Good afternoon and thanks for joining us for our market and economic outlook webinar. We hope you find the content of value and always we hope you are well safe, healthy and navigating what remains is still very difficult period as well as possible. I am Tim Holland, I am the Chief Investment Officer of Orion O CIO, which is Orion's outsource Chief Investment Officer offering. And I'm joined on today's call by my friend and my colleague Rusty Vanneman, who is Chief Investment Officer of Orion Wealth Management. Now some of you may notice that Rusty and I have taken on new roles and responsibilities at Orion and we are both super excited to be in our respective seats and look forward to working with you all going forward. For today's call, I'm going to take about 20 minutes or so and share our thoughts on the outlook for the economy and the markets at a very high level. Including how the banking price, including how the banking crisis could have made both a recession and a new bull market more likely. And Rusty is going to spend about the same amount of time, excuse me, digging in much more deeply into the markets specifically where we see opportunity today. And at the end of our prepared remarks, we'd be more than happy to take your questions. And hopefully on your screen, you'll see a Q&A widget, lower right part of your screen. Please type your questions in there and we'll do our best to answer them as as we finish our prepared remarks. So with that all said, let's get going. You'll see our cover slide, market review and outlook and you'll see the cover slide for my section which we're calling Wall Street versus Main Street. And again, we're going to address recession risk, the possibilities for a new bull market and dig into the banking crisis. As it concerns recession risk, this economy sure has proven to be pretty resilient. We got the jobs report on Friday, came in a bit better than expected and the unemployment rate is pretty darn low. So the recession we've been increasingly worried about hasn't shown up just yet, but we do think the economic data could get weaker into the back half of the year and you've seen some cracks in the broader economic picture including the the labor market. As it concerns a new bull market, we'll talk about why we think we can enter one and we're technically not all that far away from a new bull market. And we'll dig into again the banking crisis which continues to dominate the news on Wall Street. But first, a couple of three slides if we could, just looking back on last year, right, the S&P as the graph lays out on the right hand side was off about 18% for the year and it was a tough year, the geopolitical construct, the awful events in Eastern Europe. The Fed raising rates at a historically fast pace were among the factors that pushed stocks and bonds lower last year. So 2022 was difficult and somewhat historically difficult, and this slide's a bit busy. But what it essentially tells you over the last 90 years or so, there have only been four or five years out of all those years where stocks and bonds are both traded to the downside. And if you look at the scattergraph from the right hand side of the slide, that lower left quadrant, you'll see those four years on a total return basis. And that was last year, 1969 where inflation was beginning to run away from the Central bank, from the Federal Reserve 1941, which is the onset of World War Two for our country in 1931, which was the onset of the Great Depression. So last year was pretty darn tough and pretty unusual. And and so if you think about that and not to jinx it, you know the slide that you see on the screen right now looks more specifically at stock market returns, but you see that the S&P tends not to go down two years in a row. It does happen. It has happened, but it's pretty darn rare. And if you think about the fact that stocks and bonds have both only traded lower at the same time on a calendar year basis four times over the last 90 some odd years. You'll sort of understand why we've titled the last two slides. What are the odds? So we think the odds are, again at the risk of jinx in it, pretty low that we're going to see risk assets due this year, what they did last year. And so far, at least as we sit here at 4 O 4:00 PM Eastern Standard Time on May 9th, the S&P is up 7 1/2% year to date and the Bloomberg aggregate is up 2 1/2 percent or so. So, so far so good. So the recession question, again, we've been increasingly worried about a recession, and so far we haven't gotten one. We think that's a good thing. Recessions are just terrible. The consequences for most Americans, from a financial and emotional, even a health perspective are are typically devastating. So we're not wishing for a recession, we don't want a recession, but we still think that the chances are pretty good that we could get one, at least a mild one later this year as we think about the finding the recession. The unofficial definition is laid out on the left hand side of the slide and that is 2 consecutive quarters of negative GDP growth, which we actually got last year, Q2 and Q3. On the right hand side, there was the official definition of a recession, the arbiter there being the National Bureau of Economic Research. And it's a much more comprehensive look at the economic cycle, the business cycle, and it goes way beyond just two consecutive quarters. Of negative GDP. It looks and weighs heavily consumer sentiment and spending and income. So the NBER hasn't told us we were in a recession last year. They haven't told us we're in a recession now. The interesting thing or the tricky thing about the NBER is it tends to tell you you're in a recession only after you've exited the recession. So recessions are rare. the US economy's only been in recession about 10% of the time over the last 40-5 years, so it's not a good idea to bet on a recession. But we think there are any number of signs pointing towards a recession later this year and we lay out those those factors on this slide and the next slide will speak to them in visual or graph form, But not to dig into each one, but to call out a couple. You've got an historically aggressive Fed and it's not just the Fed, but central banks around the world have been tightening. The yield curve here at home, which is a pretty good indicator of a future downturn is meaningfully inverted. Where the Fed thinks the unemployment rate's going to get to from where it is today, you've never seen that kind of jump without a a contraction in the economy and the housing market, though still at elevated levels from a price perspective, is cooled and we've seen a precipitous drop in the money supply. So again, recessions are rare, but there are signs pointing towards them, towards one, and the last bullet point is is certainly worth digging into. And that's the banking system stress, which is a sort of another way to think about financial tightening. Fed Chair Powell after the March FOMC meeting even spoke to the banking crisis with Silicon Valley Bank and Signature and First Republic as being a de facto rate increase Because it tightens credit conditions, it makes it harder to get access to capital. He wouldn't say how much he would think of that de facto rate increase translating into basis points from a Fed funds rate perspective. Some folks have said 25 basis points, some other folks have said 100, but it certainly hasn't helped the economy and it hasn't helped access to credit. So just to call out a couple of those points in visual form, the lower left, the unemployment rate is at 3.4%. the Fed thinks it's going to get to 4 1/2% this cycle. At the Fed's June meeting, we'll get an updated dot plot. There's some of your economic projections. And we'll see what they think about the unemployment rate on a go forward basis. But you've never seen that kind of jump in the unemployment rate without getting a recession. So if the Fed's right, it's kind of hard to skirt the recession given their expectations for the labor market. And then upper right the yield on the US 3 month bill is well above the yield in the US 10 year note. And historically when that's happened it implies challenges in the banking system again access to credit. Credit formation and you tend to get a recession down the road. So again the consumers hanging in there, the jobs market, even though there are signs of weakness that's been hanging in there too. But we do think there there's a very good chance of a mild recession in the back half of the year. OK. So the banking crisis which is very much front page news again last week with JP Morgan taking over First Republic, but it obviously goes beyond First Republic. It began with Silicon Valley Bank on the West Coast signature. Bank on the East Coast and First Republic is sort of a bicoastal or was a bicoastal franchise. So pretty much what happened to Silicon Bank have happened to Signature and happened to First or First Republic and and broadly speaking what they had in common with the following, they all had pretty concentrated client bases. They experienced massive surges and deposits over the last couple years. A lot of those deposits were uninsured, you know, especially relative to their peers. And when all that money flowed in, they bought, you know, what they thought were safe, safe assets like mortgage-backed securities and treasuries. But as the Fed was raising rates, those fixed income securities went down in value and and and the banks had to mark those losses from an accounting perspective even if they weren't necessarily selling all that paper, but the value of those securities dropped in value. As the Fed raise rates and then as depositors began become a bit more concerned about the viability of those 3 institutions silicon and signature in First Republic, they started to pull deposits which became a self fulfilling sort of phenomenon. And it was just the an oldfashioned run on the bank and it happened across all three franchises. That said, and we'll talk about this in a little more detail, what we feel for the investors in those institutions, the people that held the stocks and the bonds that were issued by those three banks, you know, we don't think it's a systemic dynamic. We don't think the economy of the banking system is facing systemic risk. A big part of that has been the regulatory response. All three banks have been acquired in one form or another by better capitalized, bigger institutions. And and the block of text on the left hand side of the graph is a bit busy, so I apologize. But it's important from a regulatory response perspective. And what the Fed has done is stood up something called the Bank term Funding program, the BTFP. It's a $25 billion line of credit which allows banks to borrow against those fixed income securities which are probably down in value a lot because of the interest rate environment, but lets those banks pledge those securities at par value, not where they're marked right now. So if another bank is facing a deposit run and they've got a loan, a securities portfolio, they can come to the Fed and borrow billions of dollars to, to sort of offset those withdrawals or those outflows. So we think the regulatory response has been meaningful both from an acquisition perspective and from a Fed liquidity support perspective. So it doesn't mean that there won't be other shoes to drop, but again, we don't think it's systemic and on this slide. If you want to sort of get a pretty good, we think visual representation of just how unique and not in a good way silicon signature and First Republic were. You know I would look on the left hand side of the slide that that bar graph signature silicon and First Republic had meaningful amounts of deposits that were running short. So anything over $250,000 breaches the FDIC. A backstop limit. So if you're a small, say, trucking company on the West Coast and you have half $1,000,000 in one account in Silicon Valley Bank and you're starting to worry about the bank's financial viability, that $500,000 is not insured. You're going to pull that right. And so left to right, you know, Signature Silicon and First Republic had meaningful percentages of their respective deposit bases that were uninsured. And so those deposits were most likely to flee at at signs of concern or or financial risk and and that's what happened, but they're outliers to a large extent. So again, we don't think those three banks represent the broader banking system. So what does it all mean? We've touched on this a little bit already. The risk is ongoing, but we don't think it's systemic. It's not 08, it's not 09. We're not talking about massive backstopping of capital markets companies and insurance companies like 14 years ago. The regulatory response has been meaningful. Most banks are very well capitalized. The system's well capitalized. We're going to talk about that in a second in greater detail, but we wouldn't be surprised to see other banks come under pressure. And you saw some of that last week, specifically Western regional small midsize banks. So we're not necessarily through the banking crisis, but at least as of now, knock on wood, we don't think it's systemic. We don't think it threatens A broader, broader economy. But again the risk and the stress in the banking system has tightened credit conditions which is not a good thing for the economy and access to credit and capital. And we speak to to that de facto rate increase on this slide and it's really the graph on the right hand side. the Fed does a senior loan officer survey where they go around the country and they ask loan officers are credit conditions getting tighter or easier, meaning are you making it easier or harder for your customers access credit? And when those lines are going up, those loan officers are making it harder for for companies to get access to credit. And so again, that's a de facto tightening because the cost of credit is going up and we really haven't seen that come in yet. If anything, it continues to move higher. Now on this slide, these two graphs are a bit small from a text or font perspective, I apologize, but why we think it's not 08? Should call your attention to the to the graph on the left hand side. It just looks at bank equity capital ratios, how well capitalized is the system in O8 and O9 equity was about 4% aggregate common equity, 14 years later it's 12%. So banks just have more capital on hand and higher quality capital. So again we don't think it's it's O 8 not to want to have our cake and eat it too. Which is always a pretty good thing, I guess. But there are reasons and signs and and and and data points that indicate we could avoid a recession or if we go into recession, it could be quite mild. And we lay those out on this slide and we talked to them in sort of visual form on the on the next slide. The consumer's still in pretty good shape. The unemployment rate's 3.4%. Even if there's signs of weakness in the jobs market, it's hard to bet against the US economy when the consumer can get a job. Because the consumer 70% of our economy so hard to bet against the economy if the consumers doing okay, there's still a lot of excess liquidity in the system. That policy response from the pandemic and housing prices and we graph this out on the slide are off their all time highs but still pretty elevated. So homeowners have a lot of equity and a lot of those homeowners have 30 year fixed rate mortgages at very attractive. Rates and inflation's gotten a lot better. It's easing this week. We get to look at the consumer price index and producer price index for last month. So some pretty big inflation data points coming coming this week. And again, we just don't see that sort of dislocation in the economy, a bubble that is on the verge of popping that could torpedo the broader economy the way we got with housing 15 years ago, excuse me, So, so far so good. But as we talked about the market, the economy tied all together. At the risk of again sort of telling us stuff, we already know the market isn't the economy. They're linked, but they're distinct. And so if you do start to see a bit more weakness in the labor market, maybe some unpleasant headlines in the back half of the year, it doesn't mean the market can't be okay, won't be okay, you know, even as the macro data maybe gets a little more unpleasant. And so all we're doing with this slide is calling out, you know, the 09. Market bottom The 2020 market bottom in the 2002 market bottom relative to the business cycle and the idea that the headlines will get worse as the economy gets worse. But the market will likely have already found its footing and what's probably my favorite of the three is the one on the right hand side. Looking at 09, the market bottom on March 9th, 2009. The S&P. Did you know? A couple days after this? Rather unpleasant. Deadline. So the basic idea being the markets forward-looking and if we are going into a softer patch where rates may come in, the Fed is is close to pausing and and and maybe not too far away from even cutting. That should be a more benign backdrop for risk assets. And again so far at least bond yields are lower this year relative to where they went out last year and the markets up about 7% and growth stocks which are typically quite sensitive. To the macro environment and interest rates have done really well. Again, just a reminder that the market isn't the economy. The idea being that if we wait for all the bad news to pass and to get nothing but good news from an economic perspective, we're probably going to miss a lot of that move up again the market bottom in March of O9 when the headlines were about as dire as they could get. So typical recession runs for about 10 months if we do go into one. The market tends to go sideways during that period, starts to move quickly higher and again if you wait for an all clear you may end up missing some pretty powerful moves in in risk assets. OK, bull and bear markets again telling us all stuff we already know a bear markets a drop of 20%, a major index, a new bull market is something you get when a major index is up 20%. So we think knock on wood even if the economy gets a bit worse. We could exit the bear market and at the risk of drinking it. Again, as we sit here at 4:19 Eastern Standard Time, the S&P 500 is up 18% from its late 22 lows. And so we're about 2% knock on wood away from a new bull market. So we'll see. But why we think we can make that exit, A lot of this does go back to last year and how tough it was. Sentiment was awful. When people are very bearish, that's bullish. The drawdown in risk assets last year made equities much more attractive. Earnings are still going to grow, knock on wood this year and even Q1 earnings which were initially projected to be down mid to high single digits may even come in positive depending on the rest of the reporting season goes. We got through a very contested again election cycle. The geopolitical construct, as awful as it is, is something at the risk of being callous or coldhearted or at least sounding coldhearted or callous is something we've kind of gotten a little used to and we think the Feds. Closer to being done than not. And right now at least the market expects a Fed pause at its June meeting. And again the banking system stress we think has gotten the Fed to that pause position if they really are there sooner than they would have and if it really is impacting credit and access to credit probably to a, a, a, a actual cut sooner than the Fed would have gotten there. So again, calling out those bullet points in graphic form to call out just a couple lower, right, that's what the Fed did. You go back to March of last year, they had 25 basis points and then it was just off to the races. the Fed raised the Fed funds rate by 75 basis points, 4 consecutive meetings in a row. They had never done that. And then they've downshifted. And again, knock on wood, not that we want a recession, but if things are softening a bit, we may be pretty much at the end of that cycle and lower left. The consumer price index, which hit high single digits, the worst inflation in 40 years has started to roll over and and knock on wood again, we'll get a good. Inflation print or prints later this week with the CPI and the PPI and I already touched on this, but to go back to what was a very unpleasant 2022 and a particularly unpleasant September, October period. You know, I know we remember this even if it wasn't fun to live through it. But the graph on the upper left part of the slide speaks to the S&P. You know, through last year we were off 25% peak the trough last year, which is a pretty meaningful downturn. And so the S&P again, knock on wood bottomed in October and bond yields just raced higher And 2021 and 2022 is the Fed finally started to get serious about trying to tame inflation and probably peaked out, at least so far 4 1/2%. So if you go back five, 6-7 months, you know it looks like inflation started to roll over. Hopefully that's still the case. the Fed began to downshift from 75 to 50. We got through another very contentious and contested election cycle. Sentiment was very bearish. That tends to be bullish. Valuation was reset and you know we got into the third year also from a political perspective of the presidential cycle, which tends to be if history is going to guide, the best year for risk assets. So as we go into the end of the first half and get into the second-half of the year, our thinking is. Wouldn't be surprised to see some tougher macroeconomic headlines, but but we think risk assets which which have done Okay already can continue to move higher as bond yields if the Fed is just about being done from a rate hiking perspective, continue to come in. So with that said, I'll turn the webinar over to Rusty and Rusty's going to take a much, much deeper dive into the markets and in particular where we see opportunity today. Rusty. Tim, thank you. A lot of great slides, a lot of great talking points, particularly some of the key issues that are top of mind. I know a lot of advisors and investors Speaking of top of mind, we're getting a lot of great questions already. So again, submit questions. We're going to have plenty of time at the end. And I know one question that has come up is, will the slides be available afterwards? And a couple hours after this presentation, there will be an e-mail that does go out. So in terms of my agenda, I'll be talking about five factors that drive stock market returns and these five factors. Are the five factors that will be part of our reformatted market barometer. It's been a big hit with advisors and investors, our own sales people using the barometer kind of capturing our thinking and we're going to be moving it to a five factors and we'll kind of walk through some of the the key things we're looking at it under each of those. We'll also talk about why diversify and of course we always believe you need to be diversified, but we think there are a couple different areas of the global markets that we think make a lot of sense right now. Now the first factor is fundamentals. And when we talk about fundamentals, we're really talking about the fundamentals of companies making this or making money. So when we're looking at growth, it could be growth of earnings, of revenues, of dividends. We could be looking at profitability numbers and profit margins. We could also be looking at credit spreads in terms of the quality of companies as well. So what's the first thing, let's look at historical earnings growth and. To think about the return on any investment, there's really three basic building blocks for a return on an investment. First of all, there's the yield, what is the income you're getting from that investment to what is the growth of that yield over time? And the third component is changes in valuation. So terms of the valuations of that asset you're buying, the 2nd component is really the growth component and this is looking at growth going back to the 1920s for the S&P 500 that. The squiggle line is like the the earnings growth for the SP over that time, but you'll see that trend line that the line in the middle is about 5%, so 5% compound annual growth rate going back to the 1920s. That number is cyclical, but it's pretty steady over time as well. And the 10 year average as of the end of last year was about 7%. You see see that blue line is a little bit above the Gray line. As for this year, Tim already mentioned it is that analysts are expecting earnings growth of about 1%, still positive for this year, but I think those numbers are improving. We'll get into that a little bit here in a second too. This chart here is one of the charts that we look at. Again, these are all inputs that the portfolio management team uses in terms of making investment decisions for the portfolios. But this is one of the slides and kind of one of our decks and this is looking at the Russell 3000. So the Russell 3000 again is the total market. So it's not just the S&P which captures. Basically just large cap securities, but the Russell 3000 also brings in mid caps and small caps. We have three different lines there. The green line is looking at EPS growth. So that's the earnings number and that's what we're really talking about here. But you can also see sales growth and dividend growth and currently we're looking at earnings growth which is -, 3% over the last year. Again that compares a long term average of 5%. Now, what are some key takeaways from this page? Well, when it comes to any sort of data point that we use for investment decision making, there's two different things you're looking at, You're looking at the level of that data point, you're looking at the trend. And so in this case, neither one of these numbers are exactly positive. We're actually below average and it's still trending lower. However, our investment team thinks that really the overall fundamentals backdrop is kind of more neutral and here's a couple of reasons why. First of all, this earnings season, even though earnings growth is going to look like this would be slightly negative for the quarter, though there's still a chance to get officially end up being positive for the first quarter. It's actually been kind of pleasantly surprising and in terms of the upside and first of all, we have seen nearly 80% of companies beat earnings expectations. Now the earnings game is it's it's it's sort of game quite frankly by Chief Financial Officers. Usually two out of three times you'll see an earnings report come out of beats expectations. For 80%, that's a pretty healthy number. And the second thing which is pretty healthy is that guidance for future earnings has also been pretty strong, at least more positive than people have expected. So it's very encouraging also historically earnings in terms of when you look at the earnings picture and look at forward stock market returns, it's usually when earnings are low at bottoming, it's starting to improve is usually one of the better times to be in the market. So level of trend is still not positive, but we feel like we could be near a turning point somewhat soon. Now the second thing is valuations. Again, it's one of the three key parts of the building block. Again, we have yield, you know, growth of the yield and also the changes in valuation. So it's an important building block. We consider valuations A slight negative at this point. Again, there are some negative aspects and there's some positive aspects and we'll kind of walk through some of that right now too. So first of all, looks at the current price earnings ratio and this is a chart that again we use internally on the investment team. I kind of explain what's going on here. So this blue line is the last 12 months price earnings ratio. So again, it's not price, it's actually looking at valuations. That red line is a quarterly moving average and the yellow line is the annual moving average. So couple things to look at. So again, level and trend. So first of all, when it comes to the level. A number of about 18 times price earnings ratio, compare that to the historical average about 50 and 60. Now Tim mentioned the 10 year average. I'm actually going back a little bit farther on this. So I'm going back to in this particular case in the 15 and 16 this, this data goes back to like 1920. So it's a it's a longer term number. So this valuation looks a little expensive. Now I could argue that this current valuation is actually pretty fair because transaction costs are a lot lower than the historically have been. Information costs are a lot lower. Taxes and interest rates compared to long term historical averages are also lower. So you could make an argument that it's a pretty fair price earnings ratio on the counter side, if we're looking forward, given sort of the debt overhang and demographics, you could say that it might still be a little expensive. Anyway, let's interpret this chart here. So first of all, the blue line has contracted a lot over the last two years. That's a 30% contraction in valuations. That's a big explainer about investment terms over the last couple years. So what's the positive? The positive is that again, it's level and trend and the trend evaluations has stabilized here since last October. You can see the blue line is basically progressively making some higher highs and higher lows. We're above the quarterly moving average. So for the time being, it appears that. The trend is no longer moving lower, at least that's what we hope. Let's talk about another evaluation measure. You might have seen this mention, this called the Cape ratio. This is a cyclically adjusted price earnings ratio if using 10 years of data. And the reason why you use 10 years of data is it smooths out the cycles of the economic cycle and it's also looking at earnings after inflation. In this particular case, we're looking at data goes back to the 1870s. There is a website out there that's free. Anybody can play with. It's the Schiller website. If you look at the Cape ratio for the S&P, it's currently, the long term average is currently 17 and we're currently looking at 29 for the US market. That obviously is pretty expensive and it's pretty hard to sugarcoat that. In particular when you look at the Cape ratio is even though if you kind of look at historically when it's also been this high, that's obviously in recent time periods, but the only other times are 1929 in the.com era. Not exactly great times to buy the S&P 500 now. We do think there are some potential positives, however, and this is just looking at the US market. So if we look at keep ratios for the 43 largest markets around the world, the United States has the third highest keep ratio at present. In fact, if you look at like the 25% lowest keep ratios, you can't take the average of that, that multiples at 13 times, that's below average. That's actually expecting above average returns moving forward in the years ahead. Again, one thing I should have mentioned about valuations is that if you take the grand scheme of looking at market history again it's really yield and and relative yield that really explains performance. But over the five to 10 year time frame, arguably valuations is the biggest determinant of both absolute and relative returns. So valuations, one more slide on this, this has got a little bit going on here, but I think this is a really useful slide and hopefully it's it's it's that's pretty educational as well. So we do actually publish this in our quarterly reference guide. And here we're looking at equity market return probabilities. And what we do is we look at the stock market every month going back to the 1870s and we quintile the market valuations for all of it. So when we look at the columns there, so quintile since 1871, if you look under that, when I say greater than 20%, that's talking about a market return. So what was the return for the stock market 10 to 20% is obviously return 5 to 10%. The bottom row is below 0%. So obviously that's when the market lost ground. The bottom column is looking at the average return for each of those quintiles. As for the quintiles Q1 lowest, that is when the stock market has its lowest valuations just for A-frame reference as a price earnings multiple of around 10:00. And we progressively moved to the right which is looking at the highest multiples which is around 19. Now 2 questions come up. So I just talked about how the market is expensive. So two easy questions to ask is, 1, does this mean we're going to have a greater chance of a bear market? And two, what are the chances or how does that impact expected returns moving forward? I'm #1 the chance of a bear market increasing, believe it or not, It doesn't really material impact, the chances of a loss. If you look at that bottom row, which is the sub 0%. You'll see that basically for four to five quintiles, you have a 30% chance of any given year in the market. Again, the market generally has a 70% chance of generating a positive return, a 30% chance of a negative return. It doesn't really change if the market's expensive. What it does change is the chance of the loss of the market is cheap. So in terms of greater chance for bear market, not necessarily case you look at history, but how does it impact expected returns? And that is the bottom row and again this looking at a one year number. So again a lot of times a year valuations only matter over 10 year time frames, but they actually do matter even over the one year time frame. When you look at when the market is expensive, the average return during that time frame is 6.7%. That's the number in the lower right hand corner. And you'll see as the market gets cheaper, the average return actually gets steadily higher up until the cheapest quintile with returns of 15.3%. So valuations matter and starting points matter as well. So again, in terms of valuations, we have that as a slight negative. the US does look pretty negative, but there's a lot of areas we're going to talk about, some coming up. So we think there's still a lot of good reasons to stay invested in State Diversified despite the fact we have those higher P/E's. So let's look at interest rates and interest rates. We also have a slight negative despite the fact that in historical context, interest rates are still pretty low. And it looks like hopefully interest rates are not moving higher for the time being as well, at least on the longer end. But we do have negatives and the first negative Tim already talked about this is the yield curve, this is putting pressure on financials. It's hard to have a really highly functioning economy when the financial sector is also struggling. Again, it's it's just simple if if the if banks are paying out savings at you know 4% and you know their their their securities they have investing or actually getting lower returns. Puts a lot of pressure on financials and insurance. They they don't want to loan as much debt and moving forward is that just kind of it's not a negative for the economy and leading us to say an inverted yield curve again inverted is when long term rates are shorter than short term which is abnormal, tends to be a leading indicator of recessions moving forward as well. So that is not a positive, another kind of negative also given come from interest rates is that. Interest rates are a lot higher. So now they've become a lot more competitive versus the stock market. There has been expression in recent years called Tina and which stands for there is no alternative. It's kind of an argument for going into the stock market, but now obviously the bond market is offering much higher interest rates. Next we go on to policy and policy is something that can obviously impact all the variables we already talked about in. And basically we're looking at a monetary and fiscal policy and how it impacts interest rates, valuations and earnings and liquidity in the system could be a major driver of stock market returns. I know Tim has talked about this. I've talked about this in the past is first of all, let's just think about the presidential cycle, which suggests that the third year in a presidential election cycle tends to be the best year in the market I've been in the industry for. About 35 years now. And it's amazing how often the 30 year tends to be one of the stronger years, not the strongest year in the cycle. And kind of that the idea is that monetary and fiscal policy tends to be better than average for the economy and the markets in the average return since 1945 in the 30 years about 16% and as Tim already mentioned, we're almost at 10% for the year. Now let's talk about potential negative and the reason why ultimately we got policy is sort of a neutral reading and that is don't fight the Fed. And the Federal Reserve right now is raising short term rates and that's kind of one of the cardinal rules is don't find the Fed. Fed raising rates is going to make the the market conditions tough for stocks. And even though the markets do think the Fed's going to stop raising pretty soon, the Fed's not saying they are. We are looking at various inflation measures all the time. Inflation expectations, even though they've been somewhat contained, they are starting to uptick a little bit. You know, if I had to make a bet between the markets and the Fed, I think I would take the markets every time. But I actually do wonder here if I might actually take the Fed in this case. You know, one big argument for a lot of people thinking that inflation is going to plummet is the money supply. And this chart to the right is pretty fascinating. Money supply has plummeted. I mean, we did have the strongest fiscal and monetary inputs into the economy and markets. It's World War Two to fight COVID. And we've seen money supply come way off since then. You know, some it depends on the data series you're looking at. Some say it's the biggest drop in money supply since 1959. Some say it's the greatest drop in money supplies since the Great Depressions. Obviously there's a drop. However, there's a counter to that and there's the the the supply of money in the system and there's the velocity of the money in the system. And actually kind of a lot of people are reporting it, but the velocity of the money in the system actually is reporting some of its greatest increases ever. So that's kind of an offset some of that. I expect that inflation will still remain somewhat sticky and I would imagine the Fed will probably kind of stay where they're at longer than a lot of people would expect right now. Now let's go to a positive in the market and this is behavioral. So a lot of times we have a podcast called the Weighing Machine. So it's like a scale. And again the concept to that is really sort of that famous Warren Buffett quote who's quoting his mentor Benjamin Graham that. Over the long term, the market is a weighing machine. So it goes back to those first things we talked about. It's talking about earnings and how much you pay for those earnings and that the the stock market eventually kind of reconciles to that. But in the short term, the market is a voting machine. It's really about investor sentiment, it's about stories, it's about emotion, it's about positioning in the marketplace as well. We think this is a clear positive right now. First of all, it's because of investor sentiment. Now this is going to seem counterintuitive, but when investors are really negative. The market has a tendency to produce above average returns moving forward. It also a greater chance of return positive returns moving forward as well. And the reverse is also true. And so we look at the data. I'm going to have to explain this chart here too, but I think this is a great chart is we look at S&P 4 returns and we're looking at the American Association of Individual Investors. This is a free data series out there. It goes back to 1987. It's weekly, so you can play with the data yourself. And we basically quintile the sentiment level. So quintile #1 is basically the most negative where we are right now. And Q5 is when people are the most bullish. And we can look at what happens after these readings come out late Wednesday, early Thursday and what the return is the next week, four weeks, 13 weeks, 26 weeks and the next year the bottom row is the average. So what is the average turn over all time period. So for the course of a of a typical week, the markets up zero point, a positive 0.2%. Well, we see people are negative. It's actually slightly above average. And as we move forward, we can see that that consistently holds place when you even get out to a one year return. When investors are the most bearish is when the markets are having returns of over 11%. And when investors are the most bullish, there's returning about 5% on average as well. I think the investor sent in the backdrop is fascinating. Right now it's usually positive. Investors are generally wired to have a bullish bias. Wall Street generally has a bullish bias. Over the last 57 weeks, there's only been two times that the net reading on investor sentiment has been positive and over the last 76 weeks it's only been four times. I think it's fascinating. This is not only a valid investment input, but I also think it's a valid investment counseling input as well. I think all of us want to keep portfolios on balance, on plan and a lot of times when when people are getting nervous, you can just look at the data and usually the market is cyclical and it and it flips around shortly there after that. Of course when you look at behavioral, the ultimate Analyst is looking at prices and you will hear the expression technical analysis and that is looking at the study of of prices within the market. And this is a chart again we use internally. You'll probably see this again as we look at the Russell 3000. So that's the overall market. The blue line in this case are prices and again the red line is the poorly moving average and the yellow is the annual moving average. This is a pretty positive picture despite all the negative sentiment, it's really amazing and investor sentiment is this negative given this. The blue line is we're seeing, you just simply look at the chart, we're getting a steady progression of higher highs and higher lows at this point that's a positive. The prices are above both the quarterly and the annual moving averages. So this is giving us a positive signal at this point. Now let's talk about why diversify. So I talked about why the overall U.S. market which is dominated by large cap growth stocks is in. That's really reason why those valuations are so high. Why should we diversify and what are their opportunities to diversify? And here's a chart that again we produce these charts on a monthly basis. They're actually was just published in the weekly wire. So you get the weekly wire. We do actually have a link to the monthly chart pack as well. And let me tell you how to read this chart. So this is looking at U.S. stocks versus non-us stocks going back to basically the beginning of the century. That yellow line in the middle is sort of that average relationship between the two. So it says that. On average that U.S. stocks have traded a 33% premium to non-us stocks. I think it makes sense US deserves trade a premium for a combination of reasons. However, U.S. stocks right now are trading at a 63% premium, so nearly double that. So that could be a pretty good argument to if you don't have enough international exposure is a wrap. Diversified international stocks coming in today has or coming into this week of outperformed internationals outperformed US by about 10%. So you got relative performance and you have relative valuations working for non-us stocks. Another thing to point out just for A-frame of reference, if you look at the global market, it's about 60% US and 40% non-us just as A-frame of reference. Another similar charge is small cap stocks. We're looking at US small cap stocks as the beginning of the century. Small cap stocks on average have traded at 20% discount, but you can see by that blue line it's, it's oscillated to being a slight premium. It's been recently trading at a 50% discount. As I'm reading this, I see a typo in the second line. It should say small cap stocks instead of value stocks. But small cap stocks right now trading at a huge discount relative to that long term average. Again, we think this could represent opportunity and and also insurance. Small cap stocks are poised not just generate in sort of average returns but even above average returns moving forward. Here's A-frame of reference for small cap stocks. So if you look at the Russell 3000 that we've talked about so. When you think about when you break down the Russell 3000, the top 200 stocks are considered large caps, the next 800 are considered mid caps, and the next 2000 are considered small caps. Now that's just the number of names, but if you look at market capitalization, 70% of the market is considered large caps, 20% small caps, and 10% small caps. Just kind of handy frame of references when thinking about building portfolios. Let's look at value stocks just on a global basis and global basis, value stocks trading at discount as well as they should. They are value stocks. They trade at lower valuations. They have on an average it's been about a 30% discount. Over time, you've seen that has changed, anything from a 15% discount to a 50% discount. Value stocks have been outperforming. They've been outperforming not necessarily this year, but over the last year and three years now and they're still trading at a 42% discount. So value stocks again have relative performance and relative valuations on their side. We have lots of resources. I've kind of mentioned a couple of them. So I think we've got some links to some of these things. I've mentioned some podcasts, market commentary, quarterly materials, blogs, a lot of stuff. But I'm going to quit talking because I know we have a lot of questions coming up. Tell me you ready as ready as I'm going to get, I think and remember you get the tough questions. That was no, no, no, we already worked. No, wait, we worked it out ahead of time. You were going to get the tough questions. No, that that was great stuff, Rusty. So thank you very much. We've got time for a couple questions and Rusty's points and great ones have come in. Rusty, I'm going to throw one to you and this goes back to what you talked about earlier, earnings and and it's it's it's a very thoughtful question in that a lot of times you know the market looks expensive because earnings are flat on. On, on, on the back and sometimes the market looks pretty inexpensive, but earnings are sort of running through the roof but also peaking. So how do you sort of thread that needle as someone who's looked at the market over so many years and and and sort of valuation inflection points, how, how would you speak to that great point? And there's truth to that too. So three quick things. So that definitely is the case for more cyclical stocks. So a lot of times for instance, you'll see very cyclical stocks have depressed earnings, but. Again, they're down and out. That's really a good time to buy them. Secondly, a lot of times we'll look at alternative valuation metrics besides earnings as well. And then the third thing that's a big reason why a lot of people like to use that keep ratio because it takes a lot of that cyclicality out of the earnings over a 10 year time frame. Got it. Yeah, they're all good, all good points. And then another topic that's been in the press lately is, is commercial real estate. Right. We've got inflation, the geopolitical dynamic. We also have the debt ceiling standoff right now. And memory serves, President Biden was meeting with the leaders from Congress both houses today. I don't think anyone was expecting much to get done. It's their first sit down. But if Secretary Yellen is correct, the federal government could be in in a bit of a pinch from a cash flow perspective come June 1. That all said, tax receipts continue to come in and the federal government can prioritize what to do with those receipts. So a default doesn't have to happen even if we don't get a debt ceiling done in into June. But I but I think you know, like many on Wall Street, while it probably won't be a pretty process, we do think a deal will get done and and get done soon enough. So I didn't mean to hijack that the question about real estate, but obviously real estate, commercial real estate. Some of the problems and some of the urban urban cores of Chicago, San Francisco vacancy rates that the press has reported on higher interest rates and and lower property values is something that Wall Street's concerned about. So we did get a question about that rusty and and commercial real estate and the impact there especially for the banking system. So I don't know if you have any thoughts we've we've started to peel that onion a little bit in terms of loan value and exposure. But let me throw it to you first and then I'm happy to have to add my two cents. Well, I think it's a valid concern, you know, and as risk managers we gotta think about what could happen in the marketplace. I do think that real estate is a concern. You know, I have to as an investment manager too. It is, you know, Warren Buffett and Charlie Munger just had their Brookshire Hathaway meeting at Omaha this past weekend and kind of going back to Warren Buffett comment is that as investment managers you're basically. You are basically interacting with Mr. Market every day and you know, so you're sort of taking advantage of Mr. Market's emotions. So as an investment manager, I almost feel like there's opportunity coming up in that sector and opportunity in the marketplace is particularly if we get you know some sort of reaction in that area, I wouldn't be surprised if you know prices did move lower. That would be an opportunity to buy. And and and back to sort of the idea of peeling the onion a little bit and these are big numbers, so you know you you probably have to take them all with a bit of a grain of salt. But you know the the math we've seen and it's something we've talked about across the investment committee is that the commercial real estate market from a debt perspective is a four to $5 trillion market. So it's a huge. Number, but not all that's held by banks. The number we've seen there is 1 1/2 to 2 trillion which is still a big number and not all of you know sort of commercial real estate is office space. So you've seen some headlines and articles about again downtown San Francisco and New York City is people maybe don't come back to the office more than a couple, three days a week and people can live and work in different parts of the country so. Commercial real estate isn't just office space. Manufacturing by some accounts is a bigger category than than office space. And so you know, always good to sort of look at the data and parse the data and go beyond the headlines. So big numbers for sure. Billions of dollars in in office space tied mortgages to to be dealt with this year for sure but by most accounts office. Makes up about 1516% of commercial real estate. Again, there's manufacturing and healthcare and and and retail and and not all of that paper by by a stretch, not not all of that debt by any stretch is held just by bank. So there's probably some pain to come, some shoes to drop, some loans to be written down. But commercial real estate as we all know is is much more than than downtown office space. So hopefully that that helps there. And then we have time, I think for one more question. We're just at about 4:50 and Rusty, this is in your wheelhouse, so I'm going to throw it to you. I need my reading glasses as we get older. This is, this is what happens, this question about diversification, any thoughts on how to talk to clients about the need to balance portfolios? You know, especially when you're looking at maybe market that's been dominated a little bit year today by by a handful of stocks, right. You know the mega cap tech stocks have done well, growth broadly speaking has done well. So if I understand the question correctly, which is a very good one, you know how do you sort of maybe make the case for broadly diversified portfolios in the face of the market that you know is being pulled higher but but some of that weight is, is is being pulled by a narrow part of the broader universe, if that makes sense. Well, it's an excellent question. I'm sure that most people have had this conversation at some point because the names that are dominating the market are again performing very well this year. They're darlings in the media and you know, even regarding you know, artificial intelligence, a lot of them are sort of writing on that as well. I I think it kind of comes back some of the points I made. It's maybe it's just the analysts and me kind of looking at relative valuations and just understanding what's on sale and what's not and they're just thinking about how the market is composed, so. If somebody is is very overweight technology stocks and get technology stocks, you know make up you know 2025% of the overall market and somebody has a lot more than that. I think there's a pretty easy argument just looking at those relative valuations that store that frame of reference. It is also interesting to note that. You know the the numbers I gave her that 702010 break out of the overall market between large men and small. Obviously that's sort of a kind of a rough number and it changes as the market moves. But I didn't read a headline that Apple itself right now is market capitalization is greater than all small caps combined. And then if you look at sort of those handful of top companies, they are dominating the overall market like they. The top names have never dominated the market in U.S. market history. So I've never seen such concentration. We've never seen such concentration in index funds as a result as well. And again, there would be risk in that because obviously you've got highly valued securities and very concentrated portfolios. If you think about those top five names you could own, what do you want to own those five top names or would your other own the entire utility sector, real estate sector? Energy, basic materials and all those combined are less than those top five names. So I feel like there's some pretty compelling arguments. And one more too is that historically if you look at sort of the the top ten list decade by decade going back over time, you don't see many names sort of stick in that top ten. We are in a very competitive marketplace. It there's obviously a lot of smaller companies that want to compete with the larger companies. And it's really stuff tough to kind of maintain those top returns. Yeah. One more parallel is I think we currently have a handful of names right now that do seem somewhat invincible, though they are. They get hit pretty hard. Last year is that it's not just similar even to like a 1970s experience. And 5050, those were 50 great companies. You could just buy them and hold them forever. It took a long time for a lot of those companies to sort of bounce back. So I think a variety of arguments could be used to kind of help that argument. All right. Thank you, Rusty. We're a little bit past 450 Eastern Standard Time, so we're going to wrap things up. Want to thank you all for taking the time to join us for today's webinar. Again, we hope you found the content of value. The slides are downloadable. If you go to the related content widget, we'll also push out a replay. And if we didn't get to your questions, we will do our best to circle back. But thank you again for your time today. Again, be well and we look forward to speaking with you all again soon. Take care. _1714099867453