth Westminster alumnus. To learn more about Daymian, read his biography on the Team page of our website.

Earlier this month, CNBC announced that Albion has been ranked 50th among the top 100 Financial Advisors in the United States on CNBC’s annual FA100 list. We celebrate this recognition of our efforts and we are proud to provide our high standard of service to you, our client.

Finally, please mark your calendar to attend either one of Albion’s two year-end conference calls via Zoom on Wednesday, November 17th at 9am and 4:30pm. Visit Albion’s blog (albionfinancial.com/blog) for details to register.

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Weekly Market Recap

News regarding the pandemic was positive last week. Covid-19 case counts continued to fall in the US and globally, and on Thursday the FDA and CDC jointly announced new recommendations that made nearly 100 million Americans immediately eligible for a vaccine booster shot. All Americans aged 65 or older that originally received a 2-course regimen of either the Pfizer/BioNTech or Moderna vaccines are eligible, as are those aged 18-64 that either live in a long-term care facility, have underlying medical conditions that increase risk of severe disease, or live or work in settings that carry a high risk of virus transmission. In addition, all Americans aged 18 or older that received the single-shot Johnson & Johnson vaccine at least two months ago are eligible for a booster immediately.

Meanwhile, Q3 earnings season continued with a slew of strong results. With nearly a quarter of S&P 500 companies now having reported Q3 numbers, 84% of the results so far have beaten consensus earnings estimates, while 75% have beaten on top line revenues.

Against this positive backdrop for the economy, stocks rose for the 3rd week in a row, with the S&P 500 and the Dow closing at new all-time highs on Thursday and Friday, respectively. Rates moved higher, particularly on the front end of the curve as markets priced in a higher probability of a rate hike by the end of next year. Lastly, energy and other commodity prices rose, sending the Bloomberg Commodity Index to its highest level in more than six years. See the Chart of the Week for a time series.

This audio version of the Weekly Market Recap can be found in your favorite podcasting app. Search for “Albion Financial Group” and subscribe!
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Albion’s Year End Conference Calls

All clients and friends of the firm are invited to attend. Register in advance for these presentations below.

After registering, you will receive a confirmation email containing information about joining the call.

When: Nov 17, 2021 09:00 AM Mountain Time (US and Canada)

Click the below to register for the Morning Conference Call


When: Nov 17, 2021 04:30 PM Mountain Time (US and Canada)

Click the below to register for the Afternoon Conference Call