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Executive Summary

U.S Economy – (Pages 3-4)

• The U.S. economy has made a remarkable recovery from the worst quarterly decline in its 250-year history during the second quarter of 2020 when Gross Domestic Product (GDP) fell 31.4% on an annualized basis.3
• We believe 2021 will be a strong year for economic growth in the U.S. as well as globally with U.S. GDP growth potentially approaching 5% for the year.
• We see pent up demand by both consumers and businesses, fueling strong economic activity. We believe a favorable monetary environment orchestrated by the U.S. Federal Reserve will further this demand.

Equities – (Page 5-7)

• 2020 was one of the craziest years we have ever witnessed for the financial markets. In the first eight months of the year, we experienced the fastest bear market on record and the fastest recovery from a bear market.
• Unprecedented action by the Federal Reserve Bank to lower interest rates and shore up the financial system blunted the economic impact of the coronavirus pandemic and produced a strong stock market recovery beginning in late March.
• We believe stocks will continue higher in 2021 based on our optimistic outlook for the U.S. economy, as well as continued low interest rates and rising corporate earnings.
• We believe we could be in the early stages of a new bull market that could take stocks substantially higher over the next few years.

Fixed Income – (Pages 7)

• Fixed income investors enjoyed another strong year of performance in 2020.
• The rise in bond prices over the past two years has left fixed income yields at historically low levels.
• We continue to see value in high-quality fixed income investments in balanced portfolios for their potential income generation as well as a potential hedge against stock market volatility.
• We do not see value in reaching for interest yields in the higher risk segments of the bond market.

Where We See Opportunities – (Page 7-9)

• With interest rates on fixed income and money market rates so low, we see relative value in equities, especially high- quality dividend paying stocks.
• We like stocks that benefit from a strong economic recovery like industrials, travel & leisure related companies, healthcare, consumer discretionary, materials, financials and energy stocks.
• We see opportunities in emerging markets and commodity related equities.

The Bottom Line - (Page 10)

• We believe diversification will be very important in navigating through what is likely to be a volatile year in 2021. We recommend looking at your current asset allocation to ensure your portfolio is in line with your long-term goals and objectives.
• We feel this is a good time to rebalance portfolios back to long-term target allocations.

Opening Comments from Steve Mills

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There are moments in history that seem to become permanently etched in one’s mind and you can remember exactly where you were and how you felt when it happened. I can remember when I heard the news of John F. Kennedy’s assassination. I was 8 years old at the time and sitting in my fourth-grade classroom on the second floor of an old house that had been converted into classrooms by the school I attended. I vividly remember my teacher making the announcement about President Kennedy’s tragic death. I remember feeling both shock and a sense of the vulnerability that I had never experienced before. Somehow, I felt my perfect little world now had a crack in it. The September 11, 2001 terrorist attack on the World Trade Center was that way for me as well, as I’m sure it was for most every American older than ten years of age at the time. For the first time, the United States had suffered a major terrorist attack on its own soil forever changing our lives. There are also whole years that standout in my mind this way. I remember 1973, mostly because it was the year I graduated from high school but also because of the Watergate scandal and the resignation of Richard Nixon. It was a tumultuous year for our country.

There is no doubt in my mind that 2020 will ring in our memories in such a way. It was the year of Covid-19 (a name that will be forever etched in my memory), when the world was afflicted by a deadly coronavirus. Like the Kennedy assassination and the 9/11 terrorist attack, it has been a shock to the human psyche, reminding us how vulnerable life can be. Since the first Covid-19 cases were officially diagnosed in February of last year, the virus has infected over 80 million people worldwide and claimed over 1.7 million lives according to Johns Hopkins Covid-19 tracking website.1
The pandemic has not only been a major health crisis, but it has also inflicted severe economic damage to the global economy that will likely take years to repair; it led to the worst economic downturn since the Great Depression of the 1930s. Widespread lockdowns closed businesses and restricted economic activity. Although the lockdowns are now more isolated, they are still inflicting a great deal of economic pain.
Now that 2020 has passed, there appears to be light at the end of a long, dark tunnel. Remarkably, there are now three vaccines against Covid-19 developed in record time that have been approved and are currently being to administered to selected groups. It is possible that hundreds of millions of doses of the vaccine will be rolled out to hospitals, pharmacies and other medical facilities by the end of January. Healthcare workers, people over 65, and those who have underlying health conditions that put them at higher risk are in the process of receiving the vaccine. Once everyone in those groups who wants the vaccine is vaccinated, then it will be made available to the general public. We believe by summer most everyone who wants the vaccine will be able to receive it.
In the meantime, for the next few months, we will still be dealing with the disruption of the virus. Although global infection rates are very high, they have begun to diminish from the record levels of the middle of December. Though we could see another post-holiday spike in early January, we believe the worst of the pandemic appears to be over. This is very good news for the global economy and the basis for our optimistic outlook for 2021. Below we discuss our outlook and reasons for optimism.

Steve Mills
Managing Partner  

The U.S. Economy

In 2020, the U.S. economy was a little like the Disneyland attraction “Mr. Toad’s Wild Ride,” which was loosely based on Disney’s animated film, The Adventures of Ichabod and Mr. Toad. In the film, the ride recreates Mr. Toad’s wild ride through the English countryside and streets of London in a motorcar before ultimately meeting his demise in a railway tunnel and ending up in a tongue-in-check depiction of Hell.2 Fortunately, the U.S economy didn’t meet the same fate as Mr. Toad by falling into what one might call “economic hell” in 2020. To the contrary, the U.S. economy made a remarkable recovery from the worst quarterly decline in its 250-year history during the second quarter of 2020 when Gross Domestic Product (GDP) fell 31.4% on an annualized basis.3 In the very next quarter, GDP rebounded at a 33.4% annual pace nearly wiping out the second quarter decline.3 As you can see from Chart 1, the second and third quarter percentage changes in GDP are significant aberrations from the previous 14 quarters. Never in our nation’s history have we seen such a decline and recovery of economic activity.

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For the full year of 2020, the Conference Board estimates a decrease in GDP of 3.6%, the first such annual contraction since 2008.However, we believe 2021 will be a strong year for economic growth in the U.S. as well as globally with U.S. GDP growth potentially approaching 5% for the year. In the near term, because of the recent surge of the coronavirus, we may see economic growth slow somewhat in the first quarter of 2021. Once we get past the first quarter, we believe the virus-induced slowdown will subside and economic growth will re-accelerate for the rest of the year.

We see pent up demand by both consumers and businesses fueling strong economic activity. We believe the low interest rate environment orchestrated by the U.S. Federal Reserve (the Fed) in 2020 will help spur this demand. Since the early stages of the pandemic in March 2020, the Fed has implemented unprecedented monetary measures to kept interest rates low and liquidity high to help mitigate the negative economic impact of the coronavirus. Fed officials continue to pledge to use “all available tools to ensure a strong recovery from the pandemic-induced shock” according to the Fed’s vice-chairman Richard Clarida.5 In addition, we believe the $900 billion stimulus package passed by Congress and signed into law by President Trump in late December will help reduce the economic hardship of millions of Americans by providing cash payments and unemployment benefits to individuals and new loans for businesses under the Paycheck Protection Program. We believe this relief package will help bolster the economy until it can fully reopen once the virus is under control.

In our view, the key to economic growth in 2021 is continued improvement in employment. The nationwide lockdown in April & May lifted the unemployment rate to the highest level since the end of World War II reaching 13% in May before falling back to single digits as shown on Chart 2. The underemployment level was even worse hitting 22%. At the end of November, total non-farm payroll unemployment was down to 6.7% according to the Bureau of Labor Statistics November report. While the pace of gains has slowed in recent months and will most likely continue slowing into early this year, we see strong employment gains once winter passes. We believe this potential robust employment will help our economy return to normal economic activity. Strong employment supports household spending and personal consumption which accounts for two-thirds of U.S. economic activity.

Since the pandemic began, the U.S. consumer has been in sort of a financial hibernation because of the economic uncertainty. At the peak of the government induced lockdowns, the personal saving rate (personal savings as a percent of disposable income) hit 24.7% in May falling to about 13% as of the end of November as you can see in Chart 3.7     The savings rate has average about 7% over the past ten years. We feel at some point in the near future, consumers may begin spending their $4 trillion cash hoard as employment rises and the economy begins to normalize.   We believe this spending will significantly boost economic growth in the second half of 2021.

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Chart 3 – Personal Savings Rate

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Our analogy of the U.S. economy in 2020 to “Mr. Toad’s Wild Ride” could also apply to the U.S. stock market. It was perhaps the craziest year we have ever witnessed. The year started off with the stock market rising in January and February building strong 2019 gains. On February 20, the S&P 500 Index (S&P) hit a new all-time high at 3373 as you can see in the chart of the S&P 500 Index.10

It was looking like another banner year for stock investors. Then the bottom fell out of the market when it became evident to investors that the coronavirus epidemic had developed into a global pandemic which would have very negative consequences for the global economy.

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Investors sold stocks in mass, driving the major market averages down almost daily for five weeks. On March 23, the S&P hit an inter-day low of 2192, a 35% decline from the February high.10 It was the fastest bear market (defined as a 20% decline) on record for the S&P, eclipsing the 13-week decline from August 25 to December 4, 1987 when the S&P fell 34%.9It was a very scary time for investors. The U.S. economy had been virtually locked down with nearly all non-essential businesses forced by government action to close their doors. Millions of people were thrown out of work. Some economists projected the employment rate could hit 20% with GDP falling as much as 50%. Fears of a global recession swept through the financial markets. Liquidity and bankruptcy concerns arose in the bond markets setting off fears of another 2008 type financial crisis. It was perhaps the bleakest period we have ever witnessed.

However, just when things looked darkest, the cavalry arrived in the form of the U.S. Federal Reserve Bank. On March 23, the Fed introduced extensive policy measures to support households, businesses and the U.S. financial system. Both stocks and bonds prices rose sharply on the heels of the March 23rd announcement. Over the next 30 days, the Fed took actions to strengthen the U.S. financial system and blunt the economic damage caused by the Covid-19 virus. In addition to the Fed’s actions, in late March Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act which put immediate cash into the hands of businesses and taxpayers. The record setting $2 trillion aid package provided relief for individuals and businesses damaged by the public health and economic crisis. We believe the investment community gave these two policy actions a great deal of credence in their ability to support the economy and fuel a recovery. Optimism rose as the economy began to open up in April and May, leading investors to embrace a “V” shaped economic recovery for the U.S. economy.

As the economy continued to show improvement, stocks rose sharply over the next several months with the S&P fully recovering all of its February-March losses by the middle of August.10 Over the span of less than six months, investors had experienced both the fastest bear market and the fastest bull market in history. It was truly remarkable. However, the stock market was not finished for the year after recovering its losses. For the remainder of 2020, the S&P continued its upward climb as the economy bounced back in the third quarter from its depressed level. Stocks got another boost in November when FDA authorized two Covid-19 vaccines for emergency use. Investors were beginning to see the potential end of the pandemic.

We believe stocks will continue higher in 2021 based on our optimistic outlook for the U.S. economy, as well as continued low interest rates and rising corporate earnings. Last year was a difficult year for many companies as the pandemic hit both revenues and profits hard for most economically sensitive businesses. Overall, Wells Fargo Investment Institute (WFII) estimates 2020 S&P 500 earnings fell about 17% from 2019 levels, the worst decline in earnings since the 2008 financial crisis.11 WFII is projecting a strong earnings recovery in 2021 of about 25% for the S&P 500 which would put earnings slightly above the 2019 level of $170 per share.11 Based on this forecast, the price to earnings ratio (P/E) of the S&P 500 is currently trading at about 21 times earnings. Although this is high by historical standards, we don’t believe it is out of line given the low interest rate environment that has risk free yields below 2%. With the average dividend yield for the S&P near 2%, coupled with the potential for capital gains, we believe stocks still look very attractive by comparison. Thus, we believe investors will continue to move more of their idle cash into stocks in 2021 driving stock prices higher.

In the very short-term, we have to get through the winter months when the virus is potentially at its strongest. We see infection rates continuing at a high level for several more weeks. The rollout of the vaccine in the first quarter will help mitigate the virus somewhat but we think it will be sometime in the second quarter before a meaningful amount of the U.S. population is vaccinated. In the meantime, we could see some weak economic numbers that could spook investors into selling stocks. We believe we could see an 8-10% correction in stock prices sometime in the first quarter of 2021. There were two 8-10% pullbacks in the S&P in September and October before the election but the market bounced back very quickly. Since it is nearly impossible to time the stock market, we would not recommend reducing equity exposure in anticipation of a correction. However, if a correction along the lines of 8-10% did occur in the first part of the year, we would use it as a buying opportunity to put idle cash reserves to work.

Whether or not a stock market correction does occur this year, we believe by year-end stock prices will be meaningfully higher. We even feel there is a possibility of a strong economic surge in the second half of the year that will push corporate earnings higher than expected. This in turn could fuel another leg up in the new bull market that started in late March of 2020. In fact, we could be in the early stages of a period of time when conditions are ideal for stocks much like we saw in the 1990’s when stocks reached much higher valuation levels than today.

As you can see in chart below, the bull market that ended in February of 2020 was the longest on record lifting stock prices 401% from the March 2009 low as measured by the S&P 500 Index.

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Historically, recoveries after each bear market regained the lost amount and more. The current bull market that started March 2020 has not only regained all that was lost in the Feb-Mar selloff but has now gone on to new all-time highs. As of December 31, the S&P 500 has rallied nearly 70% off its March 23 low.10 Although we may not see the kind of percentage gains we enjoyed in the 1990-2000 or 2009-2020 bull markets in the future, we believe this current bull market still has room to run.

For the full year in 2020, the S&P recorded a total return of 19.5%.10     The gains were led largely by big company technology-oriented growth stocks. Combined, those stocks represent about 25% of the S&P 500 Index. The Dow Jones Industrial Average (Dow) gained a more modest 8.5% for the year.10 The Dow is mostly comprised of slower growing companies in the industrial, financial, healthcare and consumer staples sectors. These kinds of so-called value stocks lagged the performance of the more growth-oriented sectors of the market.

Fixed Income

Fixed income investors enjoyed another strong year in 2020. However, it was not looking good for the credit side of the fixed income market in late March 2020 when the global financial system came under extreme stress due to the coronavirus pandemic. Fortunately, once the Federal Reserve stepped in and essentially backstopped corporate and municipal bonds as well as money market instruments, things settled down and bond returns ended up positive for the year.

The strong performance of bonds over the past two years has left fixed income yields at historically low levels. We don’t believe the risk-reward for owning longer term fixed income is very favorable at this time. However, we continue to see value in high-quality fixed income investments in balanced portfolios for their potential income generation as well as a potential hedge against stock market volatility. We believe this type of fixed income is like an anchor in stormy seas when things get rough in the stock market. We see fixed income yields staying low for 2021 with the potential for somewhat higher yields at some point in the economic cycle as inflation expectations begin to creep above the current 2.25% level.  We don’t’ see this happening until 2022.   We see value keeping bond maturities in the 5 to 10 year range and emphasize mostly high grade bonds. We believe tax-free municipal bonds remain attractive for those in the higher income tax brackets.

Many investors are holding large amounts of cash with very few options to generate low risk yields. Interest rates on money market funds are near zero and rates for short-term instruments like CD’s are less than 1%. As we mentioned, we don’t see a meaningful increase in rates in 2021. We believe the Federal Reserve will keep interest rates low throughout 2021 in order to support the economy. We do not see value in reaching too much for yield in the high yield bond market at this time. Many investors have been venturing into high yield bonds, also known as junk bonds, to pick up yield. These are lower-rated bonds of corporations and municipalities and carry a higher risk of default than high grade bonds. Again, as with longer maturity bonds, we see the risk-reward as unfavorable in this area of the fixed income market. We feel that now is not the time to take risk in the fixed income component of a portfolio.

Where We See Opportunities

With interest rates on fixed income and money market funds so low, we see relative value in equities, especially high- quality dividend paying stocks. However, with the S&P 500 Index at all-time highs, bargains in the stock market are much harder to find. We believe there are still sectors that present good upside opportunity. In particular, we think sectors and stocks exposed to global trade and manufacturing look attractive. These types of stocks generally underperformed in 2020 as investors tended to migrate more toward traditional growth stocks.   We also like the healthcare sector which underperformed in 2020 primarily due to political risks. We feel there are a number of quality healthcare stocks that could do very well as the population continues to age and healthcare needs rise.

We mentioned earlier that we believe pent up consumer and business demand will help fuel the economy higher in 2021. We believe as the economic impact of the virus will begin to subside in early spring, we will see consumers making big ticket purchases like vehicles, home improvements, furniture, appliances, …etc., that they put off in 2020 due to the pandemic. We also anticipate the travel, hospitality and leisure industries getting back on their feet as people once again take vacations and resume traveling after the Covid-19 pandemic fades. We think the more economically sensitive areas like materials, industrials, financials and energy will also see improvement. Stocks in these sectors that were hit very hard in 2020 could do very well in 2021. However, we believe the secular growth trends in technology, social media, and on-line shopping that were reinforced by the pandemic will continue. Businesses have been adapting to the ecommerce and work-from-home trends that accelerated during the pandemic. Many businesses delayed capital investments in last year’s uncertain environment. We see companies increasing spending on technology, training, and business infrastructure in 2021 in order to improve productivity and increase profits.

One area where we see opportunity is in what is called “value” stocks. Value stocks tend to be slower growing companies in mature industries. Over the past several years, value stocks have significantly lagged their growth stock counterparts. In 2020, growth stocks, as measured by the Russell 1000 Growth Index rose 37% while value stocks as measured by the Russell 1000 Value Index fell .65%.10 The chart below shows the relative valuations of value versus growth since 1997. According to this chart, value stocks are now considered cheap relative to growth stocks but not as cheap as they were in late 1999.

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Source: FactSet, FTSE Russell, NBER, J.P. Morgan Asset Management. Guide to the Markets – U.S. Data are as of December 31, 2020. Growth is represented by the Russell 1000 Growth Index and Value is represented by the Russell 1000 Value Index. Beta is calculated relative to the Russell 1000 Index.

We expect value stocks to have their day in the sun starting at some point in 2021. As we mentioned previously, we believe the stock market as a whole is in a new bull market that could last for years. We see the growth stock sector continuing to perform well. However, we believe it makes sense to rebalance portfolios between growth and value stocks to realign portfolios. We have recently seen a rotation from growth to value as prospects for stronger economy in 2021 have brightened in light of the Covid-19 vaccines. Strong economic growth tends to favor the more cyclically oriented value sector of the market.

We see another area of opportunity in 2021 with emerging market equities. For the past several years, emerging market equities had been significantly underperforming the S&P 500 Index until 2020. In 2020, the MSCI Emerging Markets Index nearly kept pace with the S&P recording a total return of 16%.10      We believe this could be the beginning of a multi-year period of strong performance for emerging market equities. We especially like the developing countries in Asia where we think economic growth will be very strong over the next several years. We are already seeing a strong recovery in China as they have successfully mitigated the economic impact of the coronavirus and have largely reopened their economy.

South Korea is another country in that region that has successfully dealt with the coronavirus and is now showing signs of economic recovery. Nealy two-thirds of the world’s population lives in emerging countries. As their economies modernize and create jobs and higher income for consumers, we see strong economic growth fueled by manufacturing, exports, and consumer spending. We believe this presents tremendous upside opportunity for emerging market equities.

Of course, the political environment must always be considered when formulating investment strategies. Now that the elections are finally over, we have a fairly good idea what we can anticipate as far as government policy that would potentially impact the economy and the financial markets. With Democrats winning both Georgia Senate seats, both houses of Congress will now be in Democratic control. We can expect more restrictive policies toward big technology companies and the oil and gas sector as well as tougher environmental regulations especially on carbon emissions. We think we will most likely see some tax hikes over the next two years on both businesses and high-income taxpayers in order to pay for spending initiatives. At the top of the spending list could be another coronavirus fiscal stimulus bill very soon as well as an infrastructure bill some time in 2021. We see continued high government deficits for the next few years pushing U.S. sovereign debt even higher. At some point, the debt will have to be dealt with but that may not be for years. In the meantime, we believe persistent government deficits will continue to depress the dollar and ultimately lead to higher inflation.

However, with Democratic control of the Senate razor thin at a 50-50 split and the Democrats only having a 11-seat majority in the House of Representatives, we believe the legislative agenda will be tempered. We don’t see the more liberal socialistic ideas and proposals gaining enough support to pass both houses of Congress. In our view, although there was a mini-blue wave in the elections, it is a marginal one that will likely result in more Washington gridlock for the next four years. We believe this political gridlock likely means sections of the Biden platform that called for the repeal of the Trump tax cuts, massive spending for green energy, and aggressive environmental measures are less likely to be implemented. President-elect Biden will likely use executive orders to achieve some of his goals but those powers are much more limited than going through the legislative process.

For those of you worried that a unified government controlled by Democrats spells doom for the stock market, bare this in mind. According to an analysis done by Bloomberg and Wells Fargo Investment Institute, over the past 73 years there were 22 years out of the 73 where Democrats controlled the White House and both houses of Congress. Over those 22 years, the S&P 500 Index returned on average 9.79%, slightly above the 9.67% average for the entire 73-year period.12 While past performance is not a guarantee of future gains, this statistic illustrates that stocks can perform well in such a political scenario.

The Bottom Line

In summary, we see the potential for a strong recovery for the U.S. economy as we move past the winter months and the current surge of coronavirus cases. We believe the U.S. Federal Reserve will continue to provide monetary support for the economy, keeping interest rates low and liquidity high. We see the possibility of another round of government stimulus once President-elect Biden takes office and the new Congress is seated. Both the Fed and politicians want to see a strong economy so we think they will make every effort to boost economic growth. Although we are optimistic about the U.S. economy and financial markets for 2021, we understand there are risks to our forecast as we have outlined above.

We believe diversification will be very important in navigating through what is likely to be volatile markets this year. We encourage each of you to evaluate your current asset allocation to ensure your portfolio is in line with your long-term goals and objectives. This could be a good time to rebalance portfolios back to long-term target allocations. We will continue to look for opportunities to make rotational shifts with the goal of enhancing portfolio returns. We believe this is prudent portfolio management.

Lastly, Trinity Capital Management celebrated its 9th year in business in October. We are excited to announce the addition of two financial advisors to the TCM team. In September, Rob Hrnicek joined Trinity Capital. Rob is a 19 -year veteran in financial services and has been with Wells Fargo Financial Network (Finet) since 2015. In October, Michael Elias and his wife Christine joined the TCM family. Michael has 33 years of industry experience. He and Christine joined Finet in 2005.   We are excited about the future growth opportunities for TCM and look forward to adding other quality financial advisors to our team.

We would like to take this opportunity to thank you once again for your business and the trust you extend to us as our clients. We are honored to serve you and very grateful for all of our wonderful client relationships. We look forward to continuing to serve you and your families in the future.

May you and your family have a very Happy and Prosperous New Year!

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Trinity Capital Management, 821 ESE Loop 323, Suite 100, Tyler, Texas 75701. 903-747-3960.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC, a registered broker-dealer and separate non-bank affiliate of Wells Fargo and Company. Trinity Capital Management, LLC is separate entity from WFAFN.


1Johns Hopkins,


3 U.S. Bureau of Economic Analysis,

4 The Conference Board Economic Forecast for the U.S. economy, Wall Street Journal article, “Central Bank Is Committed to Using All Available Tools to Boost Economy,” November 11, 2020 6 Wells Fargo Investment Institute, Market Charts

7 Federal Reserve Bank of New York,

8 St. Louis Federal Reserve,,

9 Wells Fargo Investment Institute, “Bear Markets: Historical Perspective, April 30, 2020.

10 Thompson Charts

11 Wells Fargo Investment Institute, 2021 Outlook, December, 2020.

12 Wells Fargo Investment Institute, Guide to the 2020 Elections, September 2020.

The indices presented in this material are to provide you with an understanding of their historic performance and are not presented to illustrate the performance of any security. Investors cannot directly purchase any index.

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Investment Grade Securitized: Bloomberg Barclays Mortgage Backed Securities Index; Developed Market ex U.S: JPMorgan Global ex-U.S. Government Bond Index; U.S. Treasuries: Bloomberg Barclays Global U.S. Treasury Index; U.S. Municipals: Bloomberg Barclays U.S. Municipal Index; U.S. TIPS: Bloomberg Barclays

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The Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

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S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock's weight in the Index proportionate to its market value.

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