Good afternoon and welcome to the September edition of the Orion Portfolio Solutions Portfolio Recipe webinar where we will be discussing the Aftershock portfolio this month. My name is Ben Vasky, investment strategist with Orion. As for the purpose of this webinar is really to help you, the advisor build portfolios And then on top of this webinar, we have plenty of resources that we're pushing out at Orion portfolio solutions, including additional content. But we also have this OPS investment strategy team that is here to really help you with anything platform related including building portfolios. So you can reach our team at that e-mail on the top right corner of this slide here. And then As for a couple of additional housekeeping items, at the bottom of your screen you will see a question box. Please submit questions there. We will have Q&A at the end of the portfolio for the last 20 minutes or so. I don't know if we'll get to every single question, but please submit them. And if we don't get to your question, we'll be happy to follow up with you. After that, in the bottom left hand corner of your screen, you will see a resources section. In that little resources box you will get today's presentation slides along with a few kind of helpful links around some additional resources around Ryan portfolio solutions as well as our guest today. So to introduce the theme this month of the Aftershock portfolio, in this post pandemic world, we've seen lots of sharply changing secular trends and the quote Aftershock consequences of these market events is kind of leaving investors confused about how we move forward. Just to give you a few stats on what these sharply changing secular trends have been, you know, we've seen the highest inflation since the 1980s. We've seen one of the highest Fed funds rates since the beginning of the century. We've seen the highest treasury yields since 2007 and since the beginning of the century, again in some maturities. And so it's really leaving investors wondering how are stocks going to perform? How are bonds going to perform? How should I position myself? And really how can active management across these different asset classes reduce volatility and keep our investor expectations in line with reality? So with me this month, I have two guest speakers. We have Joe Bell from Meter Investment Management. He's the Chief Investment Officer of funds and portfolios. Joe has 17 years of industry experience as well as five years of experience at meter. And then we have Justin Blazey, Executive VP and Asset Allocation Strategist at PIMCO, who has 14 years of industry experience as well as eleven years at PIMCO. So to start it off, I will hand it off to Justin to to go over his section and then we'll follow up with Joe. Justin, thanks. Ben, can you hear me? We can. All right. There's some technical difficulties earlier. So I'm glad everything went smoothly. Appreciate everyone joining today. I don't necessarily see the slides on the screen yet, but I will allow maybe Ben to help get them up or help us drive. Before we dive in though, I did want to just echo Ben's comments that it has been a volatile ride especially for fixed income investors the last three plus years. To put a finer point on kind of the biggest risk in fixed income credit and duration. We saw the largest credit event in terms of spread widening since the great financial crisis during COVID and that was followed by the quickest rising rates in the nearly 40 years. So it's been certainly series of highs and lows quite literally in the last couple of years. And with that, we know that most clients have in their minds the sour taste that last year's rise in rates had on fixed income performance. In general, we saw some of the largest losses, especially in some of the highest quality segments of the fixed income sectors that we've seen in nearly four decades. But the beauty of fixed income and we'll talk more about this today is that looking forward one can assess with a high degree of confidence potential outcomes for the long term investor and starting conditions are much brighter on the back of higher starting yield. If we think about the three key benefits most investors want out of the fixed income portfolio, all are strengthened with higher starting yield. Returns are anchored by starting yields to higher yields mean higher returns. Equity diversification is bolstered as yields have more room to fall in a risk off environment and capital preservation or the chance of negative returns or avoiding negative returns is also improved. Higher yields help mitigate further price changes from rising rates and widening spread. Now all of that may sound great, but many of your clients are looking at money market yields today, CD yields today and thinking that is the better option. So in the first half of this presentation, I'll explain why that's not necessarily the case depending on your objective for fixed income and then I'll close with more details on how we're positioning broadly fixed income portfolios to meet certain goals. So Ben, just to check, should I be able to see the the slides here or they already kind of up on the screen, you should see them on the screen here. We're currently on Slide 8. OK, great. If you don't mind if you guys have control, if you could keep it going, I see like kind of a a tile in the bottom, but not an ability to necessarily control them. So appreciate it. And if we could go to the next slide, actually you know it's it's probably pretty most helpful to start by evaluating the current environment. And as I mentioned earlier, it's no secret that yields the most fixed income sectors doubled or in some cases like agency mortgages or core bonds nearly tripled in the span of 18 months. As you can see in the the top row there. That led to some of the worst performance in the majority of fixed income per sectors in nearly 40 years. But the middle and bottom rows kind of highlight that more subtly. Returns have actually started to rebound. You know even with this modus further rise in yields on a year to day basis. So we can see that higher yields are already starting to pay dividends for near term performance and as we'll see in a minute are setting us up our clients up for stronger long term performance. So if we turn to the next slide, when we take a look back across the landscape today and look forward, we see that most fixed income sectors are fair to cheaply priced on the heels of last year's performance. Now that contrasts with equities or valuations. As you can see in the top right are in the richest quartile. And though gains have been strong in equities, they've really been concentrated in those magnificent 7 stocks like Amazon, Apple, NVIDIA and Google, largely in the back of expanding multiples. As we dive deeper in a fixed income, we see that securitized sectors like mortgages screen a fair bit cheaper than corporate credit, either investment grade or high yield with EM somewhere in between. If we turn to the to the next page thematically zooming back to take a bigger look out, we can see how strong of our predictor starting yields have been for future returns. Regardless of whether rates are rising or falling, we see a 94% correlation between starting yield and future five year return. So while you may see the durations around this in the short term like we saw last year in the long term returns closely aligned with starting yield. In fact you can see the period of largest under performance versus starting yields was in the late 70s on the far left of the graph when rates were rapidly rising, but that was followed by the strongest out performance relative to starting yield as rates peaked and started to fall. Similarly, as you look to the right hand side of the chart today, we're essentially coming out of the trough performance, which yields in future returns resetting higher. And we can see on the next page in more detail where we highlight our five year return expectations across a number of sectors. You can see fixed income has risen the most since the end of 2021. Equities increased, but only modestly. And interestingly, most sectors, if you look at the absolute level of return expectations are approaching equities. Many of these was about 1/3 of the volatility. Now cash returns have risen as well, but once you factor in where cash Shields are likely to land over the next five years, not just the next 12 to 18 months, ever returns end up being a fair bit less than fixed income over that horizon. If we go to the next page, we can see this is in part based on history. Here we analyzed the last seven hiking cycles dating back to the early 80s, and we see a pattern start to emerge early in the hiking cycle as rates rise and bond prices fall that leads to outperformance for cash. You see that with the red bars in terms of the early stages of the hiking cycle. But as hiking cycles start to come to its close and actually about four to six months before the Fed reaches its peak policy rate, bonds start to outperform again over the following 12 months. Those are the green bars that you see. This is in part because the market starts to anticipate a pause and eventual falling of rates which typically sees yields fall across the curb and that leads to price appreciation for bonds, the cash benefit that cash allocations do not benefit from. In fact, the opposite is true. As the Fed funds rate starts to fall, the return on cash starts to fall as well just as bond prices are rallying. And if we played this out over one in three years following the Fed peak and we'd look at the next page, we can see that it's not just core bonds that outperform but a range of sectors from multi sectors to munis. Those higher starting yields pay dividends quite literally over that longer horizon over the one in three-year period and you see that outperformance from cash regardless of what you're stepping into from a fixed income perspective on the next page. If we consider the environment that we're in today with resilient but ultimately weak growth, it's positive but it's modestly positive and the potential for a few catalysts to trigger even a milder session that's again we're high quality bonds have shine. Going back to one of the key benefits they provide which is equity diversification, we can see here flat to slightly inverted yield curve environments heading into a recession like we have today. They tend to be the norm during the recession. Funding yields fall on average a fair bit reducing the returns to cash. But even modest declines that you see here on intermediate rates can lead to significant gains on the bond portfolio. For example, with the Ag at six years of duration, that 100 basis points roughly of falling yields that you see here during a recession translates to about a 6% gain just from price appreciation even before considering coupons. And we know for all the reasons that we discussed, building fixed income portfolios have been increasingly challenging. And on top of this, it's important to consider the very different objective clients have with their fixed income allocation. I am guessing almost no one here has had a client come to them and asked for can I get 100 basis points over the Barclays Act, if they even know what the Barclays Act is, right. You know, For these reasons, five years ago PIMCO launched our model portfolios to put ourselves in your shoes and allocate according to our four looking views to meet meet different client goals. So if you turn to the next page, we show what those different models are and what those goals are specifically. If you go across the top, we have three different objectives again none of which are trying to beat the Barclays tag. One is capital preservation. So you have clients that you know especially a few years ago when yields are so low, but even today I want to earn more than a money market fund or more than cash deposit, but I want to take limited risk, limited total volatility, limited duration. That's what we try to achieve in our capital preservation model. Our enhanced core model is meant to be that fixed income and allocation in a multi asset portfolio, something that has equity diversification but is a much more diversified risk profile across both rates and spreads, not just pure rate risk like a core bond portfolio and can offer still an attractive yield and their income focused model basically goes one step further. We want to achieve a higher income but do so in a more modest volatility risk than just loading up on pure credit like high yield or EM straddling both high quality sectors as well as you know credit sectors. We can see the allocations when you look at the funds and start to dig in under the hood tend to center on our flagship strategies at best embody the characteristics of that model. So that's the short term fund for capital preservation, that's the total return fund for enhanced core, that's the income fund for income focus. It's another way of thinking of this is done ahead. If I can only pick one fund that gets me most of the way there, that's the fun. And then we lean into satellite allocation. Depending on our views, you can see leaning into other shorter duration strategies like our low duration and low duration income fund in the capital preservation model and leaning into complementary funds today especially up in quality bias strategies like our international bond hedge, our mortgage opportunities fund, our investment grade corporate bond fund basically core complements that we think will do well across a range of different environment. And then from a characteristics perspective, you can see the duration and yield stats towards the bottom, very attractive yields across the board, high sixes up to seven and part representative of kind of where the flat yield curve environment is today. And most environments you'd expect the capital preservation model actually the slightly lower yield overall and then more moderate levels of duration across the board, right explicitly low duration the capital preservation model by design and then more moderate levels of duration, the enhanced corn income focus model certainly relative to the six years of duration you see in the Barclays Act. So with these models we're trying to really smooth the ride for clients through what has been and and these models have done that through what has been a very challenging environment looking back. So that basically fixed income becomes your sleep well at night portfolio yet again. And for tax sensitive clients, if we turn to the next page, we also have our tax aware model which also might provide a little bit insight of how we think about blending municipal strategies with taxable bond strategies. So we know for accounts that are tax sensitive for higher income tax bracket clients, munis have a clear home, right. The after tax advantages are very obvious. But munis also come with a few trade-offs, right. They come with a fair bit of duration in sector specific risk. They're disproportionately impacted by what happens in the muni market and they may not always be attractively valued. You know, there are times when taxable bonds are quite attractive as a as a compliment. And so therefore, we center our our tax aware models on the same 3 objectives and have a higher minimum allocation to municipals. We're always going to have at least 60% and typically between 60 and 70% of muni. What we're going to complement it with are taxable bonds that have an attractive yield even on an after tax basis and maybe have a little bit more credit risk to complement that duration that munis give you. That'll be things like our low duration income fund and our income fund and the package overall quite compelling, still high both pretax or tax equivalent yield basis and and headline yield basis with still more moderate levels of duration overall. So you know bigger picture if you kind of take a bigger step back, you know we do believe bonds are back. That has been our theme you know really throughout the end of last year into this year. Higher yields cure a lot of ills in the long term in terms of higher, better, higher starting return, better equity diversification, better capital preservation. And we believe when you think about you know investments in cash versus moving cash off the sideline that as we are closing in on the end of the hiking cycle, you know moving cash off the sideline in the fixed income is really going to set your clients up for stronger performance potential and tailwind going forward overall even if you see a little bit more choppiness in the near term. And our model portfolios are really designed to offer that guidance in a complete package. If we turn to the last slide, the other way to think about this depending on your objective is that you can align specific models with specific needs. But also in the Orion platform, we have specific funds like I mentioned earlier going ahead single fund that maybe has a lot of the characteristics of that strategy. We have the single fund option available today as well as well as separately managed account options should you choose to to build your own portfolio as well. So with that I'll I'll turn it back to you Ben and we can proceed from there. Thank you, Justin. A great overview of the PIMCO models kind of the current yield environment obviously very top of top of mind concern for a lot of advisors from here I'll I'll pass the ball over to Joe to cover maybe the equity portion of these this two prong portfolio. All right. Thank you very much Ben. All right. The the Aftershock portfolio were we talked about the theme of of post fed. Obviously we're on the heels of the pandemic and the stimulus. But I wanted to start today's conversation with a discussion really about our philosophy that we approach the market with and that number one is systematic and quantitative. When we talk about our tactical allocation strategy, we look and we research based on historical probabilities to look and put in favor investors relative to different goals and different strategies. Whether we're talking about our our time tested tactical defensive equity strategy that focuses on reducing drawdown risk and allowing investors have better longterm outcomes or even our growth or tactical fixed income. We really apply that systematic approach that removes emotion from the process across a variety of our funds and strategies and the other pillar of our investment philosophy and I think that sets us apart from from many managers as as our multifactor multidiscipline approach. I don't think the industry or the investment philosophy of of most firms is too different than terms of travel behavior. I've you tend to see some that focus on on valuations and fundamentals. You see others that focus on trends, momentum and technicals. Some are even more macro right thinking top down the overall economic environment and shifting their allocations based on that. We really do believe in a diversification of those approaches and some of those are going to be out of sync during periods and some are going to be in favor during others. And that combination of those multiple different disciplines provides better outcomes longer term for investors. Now quick just high level today we're going to be focusing mostly on our tactical models within our turnkey solutions. We also offer across the platform customized solutions whether it be our personalized SMA, think these are your more specific complex cases for high net worth investors. We also offer at the firm practice level investment consulting for helping with you, collaborating with you on your practice, trying to improve your model lineup and your your overall investment approach for your practice and for your clients. So in terms of that that full investor life cycle to and through retirement, today we're mostly going to be focusing on these six tactical portfolios, the meter investment portfolios, some of which have our growth and defensive equity and others that have our our fixed income. We also on the retirement side have a holistic solution for that distribution phase for tactical portfolios based on withdrawal rates between 3 to 7%. Now we're going to start today and talk a little bit at high level the the, the portfolios and the strategies that we have and then I'm going to touch on current positioning process kind of our outlook right now and what we're seeing in this overall environment as you see on the the slide here are risk based lineup. We have six different risk profiles from conservative all the way up to aggressive growth as you can see on that aggressive growth and growth strategy, you're getting that. That what we refer to as our our growth strategy that is constrained in terms of fully invested in equity. We are still actively managing that but that differs from our defensive equity sleeve that you see in that conservative through moderate growth portfolios which really is unconstrained. We not only actively manage in terms of U.S. stock selection, US versus international, we also can dial up and dial down the equity exposure based on the invest the overall environment and our outlook rooted in that that quantitative philosophy that I talked about. And even on the fixed income side, we're very tactical in nature, whether it be credit quality, the overall duration of the portfolio, we will actively manage that based on the environment overall. So we're very active and very tactical as a manager across the various portfolios that we're discussing. Just a couple highlights in terms of that growth sleeve, if you are looking to pair it with a PIMCO tactical solution that the the other speakers discussed today, you can look at more of our growth sleeve, our defensive equity. So you're looking at that long term growth objective for growth. Again that's going to be fully invested in equity, right. It's going to be more risky, but we are going to be actively selecting Ben mentioned earlier in terms of the narrow market breadth and participation. So you killed, you still can win by being in the right places that we've seen value and growth that dispersion this year be one of the greatest dispersions that we've seen historically. So you still can win in that stock selection arena. Also US versus international, we had the fourth quarter last year very strong outperformance by developed international XUS relative to US equities. So far this year, we've seen a little bit of underperformance, but especially when you're looking at evaluations relative to the US, there are pockets of areas internationally that are looking more and more attractive. And within that gross sleeve, you're going to get that type of active allocation. Now defensive equity, as I said that, that's that unconstrained tactical. We're still going to be making those active selections with regard to U.S. stock selection and international global equity allocation, but we're also going to dial up and down. So we're seeking to capture most of the upside of equities while reducing volatility and drawdown risk, OK. And that's that flexibility. That's what's unique about that defensive equity strategy. It actually has the flexibility to move assets between equity and cash or fixed income assets depending on our overall quantitative assessment of both the reward of the of the stock market relative to our overall expected risk. And when that ratio reward outweighs risk, we're going to be fully invested. When we believe risk is above reward, we are going to hold the defensive position and have less than 100% invested in that sleeve of the portfolio. So very tactical strategy that aims to reduce that drawdown risk, but still provides that longterm capital appreciation that you're aiming for in that equity sleeve of the portfolio. So just to give you a flavor of what this looks like, so on the chart here we have Muirfield Fund which is our our best representation of the defensive equity strategy and mutual fund format. We have the daily exposure of the mutual fund going back to the beginning of 2022, right right before the the the start of the 2022 bear market. You can see in the shaded blue area that is our daily exposure to that defensive equity strategy. And then the the orange line chart there you have the the S&P 500 index. A couple notes from this, it's a it's a bit of a dimmer switch, not a light switch. We're not moving from 100 down to 0% back up to 50 and then back up to 100. We're not making those large chunks. And there's large significant moves on average to start the year, and I'm sorry, to start the year in 2022 out of their market. We've actually started to reduce exposure down to a 33% defensive position. And as you see on the chart there on the bottom left corner, a 67% equity allocation to start the year. Our average exposure during the drawdown during the the bulk of the bear market last year was 50% for that strategy. So we were able to successfully and most of the time during that defensive position invest mostly in short duration cash securities which also helped during that rising rates environment. We have significantly increased our exposure during 2023 and have participated on the upside and we're currently, as of the end of August at a 90% equity allocation for that strategy. But we're seeing some concerns and some some some potential concerns across our models that I'm going to discuss today. But the overall weight of the evidence still favors a significant equity allocation overall. Now at a high level, this is a summary of the model itself that I talked about. I talked about that reward component and that risk component. That's what we're looking at every day. We've got data and different factors and models that are looking and evaluating this relationship within the market. That reward factor is comprised of three different categories of factors. Our long term category which is, is primarily focused on valuations, overall inflation and interest rate adjusted valuations, right. So during low interest rate environments, higher valuations are warranted during periods of of higher interest rates. Obviously this is a a good example of the current environment that's going to put more pressure on valuations. We are seeing valuations still elevated with higher rates. That's not the fat pitch that we saw in 2021 when the market was taking off post 2020. Still on the heels of a very accommodative Fed right that was a really productive market for environment. We think this is going to be a little more tactical environment during this this stage, especially longer term over the next few years. The intermediate term model is primarily focused on individual investor sentiment. Warren Buffett famously says investors should be greedy when most are fearful and fearful when most are greedy. So we're looking at investor sentiment from a contrarian point of view and we're looking at things like newsletters, overall retail sentiment, options activity. We've seen, for example, significant pessimism from the options market during this strong rally in equities, which I'll discuss here in more depth in just a moment. Short term model, we've seen a narrow participation, but there's no doubt, when you're looking at a market 3/4 of the way through the year, up nearly 14%, trends are still pretty strong. Even though we've seen a reduction in certain pockets of that short term model here recently, overall trends and momentum have been very strong during 2023 as a whole. And finally, market risk, which is kind of the baseline of our model, we not only look at expected equity market risk, but take into account areas in the market like the swap spread market in the bond market. Bond market risk has actually had a very strong correlation to equity markets really post financial crisis. Ever since the Fed's been such a large player in risky assets with quantitative easing and potentially tightening here as they they start to potentially unwind that balance sheet, that market risk balance has been pretty neutral. We've seen bond market risk very elevated. Equity market risk has struggled to get above 20 even during this pullback still below that 20 level and equity market investors still not pricing in a lot of volatility. So we've got that a bit of a a neutral reading on risk overall for investors right now. So in summary, just discussing our our positioning 90% equity allocation, that 10% defensive position primarily cash. As I said earlier within the US portion of our strategies, we're favoring information technology that's been the big game in town if you will so far this year. Consumers discretionary energy has been an area we've been overweight for most of the year. It has definitively picked up a lot of the alpha here for the portfolios during the past several weeks. Energy prices have been surging and that's really benefited the bottom line from Asia's energy companies and investors are rewarding the stocks for that. So that's been an overall positive contributor for those portfolios. We remain overweight to international versus US. We saw a historic spread back during the third and fourth quarters of 2022 when we discussed valuations between the two areas. Relative momentum has been a bit choppy, but we've also seen fun flow activity that's favoring international currently and we remain overweight that and we still do remain short duration. We've started to lengthen relative to last year, but relative to many of our benchmarks and our peer groups, we still remain short duration during the bulk of the start of 2023 where we still have continue to see that pressure on the rate environments reward the shorter end of the curve here recently now we talked about the narrowness of this market. So trends have been strong, but this chart is looking at the S&P 500 market cap weighted right, the largest companies in the S&P 5 index, the top line index that you're going to see on CNBC and the the the major websites that is market cap weighted rewarding those larger companies are a larger driver of the returns. When you look at the equally weighted S&P 500, the difference between those returns year to date through the end of August are 11 1/2 percent, nearly 12%. That's the second largest discrepancy between equal weight and market cap weight since 1998. You can see the the number three-year on there 1999. So it's sitting around that territory not necessarily calling for the next technology bubble if you will, but there's no doubt historically this is where the more narrow markets and has been a concern of ours. Within that longer term aspect, you typically want to see more resiliency out of mid cap and small cap stocks. It's somewhat of the analogy of you don't want to put all your eggs in one basket, right. You want to diversify. And right now a lot of the leadership has been held up by those large cap tech companies so far, much of it related to perhaps the markets anticipation or hope for rates to head lower. That's been sort of the what investors have been cheering for for the first part of the year. On the positive side, pessimism is actually pretty strong considering as I said, we've had a decent amount of volatility here in the past few weeks. But if you look overall, the trends been high, but there has been a healthy amount of pessimism. We look at the options market. You have bullish put options relative to, I'm sorry, bearish put options relative to bullish call options over the last 10 days. You can see that ratio has been spiking. Just looking at one example, look at the beginning of 2023 this year ahead of this rally, we saw that ratio reach its high, one of its highest levels in history. Looking back in hindsight, that amount of pessimism helped fuel the rally that we've had. This year was a great contrary indicator to start the year. So we're nowhere near that type of pessimism right now, but it is climbing and is its highest level since February of this year. So that's a good sign and one of the reasons that intermediate term model is still favoring and our reward model is still somewhat aggressively invested. Now the path for inflation remains the big wild card. So we we've got it's come down dramatically #1 right, we we peaked back in June of last year and there's no doubt that it's coming down, but there's the old adage of it. It's easier to get from from 9% down to three or 4% than it is to get from 3 to 4% down to that Fed's longterm target of 2%. So if you look at the path forward of of how do we get to the longterm target for the Fed of 2%, there's not a lot of pathways there if you're looking out to May of next year, right, right away and essentially we've got to have flat inflation or .1% average month over month for inflation. We are seeing energy prices start to to to push inflation up a little bit. The one part of this equation that I do believe is going to start to push inflation down as the the rental component of the services within CPI home prices are already come down a little bit in terms of growth rates. We haven't seen the rental component of inflation come down yet. But when you look at more timely indicators like Zillow Rep prices or look at more alternative data sets, rental prices have come down already. So we'd expect that component to put some downward pressure. But unless we see that significant economic weakness here over the next six months, that's what you're really going to probably take to get the inflation down to the Fed's target anywhere in the near term. Now expectations have been shifting. I I it reminds me of this recent market environment. I'm having flashbacks to 2022. We we kind of talk about the correlation between rates and stocks but 20/22 was the the story of every rally during that bear market was surrounded by a shift in expectations by investors hoping, expecting thinking that they were near the end of the feds rate hike cycle only to be batted back down by Powell at the next meeting for the next Federal Reserve press conference. And those expectations batted away in the market sell off. Well we've started to see a bit of a reminder for the first time this year here recently where if you look back these are the expectations for the last four fed meetings of the year. Of course just had the September 20th meeting that is the teal color all the way out to January of 2024 with the different colors here. These are the probabilities based on the Fed fund futures that the market was pricing in for a Fed rate cut or a Fed rate hike. So the negative numbers are cuts. The positive numbers are hikes. You can see the dramatic shift from May to June to July up through the end of August. Back in May, investors were expecting and pricing in. And this is a lot of the reason why growth stocks, why the market's been so narrow, right. Everybody was expecting and expecting the interest rates to come down and rewarding those growth stocks that are buoyed by lower rates and rewarding them for that. Well, you can look at that. There was back in May, there was a 70% chance of rate cuts at the December and January meeting. You Fast forward four months, now there's only a six and 21% respective probability for cuts at those meetings. So expectations have shifted higher, a lot of that due to the somewhat resilient labor market inflation. As I said, I think the stories it's become a little stickier and part of it has been the resiliency of the Fed despite kind of market pressure and perhaps expectations from investors in the market somewhat taking off here. I think the Fed has been pretty consistent and is really sticking to that target, perhaps to the detriment for some investors that are really hoping for them to cut back here soon. That higher for longer narrative I think has really been the story of the third quarter so far. So bigger picture, I talked about the long term model being one of our concerns. Long term, when you look at stocks facing more competition for bonds, this is true. And I say compared to what we call this the free money era, looking back, right, money was cheap for companies, interest rates were low, right? If you're looking for any return at all, you're going to go to the stock market. And that's what we saw post pandemic during the second-half of 2020 and pretty much the entirety of 2021 with the exception of the small midcap stocks that started to signal weakness during the third and fourth quarters of 2021 that ultimately didn't come to bear until the start of 2022. For a lot of those large cap companies that has changed significantly. So take a look at this, you got the S&P 500 earnings yield has come down a little bit. That's just the the inverse of the price to earnings ratio. So you're a higher earnings yield typically means valuations are attractive and a lower one not as attractive, but you've got that 90 day T bill up north of 5%. That creates competition for stocks. It doesn't mean stocks can't win, right? They've been winning this year so far. But the longer that relationship remains in place that again is not the same environment. So we just need to accept that, right. If we're looking at the weight of the evidence, this is a little bit more difficult environment for stocks, especially just for passive buy and hold stock investors to operate said it and forget it for 2-3 years. No, this is going to be an environment where you need to be tactical, right. We've had some high risk areas that have outperformed. But having that tactical nature in these environments, especially for for risky asset classes like stocks are going to be even more important. When you talk about investors that are surveying the marketplace and seeing lots of options across across the yield curve, especially even on the short end relative to risky stocks. And you've seen growth stocks rewarded so far this year. We've been fortunate enough to participate in much of that upside due to our overweight to equities within that defensive equity strategy. They're still overall right now reward is outweighing risk and that's why we're we're only 10% invested. They're very close to each other right now. I kind of reward that risk is still outweighing reward but not by a lot right now. But if we're forecasting and talking about the general environment, these are environments that you have to be nimble, you have to pay attention because the the, the, the era of the free money, if you will is it's just not the same environments. You need to approach it very differently during these periods. And that's what we're assessing right now. So I talked about the weight of the evidence, what are the reasons for optimism, some of the reasons that we're still 90% invested, only 10%, very positive momentum concerns about market breadth, but momentum overall is positive. That bears sentiment, right? That's a real tailwind for equities. It's not just options activity. We're seeing that in newsletters, in retail surveys, OK. Equity market risk still very low, OK. So we're not seeing that overall risk in the equity market and risk as a whole is pretty neutral. Now the longer term reasons for really as I talked about that focus on being nimble right now, more important than ever. Valuations are still elevating. This is not new, but it is new. Given how high rates are, you have to pay attention to valuations, be a little bit more careful about what stocks you're investing in when interest rates are this high and very narrow stock participation, this can be resolved, but we, we look at lots of different market rest scenarios. You look at some of the especially in the small cap space, a lot of charts look very bad right now, OK. So we would love to see some improvement there for a continuation of this market rally and we just have not seen it here recently. And then again, the broader theme of of stocks facing stronger competition from bonds that remains the general environment for risky assets right now doesn't mean you can't win in those spaces. It means you need to be more tactical and approach the market with a very methodical approach. Just a quick reminder in terms of content, we're very transparent. We're very proactive to partner with advisors and give you content about our positioning, our insights, what we're thinking. I talked about that defensive equity sleeve. Within those portfolios, we have a drive page, meter, investments.com/drive. Every day. We put the previous night's exposure for that strategy on the website for you to view every week. We've got an investment view, a 62nd audio recording of the top takeaways for our positioning there is through updates on international or fixed income strategy, the defensive equity that I spent a lot of time talking about today and then marks in focus. We've got a growing YouTube channel where we're putting out content, one of the features there every other week. I put out the markets in focus, 5 minutes, 3 insights basically. Just when I'm watching the market, what do I find fascinating and interesting? Sharing it with others, hopefully to be helpful for you when you're having conversations with clients. And finally, before I pass it back to Ben just real quick, we've got full coverage across the nation number on their e-mail address. If you think some of these solutions that we're talking about is something you're interested in or some of that customized side, if you got a unique complex case, the messier the better. We love to talk to advisors about challenges they're having with their practices and clients is in the space on the customized side too. So definitely reach out with any cases. Ben, did you want to take it over? Yeah, thank you. That was great. Thanks, Joe. And Justin, as a reminder, before we get into questions, we are getting a lot of questions coming in. So we'll see if we get to the mall, but we here at Ryan Portfolio Solutions are here to help you build portfolios. So on this slide, we threw out a couple of sample portfolios just blending the strategists that we have here today. These are kind of placeholders, you can manipulate them how you want. But just to give you kind of an example of how meter and PIMCO could be you know combined together in a in a portfolio on OPS, we do have 9 strategies from PIMCO including single tickers and 19 strategies from meter including single tickers on the platform for you to choose from. As for contact information, again for our team, if you need additional assistance with building portfolios, here again is that content or contact information I should say to the OPS investment strategy team, please reach out. I don't know if we like messy situations as much as Joe sounds like he does, but we will take them on as well. And so from here let's let's get into questions. So First off, you know Joe, you mentioned market concentration quite a bit and you know Magnificent 7 that everyone seems to be talking about these days. They they're currently at about 28% of the market cap, the S&P 500, but they're only about about 10% of the revenue in the S&P 500 and and that kind of trend has been in a downtrend as well. So do you guys think that that the Magnificent 7 is really earning their market cap or what's your view on on those few companies or or even the top ten in the S&P and we'll we'll kick it over to to Joe first. Sure. I mean the the data recently just mentioned would argue that no they're not earning their way, they that if you actually look back over the past five to 10 years in many ways they have earned their way in terms of the size of the companies. But if you talk about 2023 specifically the incredible run that they've been on so far this year, when you look at the discrepancy between growth and value stocks, most of it concentrated, a lot of it related perhaps that that push towards the A, I and some of those companies that are being rewarded for their exposure and their progress in that area. A lot of it is not related to that I I touched on it earlier. But much of the buying in the spaces is also centered not just around that, but also centered on the expectation that rates were heading higher or heading lower. the Fed was going to stop raising rates. And I think you're starting to see a little bit of those stocks being penalized now because that higher for longer narrative is taking hold. And you're starting to see some of those tech heavy indexes and tech stocks bear the brunt of it a little bit. But there's no doubt some of those companies are strong companies fundamentally. I just think some of the rally that we had, especially during the early phase of the year was also centered around expectations that the Fed was about to reverse course. Much of that narrative is shifting away. So some of it earned a lot of it this year more related to expectations and in some ways a little bit of hope from investors that Fed funds rates were heading lower sooner than later. Great. Justin, thoughts. It is important to disaggregate quality of the companies from valuations and these are nothing to say that these are not high quality companies in terms of their actual businesses, not as the quality factor, but a couple of stats. It's worth noting that now those seven stocks represent 28% of the S&P market cap. The combination of those seven stocks is bigger in terms of market cap than the public equity market valuations of every country except for the US and China. And from a return standpoint here to date, as Joe mentioned, you're looking at about 2/3 of the return coming from those seven companies, you know at least as of July for the S&P 500 for the year. So in a very, in a very near term sense is a pretty eye popping stats. I think the value argument is 1 as well that we would look at that Joe mentioned which is after a nice little rally in value kind of last year into this year, you actually saw the retrenchment of values. So values discount the growth is that kind of the 97th percentile, but it's cheapest it's ever been. So when you think about kind of broadening beyond kind of the growth segment of the category which which even market cap S&P is grossy given 30% of those seven stocks for example, we do think that's beneficial to start taking a look at just one other item been to touch on the expand on what he saw those this is an incredible status. It's still heavy, but if you look back about four to five months into this year, the top ten stocks actually accounted for 104% of the S&P 500 game. So some people look at that stat and said that's not possible. What does that mean? That what that means is in terms of contribution, the remaining 490 stocks were net negative relative at that time. It's actually down to about 80% or so right now. That's top 10, not just top seven, about 80% and it's I think there's only one other year that's higher than that historically. So it's historically narrow. You're not as narrow as it was a couple months ago, but still very narrow in terms of historical precedents. So I'm going to piggyback off of that one. You kind of brought up some good points about you know how much of that contribution that they're they're currently giving. So what's kind of the outlook for smaller and midcap companies going forward If these mega cap essentially tech companies are just dominating this year, can that really continue going forward or you know what what's the outlook for those smaller companies sort of Justin this time you know I'll keep it a little bit briefer here. You know you tend to see more sociality with small cap, higher beta overall. So you know very good in more kind of recovery sense to be focused a little bit more on small cap, a little bit less at the stage of the cycle. And if we think about you know recession was all the baked in and you know an assumption kind of 6 to 9 months ago that would be there. It's kind of gone away in terms of being the focus. But you know Pimco's view is that on kind of the cyclical horizon next 12 to 18 months we are going to see a slow down. We will see if the catalyst is not exactly certain, but certainly you know monetary policy works at the lag to the government shutdown in the election. Actually there's plenty of things that can even if it's a mild recession kind of tip the skills that way. So you we would stay, we would be thinking kind of staying up in quality and large cap at least at this point of cycle. Yeah, when you talk about small caps, it's a bit of a catching a falling knife scenario right now in terms of if you look at so this is just in terms of market breadth on a relative basis, small caps of underperformed large caps by a significant margin so far year to date. If you look at an advance decline line that's it. It's a technical indicator that essentially is a running tally of the number of advancing stocks within an index relative to the total number of declining stocks on that same index on a daily basis. And it's essentially just a running tally over time. That advance decline line for the Russell 2000 small cap index just hit a new annual low 52 week low here recently do due to the pull back. So you had small S&P 500, I'm sorry S&P 500 stocks pull off a bit from their high since the end of July. Here you have market breath indexes related to small cap stocks hitting new 52 two week lows. So it's a bit of a catching a falling knife right now. I think typically when you do have slowdowns too small cap stocks are going to feel the brunt of it. They do have a cyclical nature in terms of leadership. We saw that after the Fed came to the rescue of the market post pandemic with small cap stocks rewarded for the beginning of that rally as well as many value stocks. It's a little bit risky to dip your toes in the water when it comes to small cap stocks right now in this environment. But due to their cyclical nature during the rebound they typically will outperform especially during the early stages. Great lots to think about with with diversification of equity classes. Let's let's switch it over to fixed income. So within fixed income, what is your view on emerging market debt? And if it is favorable, how should you position it? We'll go to Justin first for throwing it open. Happy. Yeah, happy to kick things off. EM debt is really interesting this cycle because we've seen kind of the reverse what we've seen in the past which is that emerging market economies by and large we're ahead of the developed market counterpart in terms of central bank tightening. So they were raising rates 1st and faster and actually many of them are now if not already at their peak cycle, some are even starting to cut. So from a stage point in terms of kind of where we are in the macro sense, it's supportive for EM valuations like I showed in one of my earlier slides better than corporate debt today I G and and high yield though we would favor securitized actually of most of all in terms of credit but in the middle in terms of valuations. And on the on the fair side, the cheaper side of of Fair and yields are are that much higher overall than than developed market that even though we're we're that much higher already than we were on a relative basis 18 months ago. So a lot of things pointing in the right direction. So within our models that if you saw it in for example in our income focus model, we have some dedicated EM hard dollar and EM local currency debt as a complement to higher quality segments of the market. We would emphasize being active. Every country is different. You know you're talking the index with kind of 50-60 different countries all with the unique stories. So avoiding a Turkey, emphasizing in Mexico that's very important today, not just buying the index passively. And then time horizon is important as well. You know we think about kind of a three-year horizon when we allocate structure allocations within our fixed income portfolio. There will be choppiness though right EM debt will not be immune to a risk off environment and you know so there's going to be some volatility to to be aware of along the way. So sizing appropriately is very important. Yeah. Only thing I would add to that in terms of emerging markets, obviously have a little bit of a challenging environment in terms of with interest rates so high in US relatively nations. You're seeing the US dollar very strong right now, potentially putting pressure on some of those emerging economies. We found a little bit more value on the US high yield space right now the yields and the spreads have not widened significantly, but you're still earning healthy yields and they've been sort of threading that needle this year in terms of higher rates, maybe not as much quality in terms of high grade valuation in terms of how wide that spread is. But they've been kind of threading that needle so far this year in terms of the higher rate environment. But no economic slowdown to sort of cost too much downward pressure on prices and performing quite well this year. Great. So here's another inflation question which seems to have come down from the top of the headlines a little bit lately but it's obviously still looming. So since the two largest components of inflation are energy and housing and energy cost came down since the administration took oil from the the reserve, the oil reserves when that reserve gets replenished, could that potentially put upward pressure on inflation and potentially affect that the feds kind of timeline for its hawkishness I think so. If you if you look at energy, it's actually been a detractor from inflation for the past several months. It's with its increase in price we've seen it detract less if you will, but it's still in that detractor from inflation but moving upward. So that could potentially put more pressure on inflation. I talked about a little bit earlier. But I do think the housing portion of that services which is the bulk of the inflation component, that rental component, we're likely to see that move lower during the next year. We've typically seen a 12 month lag between home prices and rental prices. And if you look at many of those alternative data measures that are a little bit more timely and quicker than the rental price component of the CPI measure, a lot of those have already rolled over significantly. So we would expect the, the housing part to be a drag on inflation, if you will, or in many ways be positive for lower inflation, energy price moment and obviously pushing higher. But it's actually still a net detractor right now. I would note that, you know, going from 8% inflation to 4% inflation or even 3 headline at least that's kind of the easy part, right. And a lot of what we've seen and that move from at least eight to four is kind of working through some of the more idiosyncratic results of the pandemic, right transportation, used car prices being this large component of inflation, travel for example, as well. Those those have kind of gone away. We are focused similarly as Joe mentioned on shelter. Energy isn't in another one as well food too which is spike the fair bit after the war in Ukraine with shelter. The one thing to be aware of is is this can get a little technical but like owners equivalent ran and some of the metrics that that are used really are smooth and by design. So we can actually take several years for home price improvements to go in through OER and it has been coming down in terms of the overall rate, but it is still relatively elevated. So going then from 3 1/2 to 2 1/2 and ultimately what the Fed means which is 2 to to feel like they've hit their mandate that's going to be more painful And and you know of a large part about why the Fed is you know trying to signal it's not a rate hike at least you know higher for longer to to set market expectations appropriately. And so we'll piggyback off of that hire for longer comments. So so as we are now sitting for hire for longer potentially we're kind of out of this free money segment. What's your kind of five to 10 year outlook going forward? We've seen very concentrated, very correlated markets lately are are other asset classes going to kind of take the lead from here on? Is further diversification needed? What, what's your outlook for for say the next 5 or 10 years given this new rate environment? I I would know and and you mentioned I think earlier like the stock bond correlation, how unique of an environment 20/22 was as well as if you go back to 2020 in terms of how low rates got in 2020 and what what does it take to have basically all asset classes X commodity selling off at once? Well, what happened in 2022, well, we had a complete readjustment in real rate. And if you think about every asset class, by and large you're discounting a future cash flow. So when you raise the discount rate the the the future payments get discount at a higher rate and the price comes down. That's why we know last year pretty much all asset classes at debt and equities sold off. The last time that happened really was the 70s, maybe to a minor extent in the early 90s. So when we look forward now and this kind of gets back to some of the comments I made in my, my discussion with much higher starting point for rates, you're going to get a much more normal we believe kind of traditional stock bond correlation going forward over the next 5 to 10 years. Not going to be perfect. And you know there'll be times like right now where you still see a little bit of that rate rise equity sell off environment. But that that really is for two reasons. One is that unlike 2020 for example, rates have room to fall right in terms of that more traditional risk off hedge against equities. And the other is what you typically see when the stock bond correlation reverses is the reason we just mentioned typically rising rates in tandem, often driven by relatively sharp rises in inflation. And while inflation is likely to be more volatile going forward, we don't think we're headed back to 8% inflation anytime soon. So a little bit more normal inflation environment in terms of level albeit with more volatility, a more normalized rate environment should lead to kind of more traditional cross asset correlations going forward. Yet in in terms of longer term, I'll preface it with we approach the market very methodically day by day, month by month. So as data comes out we react and we will change based on the data of our models. We're very systematic. But when we're looking at the longer term theme that we talked about some of the let's say concerns, but it's more of just awareness items for me because I think even when given environments historically where we have seen higher rates in a more normal rate environment that zero to negative rate environment is not necessarily normal historically, right. The type of inflation, the low growth period that we entered, although we're maturing economy that not necessarily historically normal. So I would expect us to move towards a more normal period. We have been on an incredibly strong run. I obviously had bear markets in, in 2020 or 2018 was close to technically a bear market essentially when the Fed sort of pick up and had to reverse course and the market sold off quick and they had to reverse course after that. And then you've obviously had the 2022. This is kind of the first prolonged bear market that we've had really since the financial crisis, absent the 2020 which was a little bit of its own unique story. So moving into from a secular long term bull market entering a period of not necessarily extremely challenging equity returns, but it's not the layup or the fat pitch as I talked about earlier. For equities, I think you're going to have to be more selective, more tactical in these environments as we return for a more normal period relative to history in terms of interest rates being where they're at relative to risky assets right now. I think you also have an environment that has been very conditioned to the Fed reversing course, very conditioned to the government providing fiscal stimulus. Oh, by the way, government debt near its highest level ever. When we look out the next 5 to 10 years, are you going to have the tailwind for the type of government spending that the market has been used to over the past couple decades? That doesn't seem like it might be in the cards in terms of what we've seen. So these are just overarching themes that are going to create an environment that as you mentioned and I kind of mentioned on the slide earlier, it's it's not necessarily that free money era over the next 5 to 10 years. It's a different environment and we need to react accordingly. Great. Well, it looks like we are butting up against time here, so a few kind of closing notes. If you did not get your question today, feel free to reach out to to our team and we can get you answers as soon as we can. And then additionally within the next few hours, just this afternoon, the replay link should go out to everybody. So you can watch this webinar on demand or or share it with anyone. Thank you again, Joe and Justin for being with us today and have a great afternoon everyone. _1716154702894