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TCM 2023 Investment Outlook & Strategy - January 11, 2023

Thu, 12 Jan 2023 06:00:00 +0000

Stephen M. Mills, CIMA® Partner

Chief Investment Strategist

Brad Bays, CIMA® Partner

PIM Portfolio Manager

Executive Summary

Introduction (Page 2)

For the first time in over 50 years, both the stock and the bond market major averages experienced double-digit declines and officially entering a bear market.
We believe the carnage in the financial markets in 2022 was primarily caused by two underlying factors: high inflation and rising interest rates that were fueled by the U.S. Federal Reserve monetary tightening.

Global & U.S Economies – (Page 3)

The biggest fear facing investors currently is the prospect of a global recession developing during 2023.
We expect that the U.S. economy will experience a mild-to-moderate recession in 2023 lasting two or three quarters.
Economic conditions in Europe and Asia have continued to deteriorate. Recession looks likely for most European and Asian economies, in our view.

Equities/Commodities – (Pages 3-5)

Rising interest rates and inflation were the main drivers of the bear market in stocks in 2022, in our view.
We see the primary influence on stocks prices in 2023 will be corporate earnings.
We believe corporate earnings will weaken in the first half of 2023 but begin to recover in the second half of the year.
One of the few bright spots for investors in 2022 was the commodity market.

Fixed Income – (Page 5)

Interest rates on fixed-income instruments of all maturities increased significantly in 2022. This rise in rates caused major losses in most intermediate and longer-term securities and funds.
We believe 2023 will be a much better year for fixed-income investors. With interest rates exceeding 4% across much of the yield curve, investors can potentially enjoy meaningful cash flow from newly purchased high-quality fixed-income instruments.

Strategy – (Pages 5-6)

We are guardedly optimistic on equities and favor high-quality dividend paying stocks and certain growth stocks.
Small-cap stocks look attractive to us on a valuation basis but we feel this sector will continue to underperform large and mid-cap stocks in the first half of the year.
We remain bearish in foreign stocks based on our negative economic outlook for most international economies and the potential of continued U.S. dollar strength in 2023.
We remain very bullish on commodities in general, but in particular crude oil. We favor high-quality energy stocks in both the production and pipeline sectors that have attractive dividend yields.
We favor precious metals like gold and silver based on a positive fundamental and technical picture.
We continue to favor high-quality fixed-income instruments like U.S. Treasuries, bank CD’s, prime money market funds and high-grade corporate and municipal bonds.

The Bottom Line - (Page 7)

Looking out to the second half of 2023, we believe the Fed will have stopped its rate-hike strategy, inflation statistics will be moving closer to the Fed’s 2% target, and the economy will be in the later stages of a recession and perhaps beginning to recover by year-end.
In the meantime, we are encouraging our clients to stay the course, ride out the near-term market volatility and look for brighter skies to hopefully develop in the second have of 2023.

Introduction

2022 is perhaps a year most investors would like to forget. For the first time in over 50 years, both the stock and the bond market major averages experienced double-digit declines with stocks officially entering a bear market on June 17 when the broad-based S&P 500 Index (S&P 500) hit a level that was 24% lower than its January 4 all-time high.¹ A bear market is typically defined as a 20% decline from the previous high. The more value-oriented Dow Jones Industrial Average (DJIA) fared better but still recorded a loss of 8.8% for the year.¹ The NASDAQ Composite Index, which is dominated by growth stocks, suffered a decline of 33.1% for 2022.¹

High-grade fixed-income instruments, which typically insulate investors during stock bear markets, didn’t fare much better in 2022. Most major bond market indices ended the year with negative returns. The closely watched 10-year U.S. Treasury Note yield rose from 1.5% to 3.9% by year-end. This rise in yield translated into a 16.7% loss for those who held the 10-year T-Note for the year.¹ Intermediate to long-term municipal and corporate bonds experienced similar losses.

We believe the carnage in the financial markets in 2022 was primarily caused by two underlying factors. First, high and rising inflation and second, rising interest rates which were fueled by U.S. Federal Reserve monetary tightening implemented to combat the high inflation. Inflationary pressures in the economy began building in early 2021 as post pandemic spending began to heat up and supply chain problems reduced the availability of many goods. Entering 2022, the Consumer Price Index (CPI) was rising at an annual rate of 7%, according to the December 2021 CPI report issued by the U.S. Bureau of Labor Statistics.² The CPI continued to rise in January and February of 2022 prompting the Federal Reserve to begin raising the Fed funds interest rate in March by .25%.² As inflation continued to increase, reaching a peak level of 9.1% for the CPI in June, the Federal Reserve accelerated their rate-hike strategy with a .75% increase at the June FOMC (Federal Open Market Committee) meeting. This was followed by three more .75% rates-hikes over the next three FOMC meetings.³ It has been one of the fastest, most aggressive rate-high cycles in the Federal Reserve’s history.⁸A final rate-hike of .50% in December brought the Fed funds rate to 4.5%, up from just .25% at the beginning of the year.³

In addition, the Federal Reserve ended its quantitative easing program that it had begun in early 2020 to provide liquidity for the financial system that had been stressed by the coronavirus pandemic. This so-called “quantitative tightening,” removes liquidity from the financial system and tends to dampen economic growth. Both the stock and bond markets reacted negatively to the Federal Reserve’s monetary tightening strategy. Further deterioration in both markets followed the mid-December FOMC meeting when Chairman Jerome Powell indicated that the Federal Reserve will continue to increase the Fed funds rate.

Global & U.S. Economies

The biggest fear facing investors currently is the prospect of a global recession developing as result of the aggressive monetary tightening by most central banks around the world, in our view. Higher interest rates tend to depress economic activity as the cost of borrowing rises making it more expensive to purchase things like real estate and other goods with financing. As an example, mortgage loan rates in the U.S. have risen from a 3% average 30-year fixed mortgage rate in December 2021 to a 6.5% average rate as of the end of 2022.⁴ This over doubling of the mortgage loan rate has hurt housing market. The number of contracts to purchase a home fell for the sixth consecutive month as of November home sales data.⁵ Also, retail sales fell .6% during the traditionally strong month of November, another sign that higher interest rates may be impacting spending.⁶

Despite the tightening monetary conditions, the U.S. economy has remained resilient. Although certain pockets of the economy are experiencing weakness like housing, retail sales, and durable goods, there are other areas showing strength like automobiles, healthcare, and energy. The job market remains strong indicating that businesses are still hiring workers. According to the December jobs report issued by the U.S. Bureau of Labor Statistics, employers added 223,000 jobs and the unemployment rate was 3.5%.⁷ We feel the unemployment rate will rise as higher interest rates work their way through the economy. However, because of the persistent under-supply of workers, we don’t see the jobless rate going above 4.5% in 2023. Fed officials forecast the unemployment rate to rise to 4.6% by the fourth quarter of 2023, in economic projections released in December.

We expect that the U.S. economy will experience a mild-to-moderate recession in 2023 lasting two or three quarters. Wells Fargo Investment Institute (WFII) is projecting a moderate recession this year. They expect U.S. GDP (Gross Domestic Product) to decline by 1.3% in 2023.⁸ WFII is also projecting an unemployment rate of 5.2% and the CPI moving all the way down to an annualized rate of 2.2% by the end of 2023. We agree with their inflation forecast but do not believe the unemployment rate will reach that level in 2023. We feel that once the Federal Reserve is convinced inflation is moving persistently toward its target annual inflation rate of 2%, they will pause further rate-hikes. We see this happening sometime during the first half of 2023 after perhaps two or three more .25% rate-hikes. That would bring the Fed funds rate to 5-5.25% which we believe will be sufficiently restrictive to slow economic activity and bring inflation down significantly.

Economic conditions in Europe and Asia have continued to deteriorate. Recession looks likely for most European and Asian economies, in our view. The one bright spot may be China which is in the process of lifting its’ Covid restrictions that have been largely in place since the pandemic started in early 2020. If China can successfully reopen their economy in the first half of 2023, it could give a boost to other Asian economies as well as other major trading partners like the U.S and Europe.

Equities

As we closed books on 2022, the so-called “Santa Clause rally” for equities in December never materialized. In fact, over the last two weeks of December, when the stock market typically rallies, stocks fell 4% as measured by the S&P 500 Index.¹ For the entire month of December, the S&P 500 declined by 5.8%.¹ We believe that worries of a recession in 2023 as well as the likely continuation of Federal Reserve rates-hikes in the first quarter fueled the decline in stocks. This weakness in the stock market was in spite of positive news on inflation that was reported by the Bureau of Labor Statistics (BLS) on December 13.⁹ The BLS reported that CPI rose by only .01% in November and the 12-month inflation rate fell to 7.1.⁹Although that rate of inflation is still high by historical standards, it is a significant improvement from the June 12-month CPI level of 9.1%.⁹ Perhaps more importantly, it was the fifth consecutive month of declining CPI.

If this trend of declining inflation continues in the first quarter of 2023, we believe the Federal Reserve may pause their rate-hike strategy sometime in the first half of the year. We believe this would be a potential positive catalyst for both stocks and bonds. In the meantime, we expect the stock market to remain volatile. In 2022, the S&P 500 experienced a 2% daily move in either direction 46 times, the most since the 2008 financial crisis.¹⁰ While we don’t expect 2023 to experience this level of volatility, we feel the stock market will continue to be volatile for first quarter of the year.

While high inflation and rising interest rates have been the primary driver of financial market volatility in 2022 in our observation, we believe investors will shift their focus away from these two factors and toward corporate earnings in 2023. We have long believed that the two primary factors that determine stock prices are interest rates and company earnings. The level of interest rates influences investor preferences for various investments. The higher the level of interest rates, the more attractive are fixed-income type of investments. Currently, interest rates for short maturity U.S. Treasuries, bank CDs and prime money market funds are in the 4% to 4.5% range.⁸ These short-term fixed-income instruments now offer significant competition for stocks which currently have an average yield of 1.8% using the S&P 500.¹ We believe one of the primary reasons for the weakness in stocks in 2022 was a shift by investors from stocks to fixed income as interest rates rose. With the Federal Reserve possibly ending its current rate-hike program sometime in the first half of the year, we believe the downward pressure on stocks from rising rates will subside.

We believe that greatest influence on stock prices in 2023 will be corporate earnings. Currently, the consensus estimate for S&P 500 earnings is $230. Using the December 31, 2022 closing level of 3840 for the S&P 500 Index, that price gives us a Price-to-Earnings Ratio (P/E Ratio) of 16.6. This is compared to a P/E Ratio of 24.8 at the beginning of the bear market on January 4, 2022 as you can see in the accompanying chart. The average P/E Ratio at the S&P 500 lows for the last five bear markets was 15.6 as indicated in the chart. The S&P 500, at its year-end 2022 closing level of 3840, is only 6% away from that average bear market P/E Ratio low. That is not to say that the P/E Ratio for the S&P will not drop below that level. However, it does demonstrate that the S&P 500 is at a reasonable valuation level based in the consensus earnings forecast, in our view.

We feel the current level of the S&P 500 Index, after having fallen nearly 20% in 2022, mostly reflects the higher market interest rates and the possibility of a mild-to-moderate recession for the U.S. economy in 2023. We expect 2023 corporate earnings will decline from 2022 levels as the economy weakens and possibly falls into recession. Weaker earnings would most likely be negative for stock prices. We could even see a testing of the 2022 market lows in the first half of the year. The S&P 500 Index hit its lows for the year on October at 3491 as discussed earlier. We believe there is a possibility that the October low for the S&P 500 could be tested in the first half of 2023. That’s about 10% below the level where the S&P 500 started the year.

While we expect the October low to hold, if corporate earnings worsen more than expected in the first half of 2023, we could see the S&P 500 break below that level. If that happens, we believe the next level of support for the S&P 500 is the 3200-3300 range. While we don’t believe the S&P 500 will go down that much from here, it is a risk that should be considered by investors looking to put cash to work in equites. To be clear, we believe the October low for the S&P 500 will hold if tested. At that 3500 level for the S&P 500, we feel stocks would be very attractive on a valuation basis.

We see a more positive environment for stocks in the second half of 2023. We believe there are three potential catalysts for a recovery in stocks. First, the possibility that the Federal Reserve not only pauses its rate-hike strategy, but also begins to ease monetary policy in the second half of the year. Second, the continued decline in the inflation data as the impact of higher interest rates begins to dampen both consumer and business demand for product and services. Third, potential recovery in corporate earnings in the latter half of the year. We also expect investor sentiment toward stocks to become more positive by mid-year. Sentiment is also an important driver of stock prices, in our view.

Commodities:

One of the few bright spots for investors in 2022 was the commodity market. Most commodities have been on a tear since May of 2020 as demand exploded for various commodities like copper, steel, aluminum, energy and agricultural products. We believe that strong demand, supply constraints and inflationary pressures have pushed prices higher. Using the Invesco DB Commodity Tracking Index as a basis for performance, commodities have increased in value by about 130% since May 1, 2020.¹ Energy prices are a major component of most commodity tracking funds, typically making up over 50% of the benchmark weighting. Since May of 2020, crude oil prices, as measured by West Texas Intermediate (WTI) prices, have increased by almost 200%.¹ While there are various reasons for the rise in crude oil prices, we believe it all comes down to an insufficient supply of crude oil in order to cover ongoing demand. A similar story applies to many other commodities. Economics 101 teaches that when demand exceeds supply, prices must rise. We remain optimistic on most commodities sectors although we could see some weakness in the first half of the year due to slowing economic growth.

Fixed Income

At the beginning of 2022, interest rates across the maturity spectrum on most fixed-income instruments were at historically low levels. Short-term instruments like U.S. Treasuries, bank CD’s and prime money market funds offered yields below .5%.⁸ Intermediate and long-term yields weren’t much better on highly-rated fixed-income securities. The 10-Year U.S. Treasury Note yield started 2022 at a yield of 1.6%.¹ That all changed when the first quarter inflation data came in higher than expected and the Federal Reserve responded by raising interest rates in March. The increase in interest rates in 2022 hit bonds with maturities more than 10 years very hard as we previously discussed. 2022 was one of the few years in U.S. financial market history where many investors experienced losses on both stocks and fixed-income investments.

We believe 2023 will be a better year for fixed-income investors. With interest rates exceeding 4% across much of the yield curve, investors can potentially enjoy meaningful cash flow from newly purchased high-quality fixed-income instruments. With the potential of a pause in the Fed’s rate-hike strategy in the first half of the year, we see interest rates stabilizing near current levels. If a recession hits the U.S. economy in 2023 and inflation pressures continue to subside, the Fed may even begin cutting rates in the second half of the year. This would potentially lead to falling bond yields and rising bond prices which would give fixed-income investors an opportunity to recover some of their losses from 2022

Strategy

Equities/Commodities:

We continue to favor high-quality, U.S. mid and large company stocks over smaller company stocks. We especially like stocks that pay dividends and sell at reasonable valuation levels. There are many high-quality dividend paying stocks that now offer yields in excess of 3%. We also favor companies that have a history of raising their dividends each year. However, dividends are not guaranteed and are subject to change or elimination. While we are unable to mention specific securities in our letter, we would be happy to discuss our recommendations with you.
We believe there is also a potential opportunity in certain high-quality growth stocks now that prices of many of these stocks have come down significantly in 2022. The Russell 1000 Growth Index, which is made up of higher growth and higher P/E Ratio stocks, declined by 33% in 2022 after several years of double-digit positive returns.¹ Several high-quality growth stocks, in particular those in the technology sector, dropped in value by 50-70%. We believe many of these stocks are now very attractive for the long-term investor.
Small-cap stocks look attractive to us on a valuation basis but we feel this sector will continue to underperform large and mid-cap stocks in the first half of the year. Higher interest rates and recession could negatively impact small companies since they tend to borrow more to finance their businesses and typically don’t have the cash reserves to weather a recession. We have been bearish on this area for a couple of years and will remain bearish until we can get a clearer picture on the direction of interest rates and the economy. While waiting for this clearer picture may cause us to be a little late in participating in the recovery of this asset class, we want to maintain a more conservative outlook for the first half of the year for the reasons stated above.
We remain bearish on foreign stocks based on our negative economic outlook for most international economies and the potential of continued U.S. dollar strength in 2023. At some point, we feel both developed country and emerging market country stocks will be attractive for investment however, we believe that now is not the time to add exposure to these asset classes. A small exposure to international stocks may be appropriate for those investors seeking more portfolio diversification. However, we would wait to add to this area until we get closer to the middle of 2023.
We remain very bullish on commodities in general, but in particular crude oil. We believe the supply of crude oil will continue to be constrained for at least the next 12 to 18 months. Although we may see some drop-off in demand due to economic weakness in the first half of the year, we believe the supply/demand imbalance will remain and support crude oil prices near current prices. WTI is currently trading at about $76 per barrel. If demand softens as we expect in the first half of the year, we could see the price of WTI fall below $70 to the mid-60s. However, we feel the upside potential for WTI is significantly greater once the global economy begins to recover. We see prices possibly nearing the $110-120 level sometime in 2023.
We continue to favor equities in the commodity sector, in particular, energy stocks. Even if crude oil prices weaken this year, we believe energy companies involved in the oil and gas production area will continue to show strong positive cash flows as long as crude prices stay above $60 per barrel for WTI. Dividends for this sector are well above the dividend rate for the S&P 500 which currently stands at 1.8%.¹ In addition, several high-quality oil and gas pipelines stocks are paying dividend yields over 5%. Again, dividends are not guaranteed and are subject to change or elimination. We see upside potential for energy stock prices in 2023 if energy prices move higher as we expect.
At this time, we are cautious in the near-term on the basic metals sector of the commodity market based on our belief the global economy will be in recession this sometime this year and demand for many commodities like copper, steel, and aluminum may temporarily decline. We would wait until the middle part of year to add to this sector.
We favor precious metals like gold and silver which have been strengthening in price recently. We believe the fundamental and technical picture for gold and silver is very positive. These precious metals tend to perform well in recessionary environments, from our observation.

Fixed Income:

We continue to favor high-quality fixed-income instruments like U.S. Treasuries, bank CD’s, prime money market funds as well as high-grade corporate and municipal bonds. We view tax-free municipal bonds, with current yields ranging from 3% to 4.5% for intermediate and longer-term maturities, as very attractive for investors in higher tax brackets. Those tax-free yields calculate to a taxable equivalent yield for investors in a 35% tax bracket of 5.4% to 6.9%. In 2022, this sector experienced significant outflows as investors sought to protect principal from rising interest rates. We see cash flowing back into this sector in the first half of the year as investors seek lock in these yields.
Over the past two years, we have favored keeping average bond maturities under 10 years in order to help reduce downside risk if rates were to rise.¹¹ We are now favoring lengthening the average maturity for the fixed-income component of a portfolio in order to take advantage of the higher interest rates. In particular, we favor a barbell strategy for the fixed-income component. This strategy involves investing a portion of the fixed-income allocation in short-term instruments, with maturities of less than 2 years, while investing the remainder of the allocation in longer-term bonds with maturities ranging from 10-20 years.
We would avoid most international and emerging market fixed-income holdings for now as a potentially stronger U.S. dollar and weaker overseas economic conditions could negatively impact prices, in our view.
We would also avoid so called “high-yield” bonds. These bonds, which have lower credit ratings than high-grade bonds, tend to underperform in a recession as default rates typically rise.

The Bottom Line

We realize that our forecast for the first half of the year for the U.S. economy and stock market is cautious if not somewhat pessimistic. We have maintained this cautious position since June of last year when the Fed surprised investors with a .75% rate-hike and indicated further rate-hikes to follow. We believe these moves by the Federal Reserve changed the short-term outlook for stocks and increased the probability of a recession for the U.S. economy. This cloud of Fed monetary tightening still hangs over the stock market. We believe that until the Fed is finished increasing the Fed funds rate, it will be difficult for stocks to sustain an upward tread.

However, we see the proverbial light at the end of the tunnel. Looking out to the second half of 2023, we believe the Fed will have stopped its rate-hike strategy, inflation statistics will be moving closer to the Fed’s 2% target, and the economy will be in the later stages of a recession. On the basis of these forecasts, we believe the bear market in stocks will end by no later than early summer and the stock market will be in the early stages of a more durable recovery.

For this reason, we are encouraging our clients to stay the course and ride out the near-term market volatility. Since it is very difficult to time stock market movements in our experience, we believe investors should continue to hold equity allocations according to their long-term investment objectives. We believe any further downside in stocks would be a good time to selectively add to high-quality equities, where appropriate.

In addition, we believe the beginning of the year is a good time to evaluate your current asset allocation strategy to help ensure your portfolio is in line with your long-term goals and objectives. This could also be a good time to rebalance portfolios back to long-term asset allocation targets.

As we begin the new year, we are very grateful for your confidence and trust in us. We are honored to serve you and your families and look forward to our continued relationship.

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

Your Trinity Capital Management Team

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

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.

Download the PDF version of this report by clicking here.

Footnotes

¹ Thompson charts

²https://www.bls.gov/regions/mid-atlantic/data/consumerpriceindexhistorical_us_table.htm

³ https://www.forbes.com/advisor/investing/fed-funds-rate-history

⁴https://fred.stlouisfed.org/series/MORTGAGE30US

⁵https://www.usnews.com/news/economy/articles/2022-12-28/home-sales-fall-4-in-november-way-below-forecasts-and-the-sixth-monthly-decline-in-a-row

⁶https://www.cnn.com/2022/12/15/economy/us-retail-sales-november/index.html

⁷Wall Street Journal article, “Hiring, Wage Gains Eased in December, Pointing to a Cooling Labor Market in 2023,” January 9, 2023

⁸ Wells Fargo Investment Institute, 2023 Outlook, December 2022.

⁹ Wall Street Journal, “Inflation Isn’t Vanquished Yet” December 13, 2022.

¹⁰ Barron’s, “What a Crazy Year: A Bear Market, Oil’s Pop, and Those Bond Yields” December 30, 2022

¹¹ TCM 2021 Investment Outlook & Strategy dated 1/11/21 and TCM 2022 Investment Outlook & Strategy dated 1/10/22.

See page 8 for notes and disclaimers

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.

The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

Wells Fargo Advisors Financial Network is not a legal or tax advisor. Consult your tax advisor or accountant for more details regarding your specific circumstance.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income securities may be worth less than the original cost upon redemption or maturity. Yields and market value will fluctuate so that your investment, if sold prior to maturity, may be worth more or less than its original cost. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.

Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns nor can diversification guarantee profits in a declining market.

Diversification does not guarantee profit or protect against loss in declining markets.

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

P/E Ratio is a valuation of a company or an index’s current value compared to its earnings per share. It is calculated by dividing the market value per share by earnings per share.

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.

Dow Jones Industrial Average: The Dow Jones Industrial Average is an unweighted index of 30 "blue-chip" industrial U.S. stocks.

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

Index return information is provided for illustrative purposes only. Index returns do not represent investment performance or the results of actual trading. Index returns reflect general market results, assume the reinvestment of dividends and other distributions and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.

The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions.
Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks smaller, less-seasoned companies, tend to be more volatile than the overall market.
Materials industries can be significantly affected by the volatility of commodity prices, the exchange rate between foreign currency and the dollar, export/import concerns, worldwide competition, procurement and manufacturing and cost containment issues.

Past performance is no guarantee of future results and there is no guarantee that any forward-looking statements made in this communication will be attained.

CAR-0123-00998

TCM Market Outlook and Strategy - November 28, 2022

Mon, 28 Nov 2022 06:00:00 +0000

Stephen M. Mills, CIMA®

Partner
Chief Investment Strategist

Commentary

2022 has been a challenging year for most investors with major stock and bond market averages suffering broad-based losses since early January. The stock market officially entered a bear market in mid-June when the broad-based S&P 500 Index (S&P 500) hit a level that was 20% below its January 3^rd peak.¹ Currently, the S&P 500 sits at about 16% below its January 3^rd all-time high.¹

As of the date of this letter, we are currently experiencing the third 10% plus countertrend rally in stocks for this bear market.¹ The current rally began in mid-October after stocks had broken below the June lows and negative investor sentiment had hit extreme levels. The S&P 500 Index rallied 8% from the October lows before stalling out on November 2^nd when the Federal Reserve (Fed) announced a fourth consecutive .75% rate hike.²Although the .75% rate hike was largely anticipated by most economists and strategists, Chairman Jerome Powell’s comments at the post meeting press conference did not sit well with investors. Powell indicated in his remarks that the Fed would remain vigilant in its efforts to bring inflation under control and he quashed any ideas of a potential change in its tightening policy by stating that it was “very premature” to consider a pause in their rate hike strategy.³ This was not welcome news for investors who had been anticipating an end of the Fed’s rate hike cycle soon. Powell’s comments sent stock prices sharply lower with the S&P 500 Index tumbling 2.5% by the end of the trading session. In essence, the takeaway for investors was that the Fed would continue to keep its monetary policy restrictive for longer than previously anticipated.

The S&P 500 Index reversed course yet again on November 10^th on the heels of the October inflation report issued by the Department of Labor (DOL) which came in better than expected. The DOL reported an increase in the Consumer Price Index (CPI) of 7.7% from the same month a year ago, down from 8.2% in September and below Wall Street’s estimates of 7.9%. Core prices, which exclude food and energy items, rose .3% from September, the smallest monthly gain in a year.⁴ This positive inflation data sent stock prices soaring during the trading session with the Dow Jones Industrial Average finishing 1200 points higher on the day and the S&P 500 Index rising by 5.5%.¹ The S&P 500 closed at 4027 as of the November 23^rd, approximately 15% higher than its October 13^th low of 3492.¹ We saw a similar rally of 18% in the S&P 500 off the June lows through mid-August on investor hopes that the Fed would pivot from its aggressive rate hike policy soon. This gain faded after Chairman Powell’s comments at the Jackson Hole Economic Symposium on August 25^th when he reiterated that the Fed would continue with its aggressive monetary policy tightening for the foreseeable future.

This current rally in stocks appears to be once again based on a potential Fed pivot in its current monetary policy. The Fed has raised the Fed funds rate by 4% since March of this year. According to a recent Reuters poll of economists, the Fed will raise the Fed funds rate by .50% at its next meeting in mid-December, and the Fed funds rate will peak at between 4.75% and 5% by early next year before the Fed pauses.⁵ If that is correct, it would be good news for investors in our view.

While we are certainly happy about this most recent rally in stock prices, we remain somewhat skeptical. So far, the Fed has not indicated any shift in its monetary tightening strategy. We anticipate that the Fed will raise rates again in December by .50%. This is lower than the .75% rate hikes the Fed implemented in each of its last four meetings but still an aggressive rate hike by historical standards. The Fed will get one more inflation report before its mid-December meeting. If the inflation trend continues downward, we could see a shift in the Fed’s hawkish stance and a possible indication of a potential Fed pause in its rate hike strategy. On the other hand, if the November inflation report is worse than expected, we would expect the Fed to remain very hawkish in its tone and continue raising the Fed funds rate over its next several meetings.

We believe that the Fed will pause its rate hike strategy in the first half of 2023 as we potentially see economic weakness and a possible recession. We believe that it is a growing possibility the U.S. economy will enter a recession sometime in the first or second quarter of 2023, based on current economic trends and indicators. If this were to occur, we believe it will be a mild-to-moderate recession lasting two or three quarters. If history is any guide, inflation should recede significantly during the recession.

What does this potentially mean for investors? Using history as a guide, we believe bond yields will fall and bond prices will rise over the next several months as economic activity slows. This potentially presents a buying opportunity for intermediate and long-term bonds. We see potential gains across the high-quality fixed income spectrum which includes, U.S. treasury notes and bonds, high grade corporate bonds and municipal bonds. Investors can now lock in interest rates of 4% or greater with many of these instruments.¹ That level of interest rates is nearly double the levels just one year ago.

We believe the major stock market averages will continue to be volatile over the next few months until it becomes clearer that inflation is abating and the Fed is closer to pausing its current rate hike cycle. We see the stock market remaining in a trading range through the first quarter of 2023. Using the S&P 500 Index as our measure of overall stock market performance, we believe the bottom of the range for the S&P 500 will be near the June and October lows in the 3500-3600 range with the top end near the 4100-4200 range. As of the date of this letter, the S&P 500 is currently sitting nearer to the top end of this trading range. We believe the bottom end of the range will hold for now, however, if the U.S. economy and corporate earnings worsen more than expected in the first half of 2023, we could see the S&P break below the bottom end of the range. If that happens, we believe the downside risk is to about 3200 for this key benchmark. At 3200, the Price to Earnings Ratio (P/E) of the S&P 500, based on projected earnings of about $210 for 2023, would be about 15 times earnings, a historically cheap level in our view.⁶Currently, the P/E level of the S&P 500 sits at about 18 times the $210 earnings forecast.¹

While it is difficult to predict when the current bear market in stocks will end, we believe we are closer to the end than the beginning. Looking out twelve months from now, we see inflation much lower, the end of the current Fed tightening cycle, and improving economic fundamentals for the U.S. economy. We believe corporate earnings growth will resume by the middle of 2023. We believe there is a good possibility that the major stock market averages could recover most if not all of their losses from this year by the end of 2023. From our observation, stocks prices tend to bottom out well before the end of a recession and begin rising in anticipation of better economic fundamentals. Since it is very difficult to time market movements in our experience, we believe investors should continue to hold equity allocations according to their long-term investment objectives. We recommend using weakness in stock prices to add to high quality equities where appropriate.

We understand that these kinds of volatile markets test investors patience and resolve. Often, the temptation is to temporarily move out of risk assets into safer investments. However, we could caution against such action unless long-term objectives or risk tolerance have changed.

We will continue to monitor market and economic conditions and work with you in managing your portfolio. If you have any questions or concerns, please give us a call.

Your Trinity Capital Management Team

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

Footnotes

Thompson Charts
https://www.cnbc.com/2022/11/02/fed-hikes-by-another-three-quarters-of-a-point-taking-rates-to-the-highest-level-since-january-2008.html
Riverfront Weekly View, 11/7/22
https://www.wsj.com/articles/us-inflation-october-2022-consumer-price-index-11668050497
https://www.reuters.com/markets/rates-bonds/fed-lift-rates-by-50-basis-points-peak-policy-rate-may-be-higher-2022-11-18/
Well Fargo Securities, “Equity Research,” October 19, 2022

Past performance is no guarantee of future results

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 "blue-chip" industrial U.S. stocks.

Past performance is no guarantee of future results and there is no guarantee that any forward-looking statements made in this communication will be attained.

The Consumer Price Index (CPI) is a measure of the cost of goods purchased by average U.S. household. It is calculated by the U.S. government's Bureau of Labor Statistics.

CAR-1122-03164

TCM Market Outlook and Strategy - October 1, 2022

Sat, 01 Oct 2022 05:00:00 +0000

Stephen M. Mills, CIMA®

Partner
Chief Investment Strategist

Brad Bays, CIMA®

Partner
PIM Portfolio Manager

Highlights:

The S&P 500 Index has fallen approximated 22% as of the date of this letter.
The “bear market” for equities is now nine months old.
The U.S. Federal Reserve continues to tighten monetary conditions by hiking the fed funds rate and reducing balance sheet holdings in an effort to fight inflation.
Inflation has shown modest declines recently but remains well above the Fed 2% target.
U.S. economic growth is slowing and the risks for a recession have risen.

Commentary

2022 has thus far been a difficult year for investors. As of the end of the third quarter, stocks, as measured by the S&P 500 Index, have recorded a negative return of 23.9% including dividends for the year. ¹ The Nasdaq Index, which is made up of primarily higher growth stocks, has suffered an even worse decline of 32.4% for the same time period.¹ Both indices entered what is often referred to as a “bear market” (a decline of 20% from a previous high) in June of this year.¹ The Dow Jones Industrial Average hit the negative 20% level in late September, officially confirming the bear market in stocks.¹ We mark the beginning of this bear market from the January 3rd high for the S&P 500.

Bond prices have also fallen this year as rising interest rates have driven most bond indices down by double digits. As of September 30, intermediate government bonds, as measured by the Ishares 7–10-year Treasury Bond ETF (IEF), have recorded a negative return of approximately 13% for the year while corporate bonds, as measured by the Bloomberg US Aggregate Index, have fallen 11.5% in value.1 Thus far, 2022 has been one of the worst years in the past 40 years for fixed income investments. In addition, it is rare that both stocks and bonds experience such negative returns at the same time. Typically, when one of these asset classes is down the other is up but that has not been the case this year. This challenging environment has certainly tested investor patience and increased investor anxiety.

We believe the losses for both stocks and bonds are directly attributable to the aggressive monetary tightening by the U.S Federal Reserve (Fed) and other central banks around the world this year. Since March, the Fed has hiked the federal funds several times, bringing the rate to the 3-3.25% range as of the last Federal Open Markets Committee (FOMC) meeting on September 21 when the committee increased the fed funds rate by .75%.² That rate increase was the Fed’s third straight .75% rate hike.² Federal Reserve chairman Jerome Powell, speaking on behalf of the FOMC, has consistently emphasized the committee’s resolve to bring the rate of inflation back down to the Fed’s long-term target of 2%. Chairman Powell stated at the news conference following the September 21 rate announcement: “We have got to get inflation behind us. I wish there were a painless way to do that but there isn’t.”4 The monthly inflation statistics, as measured by the Consumer Price Index (CPI), have shown inflation rising by over 8% on a year-over-year basis since early this year. The latest inflation report issued by the Bureau of Labor Statistics for August showed CPI rising by 8.3% over the previous 12 months. That level is well above the Fed’s 2% target rate which is why the majority of FOMC members see the fed funds rate rising to between 4% and 4.5% by the end of the year. That may happen at the next two FOMC meetings in November and December.

The Fed’s aggressive monetary tightening will likely throw the U.S. economy into a recession, in our view. Higher interest rates tend to depress both business and consumer demand for goods and services. We are already seeing evidence of this in the housing market as mortgage rates jumped to the 6.5% for a 30-year conventional mortgage as of September 28, the highest level since mid-2008. 5 The U.S. housing market slowed for the seventh month in a row as reflected in the monthly existing home sales report issued by the National Association of Realtor. Sales of previously owned homes fell .4% in August from July to the lowest level since May 2020. 6 August sales were lower by 19.9% from the year earlier level. 6 A combination of high home prices and rising mortgage rates have made purchasing a home much less affordable. Housing is a major component of our economy and one of the reasons for the strong GDP growth over the past couple of years.

There are other data points that indicate the economy is slowing. One in particular, is the Conference Board’s Leading Economic Index (LEI), which tracks ten economic components whose changes tend to precede changes to the overall economy. As of the latest August reading, the LEI has declined for six consecutive months potentially signaling a recession according to Ataman Ozyildirim, Senior Director of Economics at The Conference Board. 7 The adjacent chart indicates three other times since 2000 that the LEI correctly signaled a recession.

Scott Wren, Senior Global Market Strategist with Wells Fargo Investment Institute, stated in a recent report: “Based on our work, the U.S. economy is likely to fall into recession late this year. We expect the recession to last into the middle portion of 2023. We see a mild to moderate recession for the U.S. economy developing in the fourth quarter of this year and extending into the first half of 2023.” 8 We concur with that forecast.

We believe recession fears are the primary reason stock prices have fallen so much this year, particularly since mid-August when Chairman Powell spoke at the Jackson Hole conference and reiterated the Fed’s resolve to tighten monetary policy to bring inflation under control. Stocks had staged on impressive rally off the June lows to mid-August with the S&P 500 Index rising 17% from its June 17 closing low for the year. This market rally subsequently faded after Powell’s Jackson hole comments. The major averages are testing the June lows as we pen this letter.

The chart on the next page, which we included in our July letter (a link to access the letter is included in footnote 9) shows the last 11 bear markets dating back to 1946 using the S&P 500 Index. The average length of these 11 bear markets is 16 months. The average price decline is 35.1%. As of the date of this letter, the current bear market has lasted about nine months and with the S&P 500 Index falling nearly 25% from its January 3rd high so we may have a bit further to go before the bear market ends. But here’s the good news: notice the two columns labeled 6-month and 12-month returns after the bear end. The overall average return for the S&P 500 after six months is a positive 27.3% and after 12 months it is plus 43.4%. We don’t know when this current bear market will end nor how much stocks will ultimately decline. However, what we do know is that historically, bear markets are followed by bull markets. Although we may see stocks fall further from current levels, we feel that the bear market is closer to the end than the beginning and we could begin to see a more durable recovery beginning as early as the fourth quarter of this year or in the first quarter of next year.

The current high degree of uncertainty concerning inflation, the Federal Reserve’s future monetary policy actions, and the potential of a recession beginning later this year, make predicting the end of the bear market very difficult. Eventually, we feel the outlook will become clearer and investor attitudes will change. But until then, we expect the stock market will remain volatile.

Some investors may be tempted to sell their equity holdings and wait for fundaments to improve before getting back into stocks. However, in our experience, by the time the fundamentals start to improve, the stock market has already bottomed and has risen significantly off the lows. Case in point, at the onset of the coronavirus pandemic in February 2020, the S&P 500 Index began falling, declining by 35% from its February 14 high to its low on March 20. The global pandemic was just getting started and counties around the world, including the U.S., were shutting down their economies. Over the course of the next three months, U.S. economic activity fell off a cliff with Gross Domestic product falling an astonishing 9.6 for the second quarter. 10 However, the S&P began to recover in late March and had regained most of its losses by the beginning of June, well before the economy began to recover. By the beginning of August, the S&P had fully retraced its 35% first quarter decline. We believe this is typical of a bear market pattern where stocks begin their recovery before economic fundaments start to improve.

We continue to focus primarily on holding high quality stocks and equity funds in our client’s portfolio. We favor U.S. large and mid-size company stocks and funds. Our bias toward quality means holding companies with strong financials, consistent sales and earnings growth and that pay current dividends with a history of increasing future dividend payments. We believe these types of stocks can better weather economic downturns while at the same time giving the investor a consistent stream of cash flow. We remain underweight international stocks due to our view that the economies in Europe and Asia may experience deeper recessions that in the U.S. We still favor commodity related stocks especially those in the oil and gas sector. Many commodity related stocks have experiences significant declines recently and could go lower if the economy falls into a recession. However, we believe the current valuations for many of these stocks are attractive, especially for those that pay dividends. We see long-term structural supply deficits in commodities like copper, oil, and lithium, supporting the prices of these resources and increasing the earnings and dividends of the companies that produce them.

We are beginning to favor high quality intermediate fixed income securities. We believe current interest rates for Treasury securities, high-grade corporate bonds and municipal bonds have become attractive at current levels. Short to intermediate Treasuries are now yielding close to 4% while intermediate corporate bond yields are approaching 5%. 1 Tax-free municipal bonds with maturities between 5 to 10 years are now yielding in the 4% range. 1 A 4% tax-free yield is equivalent to a 6.1% taxable yield for an investor that is in the 35% tax bracket. Even money market yields have risen to about 3% recently and are expected to go even higher as the Fed raises rates. 1 These yields are substantially higher than at the beginning of this year when yields for most maturities ranged between .1% and 2% for most fixed income securities. We believe this rising rate environment has presented an attractive opportunity for yield-hungry investors to put idle cash to work.

While we may have more downside left in stocks before a durable bottom is made, we believe we are getting close the end of the bear market. We feel many stocks are at an attractive entry point for those who have a time horizon of two years or longer. We believe there are three primary drivers of stock prices: earnings, interest rates and investor sentiment. We see each of these drivers beginning to show improvement by the first quarter of 2023. We believe the Fed will pause its rate hike cycle by the end of the year or at the latest, the first quarter of 2023. We believe the economy can withstand interest rates in the 4-5% range. We see an earnings recovery for stocks beginning in the first or second quarter of 2023. Currently, investor sentiment regarding the outlook for stocks, is at some of the worst levels in history. In addition, according to the most recent AAII Investor Sentiment Survey, individual investors are at the highest level of pessimism since March of 2009 which marked the beginning of a multi-year bull market in stocks.11 There are other sentiment indicators that show similar levels of investor pessimism. Whether the current sentiment readings will mark the beginning of a new bull market remains to be seen. However, historically, bear markets often end at such extreme levels of pessimism, in our view.

In summary, we understand that the volatility in the financial markets is very stressful for most investors who have exposure to stocks and bonds in their portfolios. Our recommendation is to remain patient and hold current allocations. We believe the key to navigating through highly uncertain and volatile investment environments, like the one we are in, is to be diversified through prudent asset allocation. Tactical portfolio adjustments can be made depending on circumstances. This may be a good opportunity to use any further downside volatility to add cash reserves to both stocks and bonds where appropriate. We encourage investors to evaluate current asset allocations to ensure portfolios are in line with long-term goals and objectives. This could also be a good time to rebalance portfolios back to long-term target allocations particularly if equity allocations have dropped below targeted levels.

As always, we greatly appreciate your trust and confidence in us. We will continue to work to keep you informed of economic and market developments.

Your Trinity Capital Management Team

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

Footnotes
¹ Thompson Charts
² https://www.federalreserve.gov/monetarypolicy/openmarket.htm
3 https://www.bls.gov/cpi/
4 Wall Street Journal, “Fed Raises Interest Rates by .75% for Third Straight meeting, September 21, 2022.
5 https://www.reuters.com/markets/us/us-mortgage-interest-rates-jump-652-highest-since-mid-2008-2022-09-28/
6 Wall Street Journal, U.S. Home Sales and Prices Fell in August as Mortgage Rates Rise, September 21, 2022.
7 https://www.conference-board.org/topics/us-leading-indicators
⁸ Wells Fargo Investment Institute, Market Commentary by Scott Wren, September 28. 2022.
9 https://www.tcmtx.com/blog/post/tcm-market-outlook-and-strategy-july-6-2022
10 https://www.bea.gov/news/2020/gross-domestic-product-2nd-quarter-2020-advance-estimate-and-annual-update
11 https://www.aaii.com/sentimentsurvey

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.

Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock
market should be made with an understanding of the risks associated with common stocks, including market fluctuations. Investing in foreign
securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and
different accounting standards. This may result in greater share price volatility.

The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

Past performance is no guarantee of future results and there is no guarantee that any forward-looking statements made in this communication will be attained.

Wells Fargo Advisors Financial Network is not a legal or tax advisor. Consult your tax advisor or accountant for more details regarding your specific circumstance.

U.S. Treasuries: Bloomberg Barclays Global U.S. Treasury Index; U.S. Municipals: Bloomberg Barclays U.S. Municipal Index; U.S. TIPS: Bloomberg Barclays U.S. TIPS Index; U.S. Corporates: Bloomberg Barclays U.S. Aggregate Corporate Bond Index; U.S. High Yield: Bloomberg Barclays U.S. Corporate High Yield Index; Emerging Market: JPMorgan Emerging Markets Bond Index. Index return information is provided for illustrative purposes only. Index returns do not represent investment performance or the results of actual trading. Index returns reflect general market results, assume the reinvestment of dividends and other distributions and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment.

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.
Dow Jones Industrial Average: The Dow Jones Industrial Average is an unweighted index of 30 "blue-chip" industrial U.S. stocks.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
The Consumer Price Index (CPI) is a measure of the cost of goods purchased by average U.S. household. It is calculated by the U.S. government's Bureau of Labor Statistics.
Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
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.

CAR-0922-04406

TCM Market Outlook and Strategy - August 25, 2022

Fri, 26 Aug 2022 05:00:00 +0000

Stephen M. Mills, CIMA® Partner

Commentary

The U.S. equity markets have staged an impressive comeback since making lows in mid-June. The S&P 500 Index surged 14% since its June 17 low cutting the loss for the year to 13% which, at the low, the index was down almost 25%.¹ The Dow Jones Industrial Average has also gained 11% since hitting its lows in June.¹ In our view, the stock rally was fueled by investor optimism that the Federal Reserve (Fed), after hiking the Fed funds rate by 2.25% since March, is getting closer to the end of its rate hike cycle.² This optimism was partially based on a better-than-expected Consumer Price Index (CPI) release for July. The Bureau of Labor Statistics reported that CPI increased by 8.5% on an annualized basis at end of July, lower than the 8.7% increase that a survey of economists were expecting.³Although the rate of CPI increase was still high, it indicated that inflation may be peaking and heading lower over the next several months. This was welcome news to investors since the high inflation readings late last year and early this year prompted the Fed to embark on an aggressive monetary tightening strategy in order to bring the inflation rate back down toward its 2% target level. In addition to this optimism regarding future inflation and Fed policy, second quarter corporate earnings have so far been mostly positive indicating that the economy is still growing and a deep recession in the near term is less likely.

Recession talk has taken center stage over the last several weeks after the Department of Commerce Bureau of Economic Analysis (BEA) reported in early July that U.S. Gross Domestic Product (GDP) fell .9% after inflation which was the second quarter in a row that inflation adjusted GDP has declined.⁴ One common definition of a recession is two consecutive quarters of negative GDP, however, many economists disagree with that definition and prefer look to the National Bureau of Economic Research (NBER) to determine if the economy is in a recession.⁵ According to the NBER website, their broad definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”⁶ The NBER examines the depth, diffusion, and duration of an economic downturn to determine if it qualifies as a recession.⁶ They look at a range of economic data including GDP, employment, household income, personal consumption expenditures, wholesale and retail sales, and industrial production.⁶The NBER has identified 12 recessions dating back to 1948, or one approximately every six years.⁵

As of the date of this letter, the NBER has not announced that the U.S. economy is in a recession. Recent economic data has been mixed with areas like manufacturing, housing, business and consumer sentiment all indicating that the U.S. economy is deteriorating while areas like consumer spending, employment, and corporate profits indicate continued economic expansion, although, several of these areas are growing at a slower rate than last year. From our perspective, the jury is still out on whether we will fall into a recession this year. October’s third quarter GDP report will give us a good reading on how the Fed’s tightening policy is impacting economic growth. We think it is probable that based on continued high prices for food, energy and other goods, the increased cost of capital from the Fed’s rate hikes, and the possibility of an acceleration in job layoffs, the economy could fall into a mild to moderate recession by the end of the year or early 2023.

The global economy is showing weakness as well. It seems the global economy is in the midst of a perfect storm environment of high inflation, falling demand for goods and services, supply chain frictions, and rising interest rates. Europe faces a difficult winter with shortages of natural gas driving prices to extraordinary levels and China continues to show economic weakness from their Covid lockdown policy. Although the U.S. economy is somewhat immune to these forces, it will certainly be impacted by the economic weakness in these economies.

What does that potentially mean for the U.S. stock and bond markets? Given the uncertainty with the current economic and market environment, forecasting the short-term direction for stocks is particularly difficult. However, looking at it from the standpoint of risk/reward, we feel that at the current level for the S&P 500 Index at 4188, stocks are fairly valued based on earnings, interest rates and Fed policy.¹ We see as much downside risk for stocks as we do upside reward in the short-term after the recent rally. Our base case is for the stock market to churn near current levels for the rest of year as the economy and corporate earnings continue to feel the pinch of Fed tightening. We believe the June low for the S&P 500 Index of 3637 will serve as the low of this bear market.¹However, we see the possibility that the index could test that low before the end of the year, perhaps before the November Congressional election.

As far as the bond market is concerned, we see interest rates on short to intermediate bonds like U.S. Treasury bonds, high grade corporate bonds, and municipal bonds remaining near current levels and possibly trending lower over the next few months. Recently, the 10-year U.S. Treasury note yield moved back above 3%, up from the 2.6% level reached at the end of July.¹ Corporate and municipal bond yields have also moved higher. At this level, we believe high grade bonds are attractively priced, can add income to a portfolio, and provided some downside protection if the stock market tests the June lows. We don’t believe bond yields will go much higher over the next six months as the economy slows and perhaps falls into a mild recession.

Looking out twelve months, we are optimistic that the economy will be growing once again, corporate earnings will be reaccelerating, and stock prices will be trending higher. We believe there is a good possibility that the major stock market averages could recover most if not all of their losses from this year by next summer. However, in the interim, we see both stock and bond markets remaining volatile.

These volatile markets require patience and perseverance. They can certainly test one’s resolve to stick with portfolio allocations. In our view, this volatility can present an opportunity to adjust risk exposure and add to the growth areas of the portfolio. We are seeing value in several sectors of the stock market and where appropriate are adding to equities as the market presents good opportunities.

Lastly, we sincerely appreciate your trust and confidence in us. We are here to work with you on adjusting portfolio allocations if needed as well as achieving your long-term objectives. If you have any questions or concerns, please don’t hesitate to give us a call.

Your Trinity Capital Management Team

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

See below for Disclosures

Past performance is no guarantee of future results

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 "blue-chip" industrial U.S. stocks.

Past performance is no guarantee of future results and there is no guarantee that any forward-looking statements made in this communication will be attained.

The Consumer Price Index (CPI) is a measure of the cost of goods purchased by average U.S. household. It is calculated by the U.S. government's Bureau of Labor Statistics.

CAR-0822-03680

TCM Market Outlook and Strategy - July 6, 2022

Wed, 06 Jul 2022 05:00:00 +0000

Stephen M. Mills, CIMA_®Partner

Chief Investment Strategist

Brad Bays, CIMA_® Partner

PIM Portfolio Manager

Highlights:

The first half of 2022 was the worst year for stocks since 1970.
The S&P 500 Index officially entered a “bear market” in June.
The U.S. Federal Reserve continues to hike interest rates and reduce liquidity in an effort to fight persistently high inflation. .
Inflation continues to show no signs of abating
Although the U.S. economy remains resilient, rising interest rates and high inflation are putting downward pressure on growth.

Commentary

The first six months of 2022 have been one of the worst starts in history for U.S. stock markets. We have to go back to 1970 when the S&P 500 Index lost 21% to find a six-month start worse than this year’s performance.¹ As of June 30, the S&P 500 Index is down 20.5% in value since the beginning of the year reaching Wall Street’s technical definition of a “bear market” which is a decline of 20% from a previous high.² The Dow Jones Industrial Average faired a little better but still lost 15.3% of its value over the same time period while the Nasdaq Index declined by a whopping 29.5%.² Needless to say, many investors find themselves somewhat shell-shocked and frustrated by the severity of the stock market decline so far this year.

While we have been warning of the possibility of a correction in stock prices since the first of the year coming off a very strong 2021 when the S&P 500 Index rose 28.7%, we have been surprised by the severity and volatility of the decline in stocks this year. In the TCM 2022 Market Outlook & Strategy letter that we wrote in early January, we believed the U.S. stock market was vulnerable to a correction of as much as 10-15% during 2022 due to a number of risk factors. However, we were also optimistic about the prospects of the stock market for 2022 and believed we would see positive returns for the year in the S&P 500 Index based on continued strong economic and earnings fundamentals. Our forecast began to unravel in February when Russia invaded Ukraine sending oil and natural gas prices dramatically higher. The price of oil, as measured by West Texas Intermediate Crude (WTI), surged from the mid $70’s per barrel at the beginning of the year to nearly $120.² In addition, in March, the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) surged 7.9% for the previous 12 months ending February 28, a 40-year high.³ The S&P 500 Index responded to these negative developments by falling nearly 14% by March 15 from its January 4 high.²

The stock market staged a strong rebound over the next few weeks but then turned lower again as it became apparent to investors that the Federal Reserve (Fed) was going to have to get much more aggressive with its actions to fight inflation. This narrative of higher interest rates and persistently high inflation has been in control of the market for the past several months sending stock prices on a downward path. In mid-June, the Fed surprised markets with a higher than expected .75% rate increase in the Fed fund rate and cemented the concerns about higher short-term interests rates this year.⁴ The Fed has now raised the Fed funds rate to 1.5% from 0% at the beginning of this year and it appears they will continue to hike rates for the remainder of 2022.⁴ This has raised the probability of a recession for the U.S. economy over the next few quarters which we believe is one of the contributing factors for the sharp selloff in the S&P 500 Index in late June. The S&P 500 Index officially fell into bear market territory on June 17, closing the day down 24% from its January 4 high.²

We have not experienced a bear market in stocks since the first quarter of 2020 when the S&P 500 index fell 35% over a 5 week stretch on fears the Covid-19 pandemic would throw the global economy into a severe recession. By mid-August, the S&P had fully recovered all of its losses. We are not anticipating that large of a decline in stocks this time around but we are also not anticipating as quick of a recovery. The chart below shows the last 11 bear markets dating back to 1946. The average length of these bear markets is 16 months with the shortest being about 1 month and the longest just over 30 months. Thus far, the current bear market has lasted about six months so based on history we may have a little ways to go before it ends. We believe that the current downturn in stock prices may not end until it becomes evident that either inflation is subsiding and/or the Fed is nearing the end of its rate hike cycle. That could happen as early as sometime in the third quarter of this year or as late as the first quarter of 2023, in our view.

From our 40 plus years of observing financial markets, the stock market typically trades differently in a bear market as compared to a bull market. In a bull market, stocks are generally in an uptrend with shallow corrections in prices that are quickly met with buying as investors seek to put cash to work on stocks. Investor psychology is generally positive and the outlook for the economy and corporate earnings is optimistic. However, in bear markets, investor psychology changes. Investor attitudes generally become more pessimistic about the stock market and future economic activity. The R word, recession, is often bandied about in the news media and among investment analysts. In a typical bear market, stocks generally trend downward. There are often sharp countertrend rallies in the market that are quickly met with selling that takes the market to new lows.

In looking back over the past six months we can see this typical bear market pattern in the major stock market averages. During the recent market downturn, we have experienced several sharp rallies that were met with more selling taking the market to new lows. In our view, this pattern was firmly established in June when the S&P 500 Index rallied about 8% from its May lows to only turn back down and make new lows on June 17. Again, the S&P 500 index rallied almost about 8% off the June lows over the next several trading sessions. This countertrend rally was again met with more selling. As of the date of this letter, we are currently in the process of testing the June lows for the major stock market averages. This bear market pattern will most likely persist until the market can establish a firm bottom. We may be there right now or it could be months away. There is really no way of knowing when a bear market will end especially with today’s high degree of uncertainty concerning inflation, the aggressive Fed policy actions to reign in inflation, and the cloudy outlook for economy over the next few quarters. Eventually, the outlook will become clearer and investor attitudes will change. But until then, we expect the primary trend for stocks will be sideways to downward.

This begs the question: Should we simply get out of stocks to avoid further losses until the economic clouds begin to clear and things look better? This strategy sounds prudent and reasonable. The main problem with this strategy in our view, is that by the time we see the economic storm clouds clearing, the stock market has typically bottomed and is well on the way to a recovery. Trying to time market movements is very difficult because essentially, you have to make two right decisions, one decision to sell and then a second decision as to when to buy back. You have to have the timing right for both decisions to benefit from such a strategy. Catching the bottom of a bear market is tricky because it is typically at that point the economic outlook often looks the bleakest. The old adage, “It is darkest before the dawn” can be applied to investing. Even seasoned investors have a difficult time buying when the outlook looks bleakest. But that is what we feel would best benefit you when timing market moves.

The big issue now facing investors is the prospect of a recession in the U.S. economy. Recession talk has increased lately with the reality that the Fed will likely have to raise rates further in order to reign in inflation. The market is now anticipating that the Fed will raise the Fed funds rate to around 3-3.5% by the end of 2022. That would mean several more rate hikes over the remaining course of 2022 with the possibility of another .75% hike in July. Investors have grown more worried that these higher rates, along with inflationary pressures, could potentially lead to an economic contraction in the second half of this year. The technical definition of a recession is two consecutive quarters of negative GDP. Based on recent economic data, we believe the probability of a recession developing this year has definitely risen. Wells Fargo Investment Institute believes that it is more likely than not, the economy will enter a mild recession this year and early next year.⁵ We feel the stock market is in the process of discounting such a probability. Stocks tend to anticipated an economic downturn well in advance of it actually occurring.

While recessions and bear markets are no fun, they are normal part of the economic and investment cycle. They occur for a variety of reasons including geopolitical crisis, the bursting of a financial bubble, natural disasters, excessive inflationary pressures, and government and central bank policies. It is important to remind ourselves when we are in the midst of a downturn, that historically, the U.S. stock market has shown remarkable resilience. The chart below illustrates the track record for the S&P 500 index going back to 1965. As you can see, there have been many significant market disruptions during this time period but the overall trend is upward.

We believe the current market volatility and downturn will eventually subside and stocks will recover. That’s why we are encouraging our clients, where appropriate, to stay the course and avoid panic selling. We believe a lot of negativity has already been priced into stocks. Instead of reducing equities at this point in the market cycle, we recommend where appropriate, using cash to slowly add to high quality stocks that have durable business models and strong financials. These types of stocks can weather most economic storms. We feel that many stocks in this category have sold off and have become very attractive bargains during this bear market and possibly present an excellent long-term buying opportunity. There is another old Wall Street adage attributed to the 18^th century banker and investor Baron Rothchild that we believe applies today, “Buy stocks when there is blood on the streets, even if it's your own.” This contrarian approach can produce some very nice profits for the long-term investor.

As far as fixed income is concerned, 2022 has been a very difficult year for the bond market. The 10-year U.S. Treasury Note has risen from 1.5% to about 3% as of June 30.² That translates into about a 12% decline in the principal value of the 10-year U.S. Treasury Note.² While normally bonds provide some cushion in a declining stock market, that has not been the case this year. There has been little downside protection from market losses for fixed income investors from their bond portfolios this year. We have been somewhat negative on bonds for the past two years as we felt yields were unattractive. However, we believe rising interest rates since the first of the year have made both high grade taxable bonds and municipal bonds more attractive. We are seeing yields in the 3-5% range for short-term and intermediate bonds.² Even money market yields have risen to about 1.5% recently and are expected to go even higher as the Fed raising rates.²We believe this rising rate environment has presented an attractive opportunity for yield hungry investors to put idle cash to work.

In summary, while we may have more downside left in stocks before a durable bottom is made, based on our positive outlook for corporate earnings for 2023, we believe the stock market is at an attractive entry point for those who have an investment time horizon of three years or longer. We believe the main driver of stock prices is corporate earnings. While earnings may weaken somewhat for the remainder of this year if the economy enters a recession, we believe corporate managements will respond to any weakness by making the necessary adjustments to weather the storm and grow their businesses in the future. As a whole, we believe corporate managements successfully navigated the coronavirus pandemic and paved the way for record earnings results for the S&P 500 in 2021. We have faith they can successfully navigate through this period of high inflation and rising interest rates.

We recognize that the current situation in the financial markets can be frustrating and very stressful for investors. As we have stated before, we feel the key to navigating these highly uncertain and volatile investment environments is diversification through prudent asset allocation. We believe this is a good time to assess your current asset allocation to ensure your portfolio is in line with your long-term goals and objectives. This could also be a good time to rebalance portfolios back to long-term target allocations particularly if equity allocations have dropped below targeted levels.

As always, we greatly appreciate your continued trust and confidence in us and we will continue to work to keep you informed of economic and market developments.

Your Trinity Capital Management Team

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

Footnotes

Reuters, S&P 500 Ends Brutal First Half ’22 With Largest Percentage Loss Since 1970, June 30, 2022.
Thompson Charts
CNBC.com, “Inflation rose 7.9% in February, as food and energy costs push prices to highest in more than 40 years” March 10, 2022
Yahoo.com, Federal Reserve raises interest rates by 0.75%, most since 1994, amid effort to slow inflation, June 15, 2022
Wells Fargo Investment Institute, 2022 Midyear Outlook, June 2022.

Past performance is no guarantee of future results and there is no guarantee that any forward-looking statements made in this communication will be attained.

Wells Fargo Advisors Financial Network is not a legal or tax advisor. Consult your tax advisor or accountant for more details regarding your specific circumstance.

Dow Jones Industrial Average: The Dow Jones Industrial Average is an unweighted index of 30 "blue-chip" industrial U.S. stocks.

NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.

The Consumer Price Index (CPI) is a measure of the cost of goods purchased by average U.S. household. It is calculated by the U.S. government's Bureau of Labor Statistics.

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.

CAR-0722-00285

TCM Market Outlook and Strategy - May 16, 2022

Mon, 16 May 2022 05:00:00 +0000

Stephen M. Mills, CIMA_® Partner

The stock market is currently experiencing one of the worst declines since the first quarter of 2020 when the major stock market averages fell over 30% as the Covid-19 pandemic began to emerge. In the beginning of the year, we felt there was a possibility of a 10-15% correction in the S&P 500 Index.¹ It didn’t take long for such a correction to occur. Beginning January 4, when the S&P 500 hit an all-time high of 4818, the benchmark fell 13.4% through close of trading on March 8 when the S&P 500 hit 4171.² In early April, we thought the S&P could retest the March 8 low but we believed that low would hold. It did not. On Monday of last week, the S&P broke through the March 8 level and finished below 4000 for the first time since March 2021. The benchmark is now down almost 16% for the year.²

From a technical perspective, the S&P Index is clearly in a down trend which could persist for a while longer, in our view. The next level of support for the benchmark is in the 3700 to 3800 range. That represents a potential decline of 5-7% from last Friday’s closing price of 4024. It is difficult to say if the S&P will hit that next level of support but we would not be surprised if it did given the negative sentiment in the market currently. At the same time, it would not surprise us if the market moves higher from Friday’s close based on what appears to us to be an extremely oversold condition.

In our opinion, stock prices are in the process of adjusting to higher interest rates which we feel are being driven by higher inflation. With inflation running at over 8% for the past several months according to the Labor Department’s Consumer Price Index measure,³ interest rates have moved higher in response. Recently, the Federal Reserve (Fed) announced a hike in the Fed Funds rate of .50% after the Federal Open Markets Committee meeting on May 4^th.⁴ The Fed had previously raised the Fed Funds rate by .25% after its March meeting. The Fed also indicated in their statement, that there could be several more rate hikes this year in an attempt to slow the pace of inflation. Stocks initially rallied after the Wednesday afternoon rate hike announcement ending the day with the Dow Jones Industrial Average up 932 points for the day. However, the Dow soon gave back that gain and more over the next three trading days falling over 1800 points through last Monday’s close. This kind of market action is difficult to understand. It suggests to us the market is not trading on fundamentals but more on psychology with fear as the main driver. In our experience, when fear seems to be the primary factor in market movements, we may be approaching at least a near term bottom in stock prices. However, with the Fed clearly is a monetary tightening mode, stocks may continue to struggle until there are positive signs that inflation is slowing and Fed monetary policy becomes clearer.

Generally, rising interest rates are negative for stock prices. The area of the market that is often hit harder by rising rates is the growth stock sector where earnings and revenue growth are typically greater than the average stock and the price-to-earnings ratio (P/E) is higher. The P/E ratio is calculated by dividing the price of a stock by its earnings per share. These types of growth-oriented companies tend to reinvest cash flows back into their businesses instead of paying out dividends to shareholders. These stocks tend to struggle during times of rising interest rates because the discounted value of future cash flows is lower as interest rates rise. In simpler terms, a dollar’s worth of future cash flow is worth less in the future than it is in the present when interest rates are higher. This makes the current value of these companies worth less as interest rates rise. Stocks that pay higher cash dividends tend to do better in rising rate environments because shareholders receive more of the current earnings in cash instead of in the future as is the case for growth stocks.

The performance of value stocks verses growth stocks in times of rising interest rates can be seen by looking the Russell 1000 growth and value indices this year. The Russell 1000 Growth Index, which is made up of higher growth stocks as we discussed above is down 24% so far in 2022 as of the date of this letter while the Russell 1000 Value Index, which is made up of slower growing companies that tend to pay higher current dividends is only down 8% over the same time frame.²This is the first year that value stocks have outperformed growth stocks since 2016.⁵ Although the year is still young and there is plenty of time for growth stocks to catch up to their value counterpart, we believe this outperformance may continue for a while as long as interest rates continue to rise.

S&P 500 value stocks are currently trading for about 15 times their expected earnings over the coming 12 months. That is down from just over 17 times in early 2022.⁶ Meanwhile, S&P 500 growth stocks have seen their forward price-to-earnings ratio drop to below 21 times, from about 28 times since the start of the year.⁶ The P/E ratio of the entire S&P 500 has fallen from about 21 times earnings to about 17 currently.⁶

According to data from Credit Suisse, earnings per share for the S&P 500 are on track for 11% year-over-year growth on a 13.5% increase in revenues.⁶ Yet even with this impressive growth, the S&P 500 Index has dropped approximately 10% since the results started coming in early April.² It seems that investors are more focused more on Federal Reserve monetary tightening policy than on corporate results. This dynamic may continue to play out for a while longer until there is more clarity on inflation and the Fed’s monetary actions. However, we believe the S&P 500 is getting close to a point that it is very attractively priced for the long-term investor.

There is a great deal of uncertainty facing investors currently. We see financial markets remaining highly volatile in the near-term as investors deal with tightening monetary conditions and the increased possibility of a U.S. recession next year. While we still do not believe the U.S. economy will fall into a recession this year based on our observation of several economic indicators, we think the probability of a mild growth contraction occurring within the next 18 months has risen.

For the long-term investor who has at least a three-year time horizon before needing investment funds, we believe the recent correction in stock prices may present a good buying opportunity. For those investors either currently in a distribution mode or will be in a distribution mode within the next two to three years, we believe portfolios should be well balanced between equities, fixed income and cash.

As always, we greatly appreciate your continued trust and confidence in us and we will continue to work to keep you informed of economic and market developments.

Your Trinity Capital Management Team

www.tcmtx.com

Footnotes

TCM 2022 Market Outlook & Strategy letter, January 10, 2022
Thompson Charts
https://www.bls.gov/cpi/
https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504a.htm
Wells Fargo Advisors Advisory Services Group Index Performance Statistics.
Barron’s , “Why Earnings Season Couldn’t Save the Stock Market This Time,” May 10, 2022

Past performance is no guarantee of future results

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 "blue-chip" industrial U.S. stocks.

Past performance is no guarantee of future results and there is no guarantee that any forward-looking statements made in this communication will be attained.

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

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

The Consumer Price Index (CPI) is a measure of the cost of goods purchased by average U.S. household. It is calculated by the U.S. government's Bureau of Labor Statistics.

CAR-0522-01894

TCM Market Outlook and Strategy - April 11, 2022

Mon, 11 Apr 2022 05:00:00 +0000

Stephen M. Mills, CIMA_®Partner

Chief Investment Strategist

Brad Bays, CIMA_® Partner

PIM Portfolio Manager

Highlights:

The first quarter brought several new developments that could impact U.S. economic growth for 2022.
In March, the U.S. Federal Reserve shifted monetary policy to a tightening mode.
Inflation continues to surge potentially threatening the economic recovery.
The Russia-Ukraine war has disrupted both the energy and commodity markets causing significant increases in the price of several commodities.
The U.S. economy remains resilient despite near-term headwinds, in our view.

Commentary

Plenty has changed in the financial markets and in the minds of investors since we published the TCM 2022 Investment Outlook & Strategy on January 10, 2022.¹ As we began the year, Covid-19 cases had started to wane, the economy was poised to regain its reopening momentum, and the stock market was hitting new highs. There were concerns about rising inflation and potential monetary tightening on the part of the Federal Reserve but these issues were not having much of a negative impact on investor sentiment or behavior. Investors remained mostly positive toward the near-term future for economy and the financial markets. Money was still flowing into the stock market, consumers were beginning to boost spending, and businesses were poised to ramp up capital investment. As we indicated in our January 10 letter, we believed the setup for the U.S. economy looked very good and we were positive on the U.S. stock market for 2022. Although we thought we could see as much as a 10-15% correction in stock prices, overall, we felt 2022 would be another positive year for the major stock market averages.

Fast forward three months and a lot has changed. Several developments occurred during the first quarter that could potentially impact U.S. economic growth and the financial markets in 2022. First, war broke out in Europe as Russia invaded neighboring Ukraine on February 24. Russia’s invasion of Ukraine has disrupted both the energy and commodity markets causing significant increases in the prices of oil, natural gas, iron ore, wheat, corn, and other commodities. These price spikes only added to the already high inflation rates we have seen both here and abroad. As the war persists, the disruption to the commodity markets will likely continue driving prices higher, in our view. Of course, the humanitarian crisis caused by the largest invasion of a foreign country since WWII has been unprecedented. Our thoughts and prayers go out for the Ukrainian people.

Second, the U.S. Bureau of Labor Statistics (BLS) reported on March 10 that the Consumer Price Index (CPI) surged 7.9% for the previous 12 months ending February 28.² Items such as food, energy, and clothing were the primary drivers of the highest twelve-month inflation rate in 40 years, according to the BLS report. Prices of these items have been impacted by supply chain bottlenecks created by the pandemic. Inflation could have a big impact on consumer buying behavior especially if the rate of inflation is outpacing wage growth. Since consumer spending is about two-thirds of U.S. Gross Domestic Product (GDP), investors fear that any near-term slowing of consumer spending activity could have a meaningful impact on GDP growth this year. We will further address this concern later on in our letter.

Third, the U.S. Federal Reserve (the Fed) implemented it’s first Fed fund rate increase in over two years on March 16 and indicated it will hike rates several more times this year as part of their effort to combat inflationary pressures.³ The Fed also ended the bond purchase program it put in place in early 2020 to provide liquidity for the financial system that had been stressed by the coronavirus pandemic.³ In addition to this bond purchase program, the Fed lowered the fed funds rate to nearly zero to combat the pandemic induced recession which hit the U.S. economy in the second quarter of 2020. We believe these monetary measures were largely responsible for the quick recovery in the economy and the strong rebound in stock prices after nearly a 35% decline in the major stock market averages in February and March of 2020.

In our view, the Fed’s new monetary tightening approach is already impacting what businesses and consumers pay for loans. For instance, the average 30-year fixed rate mortgage has surged past 4% for the first time in three years and risen nearly 1.6% this year from 3.1% to 4.67% as illustrated in the chart provided by Freddie Mac. On a $250,000 conventional loan, that rate increase bumps up the monthly payment by $224, a 21% increase.⁴ This increase in rates may have something to do with the recent decline in mortgage applications for the week ended March 25^th of 6.8%, the lowest level since December 2019.⁵ Rising mortgage rates typically reduce mortgage refinancing and home purchases because fewer homeowners can save money by refinancing their homes and higher rates can discourage potential buyers. This potentially translates into a slowdown in the housing industry which could negatively impact home pricing for the rest of 2022 and perhaps 2023, in our view. Home prices rose a record 18.8% on average in 2021. Home price growth has decelerated somewhat in recent months and is expected to slow further in 2022 with higher mortgage rates.⁶ But for now, the housing market remains strong with surging prices, ultralow inventories and persistent demand around the country. That is good news for the home building industry and the economy in the near term, but rising mortgage interest rates could further reduce affordability at a time when consumers are feeling the pinch from rising commodity prices.
https://www.freddiemac.com/pmms

The recent rise in interest rates has now pushed the two-year U.S. treasury note yield above 2% for the first time since June 2019.⁷ As of the date of this letter, the two-year note was yielding nearly 2.5%, up from an all-time low yield of .11% reached in January 2021 and up from a yield of .73% at the end of last year. The ten-year U.S. treasury note yield has also risen this year from 1.5% to 2.78%, as of the date of this letter. Not to get too technical but we are approaching a condition called an inverted yield curve where short-term yields exceed longer term yields. This has been much talked about recently by economic strategists and by the financial news media. As you can see, the two-year treasury note yield is still below the ten-year treasury note yield and but is closer to becoming inverted. Historically, yield curve inversions often occur before recessions. An inverted 2s-10s yield curve has historically only been useful as a recession signal when it inverts and remains that way for more than a week, according to a recent Wall Street Journal article.⁸ However, the article points out that the time between inversions and the following recessions have varied widely in length from as short as 6 months to as long as 24 months, according to a 2018 paper from the Federal Reserve Bank of San Francisco.⁸ Although we are not too concerned at the moment about a potential yield curve inversion indicating the imminent onset of a recession, it is something we will continue to observe closely.

We believe the developments cited above will present near-term challenges for the U.S. economy. They have created a cloud of uncertainty that hangs over the economy and the financial markets until some of these issues begin to get resolved. We feel this uncertainty has increased the chances a recession in the U.S. economy over the next 12-18 months. However, while we must admit that the probability of a recession occurring within that timeframe has risen, we still believe that a contraction in U.S. GDP for two quarters in a row this year (the technical definition of a recession) is a low probability.
In fact, we remain optimistic that the U.S. economy will avoid recession this year and achieve modest growth.

Here’s why: First, we believe the fundamental underpinnings of our economy remain strong as demonstrated by its remarkable resilience since the pandemic began in early 2020. Once we got past the pandemic induced collapse of the U.S. economy in the second quarter of 2020, the U.S. economy has been a juggernaut despite several major surges of Covid-19. Last year, U.S GDP grew at a rate of 5.7% according to the U.S. Bureau of Economic Analysis released March 30.⁹ Both businesses and consumers have adapted to the pandemic and have largely reengaged in normal activities. It appears to us that the coronavirus pandemic is close to running its course and will progress to the epidemic stage for most countries. Covid-19 and its variants will likely be with us for many years, but we believe the availability of vaccines and therapeutics will mitigate the impact on society. We view our economy’s ability to deal with the worst pandemic since the Spanish flu pandemic in 1918 as a show of strength and resilience.

Second, jobs growth remains strong. The most recent jobs report released by the U.S. Bureau of Labor Statistics (BLS) on April 1, showed U.S. employers added 431,000 jobs in March and the unemployment rate declined by .2 from the previous month falling to 3.6%.¹⁰ For the year, the economy has added an estimated 1.7 million jobs according to the BLS. We believe job growth will be an important factor for the U.S. economy to avoid a recession and help drive the next leg of the recovery. In addition, wages grew 5.1% year over year as of February 28, 2022 according a Department of Labor report released on March 4. Although the pace of wage gains has slowed in recent months, higher wages are helping to offset rising inflation. Job growth is a key underpinning for the economy and we view these reports as sign of continued economic strength.

Third, we believe consumer financial health remains strong. As we discussed in our January 10 letter, U.S. consumers are in great financial shape having paid down debt and increased savings over past couple of years. As a result, total household net worth (assets minus liabilities) has reached an all-time high at $150 trillion, according to the Federal Reserve fourth quarter 2021 Household Balance Sheet report.¹¹ Total consumer debt has only increased slightly over the past two years and is currently only 11% of total household assets, the Fed report showed. In addition, according to a separate Fed report, American households added an additional $4.2 trillion savings during the pandemic.¹² Savings increased from $10.6 trillion at the end of 2019 to $14.7 trillion at the end of last year.¹²Since personal consumption accounts for over two-thirds of U.S. GDP, we believe the financial health of the consumer will help bolster the economy in the coming months.¹³

Fourth, business capital spending on technology and other business investments grew 7.4% in 2021, a trend that appears could remain strong for 2022 according to the Wall Street Journal.¹⁴ The Journal article cited a recent manufacturing firms survey by the Institute of Supply Management that indicated a potential increase of capital expenditures of 7.7% in nominal terms in 2022. Such investment helps increase productivity and boost economic growth.

Lastly, we don’t believe that the Federal Reserve will tighten monetary policy to the point of causing a recession. We believe, based on our observation of the Jerome Powell led Fed since his appointment 8 years ago, the Fed will err on the side of allowing higher inflation rather than tightening monetary policy to the point of recession. We see the Fed raising the Fed funds rate to 2-2.5% by the end of this year or early next year. That would be about 1% above the 1.25-1.5% Fed funds rate range at the beginning of 2020 before the pandemic started.¹⁶ We believe the Fed will pause their rate increases at that point and give the economy time to digest the rate hikes and observe how inflation reacts to the higher interest rate environment.

There are several other positive economic indicators as illustrated in the chart below. ClearBridge Investments tracks 12 economic indicators and compiles a “Recession Risk Dashboard” as shown in the chart. As of March 31, 10 of the 12 indicators pointed toward continued expansion for the U.S. economy while one (wage growth) was flashing recession and one (money supply) was indicating caution. Of course, economic conditions can change quickly but for now this recession risk indicator is suggesting continued expansion for the U.S. economy.

In summary, we believe the U.S. economy will avoid a recession this year and continue to grow moderately for the rest of 2022. However, Fed monetary tightening, the war in Ukraine and the inflation problem will likely slow global economic activity somewhat for the rest of the year, in our view. We see the U.S. GDP growing closer to 2.5%-3% in 2022 instead the consensus forecast of 3.8% growth at the beginning of the year.¹⁷ We see corporate earnings continuing to expand as companies adapt to the current economic environment. In turn, we believe corporate earnings growth will help support stock prices. We have little doubt that the equities markets will remain volatile in the near term. Stocks fell on average 13.6% from January 4 to March 14, as measured by the S&P 500 Index.¹⁸ As noted earlier, in our January 10 letter we felt the major stock market averages could experience a 10-15% correction in 2022.¹ The S&P rallied nearly 9% over the last two weeks of March and closed the quarter with a 5% loss. Although we could see the stock market averages retest their March lows at some point, we believe we have seen the lows for the year and think we could still end up with a positive year for stocks.

The current situation in the financial markets can be unnerving and stressful. We believe the key to navigating a highly uncertain and volatile investment environment is patience and diversification. As always, we greatly appreciate your continued trust and confidence in us and we will continue to work to keep you informed of economic and market developments.

Your Trinity Capital Management Team

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

Webite:www.tcmtx.com

Footnotes

https://www.tcmtx.com/blog
https://www.bls.gov/news.release/cpi.nr0.htm
https://www.federalreserve.gov/monetarypolicy/openmarket.htm
https://www.mortgagecalculator.org/
https://finance.yahoo.com/news/u-mortgage-rates-jump-most-110505621.html
Wall Street Journal, “Home Price Growth Hit Record in 2021, February 22, 2022.
https://www.cnbc.com/quotes/US2Y
WSJ, “The Yield Curve Briefly Sent a Recession Warning. Here’s What That Tells Us.” 3-31-22
https://www.bea.gov/news/2022/gross-domestic-product-third-estimate-corporate-profits-and-gdp-industry-fourth-quarter#:~:text=Real%20GDP%20increased%205.7%20percent,of%203.4%20percent%20in%202020.
Wall Street Journal, “U.S. Employers Added 431,000 Jobs in March,” April 1, 2022
https://www.federalreserve.gov/releases/z1/dataviz/z1/balance_sheet/chart/
Bloomberg.com, “Americans Added $4/2 Trillion in Pandemic Savings,” March 31, 2022
Federal Reserve Economic Data (FRED), https://fred.stlouisfed.org/series/DPCERE1Q156NBEA
Wall Street Journal, “Capital Spending Boom Helps Raise Productivity, Contain Costs, March 27, 2022
https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/march/
https://www.macrotrends.net/2015/fed-funds-rate-historical-chart
Reuters, Goldman Sachs cuts 2022 GDP forecast to 3.2% vs 3.8% consensus
Thompson Charts

Past performance is no guarantee of future results and there is no guarantee that any forward-looking statements made in this communication will be attained.

Wells Fargo Advisors Financial Network is not a legal or tax advisor. Consult your tax advisor or accountant for more details regarding your specific circumstance.

The Consumer Price Index (CPI) is a measure of the cost of goods purchased by average U.S. household. It is calculated by the U.S. government's Bureau of Labor Statistics.

CAR-0422-00931

TCM Market Outlook and Strategy - February 23, 2022

Wed, 23 Feb 2022 06:00:00 +0000

Stephen M. Mills, CIMA_®Partner

Chief Investment Strategist

Brad Bays, CIMA_® Partner

PIM Portfolio Manager

Highlights:

Stocks suffered the first 10% correction since September 2020, as measured by the S&P 500 Index.¹
The U.S. economy remains resilient despite near-term headwinds, in our view.
The U.S. Federal Reserve has indicated it will be shifting monetary policy to gradual tightening beginning in March.
Inflation continues to be persistently high, however there are signs it could begin to abate in the latter half of 2022.
Russia-Ukraine crisis poses a potential near-term threat to the equity markets.

Commentary

Global stock markets have been in correction mode since the first part of the year as investors react to the potential for rising interest rates, higher-than-normal inflation and the Russia-Ukraine crisis, in our view. Coming into the new year, we felt the U.S. stock market was vulnerable to a correction of as much as 10-15% during 2022 due to a number of risk factors which we pointed out in our TCM 2022 Market Outlook & Strategy letter sent out early January.² Unfortunately, it didn’t take very long for that correction to occur. In January, the S&P 500 Index fell sharply from its all-time high recorded on January 4, reaching the 10% correction threshold on January 28 where it bottomed out with a total decline of 10.9%.¹ The Dow Jones Industrial Average faired a little better falling 8.5% over the same period however, the technology laden Nasdaq average slid 15% during that timeframe.¹ Growth stocks took the brunt of the selling while value stocks held up better.

We were not surprised by the January correction in the stock market given the run-up in stock prices at the end of 2021 and the near-term challenges we discussed in our January letter. As to the date of this letter, the major averages rallied from the January 28 lows but may be in the process of retesting those levels. We would not be surprised to see this volatility continue over the next few months as investors digest the potential for several interest rate hikes by the U.S. Federal Reserve (Fed) over the course of the year as well as continued high inflation data.

We believe some of the recent market volatility can be attributed to the Russian-Ukraine situation which has escalated over the past several weeks as Russia continues to build up a military presence along their border with Ukraine threatening to invade. We believe if Russia launches an attack on Ukraine, we could see a significant sell-off in the stock market, perhaps in the 3-6% range if history is any guide. According to an analysis done by CFRA, an independent investment research provider, where CFRA analyzed 24 geopolitical events since World War II, CFRA found the S&P 500 Index fell an average of 5.5% from peak to trough coincident with those events.³ The S&P took an average of 24 days from the start of the event to reach a bottom, but it recouped those losses in an average of 28 days later, according to the study.³

The Russia-Ukraine crisis appears to be impacting the oil market as well. Oil prices, as measured by West Texas Intermediate oil (WTI) surged to over $90 per barrel as the crisis escalated recently.¹ Goldman Sachs, Morgan Stanley and Wells Fargo Investment Institute¹¹ now forecast summer 2022 oil prices in the $100+ range, citing increasingly tight balances and the need for prices to rise to blunt demand growth.⁴ In our January letter, we had suggested WTI could hit $100 per barrel which at the time was trading in the mid-70s.² $100 oil now looks increasingly likely with demand for oil rising as the global economy continues to recover from the coronavirus pandemic.

Another reason for the weakness in stocks is the concern about inflation and how the Federal Reserve is going to respond to the highest inflation numbers since the 1980s. In a report released by the U.S. Labor Department on January 12, 2022, the Consumer Price Index rose 7% for 2021.⁵ It was the largest 12-month increase in the CPI since June 1982.⁵ We feel this inflation number stoked fears of more aggressive Fed action to hike interest rates in order to combat rising prices and bring inflation back in line with the Feds’ 2% mandate. We believe these fears led to broad based selling of stocks, especially high price-to-earnings growth stocks that typically underperform in higher interest rate environments from our experience.

Based on comments made by Fed Chairman Jerome Powell on January 26 after a Federal Open Markets Committee meeting, it appears the Fed has opened up its’ inflation fighting playbook which will likely include raising the fed fund rates several times this year along with reversing the Quantitative Easing (QE) measures the Fed put in place at the beginning of the pandemic in early 2020.⁶ We feel the combination of aggressive Fed action to lower interest rates and inject monetary stimulus into the financial system during the pandemic, along with U.S. government spending, exacerbated U.S. inflation.

We see the Federal Reserve raising the fed funds rate at least 4 to 5 times this year which would place the fed funds rate at .75% to 1.25% by year end. However, if inflation remains on its current pace for the next few months, we may see the Fed bumping rates even higher this year. Some analysts are predicting as many as 6 or 7 Fed rate hikes this year.⁷ These rate hikes could potentially push interest rates higher on various types of consumer and business loans and possibly lead to a slowdown in spending for goods and services, in our view.

We believe this Fed tightening, along with a reduction of government stimulus spending, will be a headwind for economic growth in the short-term and could cause continued near-term volatility for the financial markets. However, we feel that the economy can handle the Fed rate hikes this year without a significant slowing of economic growth. We see the potential Fed tightening over the next 12-18 months as only returning monetary policy back to pre-pandemic levels which we believe was still very beneficial for the economy and financial markets.

Despite the near-term headwinds from the change in Fed policy, we see strong fundamental support for the economy from both businesses and consumers. Consumer spending accounts for two-thirds of our nations GDP. The January U.S. retail sales report showed consumer spending rose 3.8%, according to the U.S. Department of Commerce February 16 report, marking the strongest monthly gain since last March.⁸ We believe this is a good indication that the U.S. economy is healthy and poised to deliver strong growth in 2022. In addition, the February 18, 2022 LEI report, (Leading Economic Indicators) released by the Conference Board for January, continues to indicate future economic growth for this year.⁹ The Conference Board estimates that U.S. GDP (Gross Domestic Product) growth would slow for the first quarter of 2022 but expand by 3.5% year-over-year for 2022.⁹

In summary, despite the current challenges and near-term volatility of the financial markets, we remain positive on both the U.S. economy and stock market for the remainder of 2022. We believe the correction in U.S. equities will run its course soon and the bull market, that we believe began in March 2020, will resume its upward trend. One option is to use the current prices correction to put idle cash to work where appropriate. Cash is still earning next to nothing and with inflation running at over 7% annually, funds in cash holdings are losing purchasing power. Based on one’s investment objectives, using cash to selectively add to risk assets may make sense in the current environment.

As always, we greatly appreciate your continued trust and confidence in us and we will continue to work to keep you informed of economic and market developments.

Your Trinity Capital Management Team

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

Footnotes

Thompson Charts
TCM 2022 Market Outlook & Strategy letter, January 10, 2022
Reuters.com - “As Markets Churn Over Russia-Ukraine Conflict, History Shows Fleeting Impact.” February 14, 2022
Seeking Alpha “Is $100+ Oil Dependent On Conflict Between Ukraine and Russia.” February 15, 2022
CNBC.com, “Inflation Rises 7% Over the Past Year, Highest Since 1982” January 12, 2022
CNBC.com, “A Full Recap of the Fed Rate Decision and the Powell Remarks That Knocked the Stock Market,” January 26, 2022
CNBC.com, “Why the Fed might not go through with 6 or 7 priced-in interest rate hikes” February 16, 2022
The Wall Street Journal, “U.S. Retail Sales Show Consumer Appetite for Spending Amid High Inflation” February 16, 2022
The Conference Board, February 18, 2022.
Reuters.com, “U.S. Leading Economic Indicator Rises Strongly in December,” January 21, 2022.
Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company

Past performance is no guarantee of future results and there is no guarantee that any forward-looking statements made in this communication will be attained.

Wells Fargo Advisors Financial Network is not a legal or tax advisor. Consult your tax advisor or accountant for more details regarding your specific circumstance.

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.

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 "blue-chip" industrial U.S. stocks.

Past performance is no guarantee of future results and there is no guarantee that any forward-looking statements made in this communication will be attained.

NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.

The Consumer Price Index(CPI) is a measure of the cost of goods purchased by average U.S. household. It is calculated by the U.S. government's Bureau of Labor Statistics.

CAR-0222-03425

TCM 2022 Investment Outlook & Strategy - January 10, 2022

Mon, 10 Jan 2022 06:00:00 +0000

Stephen M. Mills, CIMA® Managing Partner

PIM Portfolio Manager

Brad Bays, CIMA®

Partner

PIM Portfolio Manager

Highlights:

The U.S. economy has shown resiliency in the face of a global pandemic.
The U.S. Federal Reserve indicated in its December meeting it would accelerate the tightening process of its’ monetary policy.
Stocks surged despite the economic headwinds of the coronavirus pandemic and the change in Fed policy.
We remain optimistic for the prospects for the U.S. economy and the stock market for 2022.

Introduction

As we began 2021, we were still battling a global pandemic that has claimed the lives of millions of people, Covid-19 vaccines were in the early stages of being administered, the U.S. economy was recovering from the pandemic induced recession, and we were adjusting to a new presidential administration. Although the development of vaccines in late 2020 raised optimism for 2021, the future was still very uncertain. During the summer, a highly contagious variant dubbed Delta, emerged causing yet another surge of Covid-19 cases and slowed economic growth. Despite all of this, 2021 ended up being a good year for investors.

As we begin a new year, things have certainly improved but we are still not quite out of the woods. The immergence of another Covid-19 variant labeled Omicron, is another reminder that the virus is still alive and well. Yet we remain optimistic that there is in fact light at the end of the tunnel. We invite you to read on to find out why we remain optimistic about economic growth and further gains in risk assets.

U.S. Economy

Despite the persistence of the global pandemic, we believe the U.S. economy remains healthy and vibrant. After a temporary slowing of economic growth from a surge in coronavirus cases in late summer of 2021, the economy resumed its recovery in the fourth quarter. For the entire year, Wells Fargo Investment Institute is estimating GDP (Gross Domestic Product) will increase 4.9% for the U.S. economy.1 In our view, this strong GDP growth rate was fueled by both consumer and business spending that surged from pent-up demand for goods and services after the 2020 pandemic induced collapse of demand. Consumers in particular were ready to come out of their virtual economic hibernation and start reengaging in normal activities like traveling, going to restaurants, movies, sport events and other forms of entertainment they were deprived of in 2020. We believe had it not been for the coronavirus case surge from the Delta variant in late summer, economic growth would have been even stronger in the fourth quarter and for the year as a whole.

Coming into 2022, the economic set up for the U.S. economy looks very good in our view. Although the most recent coronavirus case surge from Omicron variant may slowdown economic growth over the next couple of months, we feel as we move into early spring, the U.S. economy will begin hitting on all eight cylinders again.

Our optimism is based on several factors. First, we believe the pandemic is in the later stages of its progression and will begin to slowly burn itself out sometime in 2022. We are not epidemiologists by any means but we have noted that a number of health experts and scientists believe the continued rise in vaccinations as well as immunity gained from people contracting the virus will allow us to reach “herd immunity” sometime this year. One notable expert on the pandemic suggested recently that in his analysis, 80% of Americans may have some level of immunity either through vaccination or from having contracted the virus. Currently, about 62% of Americans are “fully vaccinated” according to Johns Hopkins Coronavirus Resource Center as the date of this letter.2

As far as the economic impact of the new Omicron coronavirus variant, like the Delta variant, we don’t believe it will cause significant damage to the U.S economy the way the initial onset of the virus did in 2020. The recent case surge we are currently experiencing may cause a temporary slowing of economic activity and hurt GDP growth for the first quarter of 2022. However, we feel there is no appetite for widespread lockdown measures in the U.S. Recently, the CDC (Centers for Disease Control) relaxed their recommendation on how long infected people who are asymptomatic should isolate, reducing the timeframe from 10 to 5 days which should help businesses deal with rising Covid cases in their employee populations.3 In addition, as scientists and health officials learn more about the coronavirus, we are finding better ways to deal with the health impact of the coronavirus. In the fourth quarter of 2021, two major pharmaceutical companies announced the development of two oral anti-viral medications that will help combat the disease once contracted and reduce the chances of several illness or death.4 One of these anti-viral pills has received emergency use authorization from the FDA in late December.5 There is no doubt in our minds that the coronavirus is not going away anytime soon but we are learning how to deal with it and still engage in normal activities.

Second, we believe 2022 will be another strong year for business capital investment (Capex). Capex is funds used by companies to acquire, upgrade and maintain physical assets such as property, plants, buildings, technology and equipment.6 According to S&P Global Ratings, corporate capex will show an increase of about 13% for 2021, the biggest surge since 2007.7

The chart illustrates how corporate sales growth goes hand in hand with capital expenditures. Capex improves productivity which typically translates into more sales and higher profits. Although capex spending may slow somewhat in 2022, we believe companies will continue to invest in their businesses in order to upgrade and expand productive capacity. We see this long-term investment in our economy helping to drive future U.S. GDP growth for many quarters.

Third, we believe the U.S. consumer is poised to boost spending in 2022. As a whole, U.S. consumers are in great financial shape having paid down debt and increased savings over past couple of years. As a result, total household net worth has reached an all-time high of $145 trillion, according to a Federal Reserve Q3 Funds report.8 As indicated by the chart sourced from the Federal Reserve Financial Accounts of the United States, this represents a 24% increase in household net worth from $117 trillion at the end of 4Q 2019.8 We feel this is remarkable considering the economic

damage wrought by the pandemic. It shows the resiliency of the U.S. consumer and ability to weather economic storms. It also shows that consumers are in good a financial position to boost future spending which bodes well for economic growth since consumer spending accounts for approximately two- thirds of U.S. GDP.

Fourth, we see the December 15 Fed announcement to accelerate the tapering of its bond purchases (Quantitative Easing – QE) and possibly begin raising interest rates in 2022 instead of 2023 as a positive for the U.S economy.9 It is true that the acceleration of the Fed’s monetary tightening could possibly slow economic growth. However, from our observation of how Chairman Jerome Powel and the other members of the Federal Open Market Committee (FOMC) have operated over the past few years, we believe the committee’s actions will be slow and measured in its effort to adjust monetary policy so as not to disrupt the economy or cause a major correction in stock prices. Essentially, we view the FOMC’s potential monetary actions in 2022 as returning monetary policy to pre-pandemic levels which was no QE and a Fed funds rate range of 1.5% to 2.0% compared to the current range of 0% to .25%.10 That rate adjustment would mean about six to eight rate hikes of .25% which we think will take the Fed at least 12-18 months to implement. We believe that will still leave us with very favorable monetary environment for the U.S. economy and financial markets for 2022.

Equities

Despite the continued bad news about coronavirus variants and surges in case counts, investors enjoyed a third straight year of strong returns from the U.S. stock market as the broad-based S&P 500 Index posted a 28.7% total return for 2021.11 The narrower Dow Jones Industrial Average made up of only 30 stocks, gained 18.7% for the year.11 The market gains were driven by robust corporate revenue and earnings growth as the U.S. economy continued its recovery from the 2020 economic downturn. The third quarter 2021 earnings season marked the sixth straight quarter that corporate earnings beat consensus expectations, something that has never happened before.12 It appears to us that businesses as well as consumers have largely adapted to the pandemic and the economy is well on the way to fully recovering.

In our view, one word best describes the stock market this year, resilient. The market has been climbing the proverbial “wall of worry” since the beginning stages of the pandemic in March 2020. After suffering a sharp downturn from mid-February to late March 2020 during which the S&P 500 Index (S&P) fell 35%, stocks have been in a persistent bull market with the S&P rising over 100% as of the date of this letter.11

The stock market had a lot of bad news thrown at it over the past two years yet has still managed to continue making record highs.11 Investors have dealt with several coronavirus case surges, a highly contentious presidential election, supply chain problems, and a major spike in inflation. The latest apparent bad news as noted above, came from the Fed’s policy shift to accelerate the reduction of bond purchases and possibly begin raising interest rates in 2022. This news would have normally sent shock waves through the financial markets and caused a significant decline in stock prices. However, the stock market actually closed up on the day of the Fed’s announcement. It appears to us investors are looking at these recent negative developments as a glass half full scenario. For instance, although Fed policy is technically “tightening’ the monetary environment which is typically bad for the economy and the stock market, many investors appear to believe it is a positive move because the economy no longer needs the extraordinary monetary stimulus it put in place to fight the economic impact of the coronavirus pandemic. In essence, investors seem to be looking at it as a vote of confidence on the part of the Fed in the economy.

Also, recent inflation data was cause for concern among investors. The Fed’s more aggressive approach to returning monetary policy back to pre-pandemic levels could help combat the recent spike in the inflation data. Inflation has been running hot this year as indicated by CPI (Consumer Price Index) data released in December by the U.S. Bureau of

Labor Statistics (BLS) showing an increase of 6.8% for the 12 months ending November 30.13 As you can see from the chart provided by the BLS, the 12- month percentage change is at the highest level in 20 years.

According to the BLS data, the October and November CPI increase showed an even higher annualized rate of 10.2%. We believe the Fed actions along with an improvement in supply chains problems could lead to a deceleration in inflation by the second half of 2022.

Source: https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-metro-area.htm

In the meantime, we see rising inflation as positive for stocks. Many businesses are able to increase the cost of their goods or services as inflation rises. This “pricing power,” as it is often referred to, can allow nominal corporate earnings to rise. A study done by Yale University’s Robert Shiller which looked at data going back to 1871, showed the S&P 500’s nominal earnings per share grew faster on average when inflation was higher.14 We feel the key driver for stock prices over the past two years has been corporate earnings growth. Although the short economic downturn in the summer of 2020 depressed corporate earnings for the year, earnings rebounded strongly beginning in the fourth quarter of 2020. Wells Fargo Investment Institute (WFII) is forecasting earnings for the S&P 500 to come in at $209 for 2021.1 For perspective, the S&P posted earnings of $163 for 2019.15 That’s a 22% increase in earnings despite the global pandemic. WFII is projecting S&P 500 earnings will rise another 12.4% in 2022 to $235.1 We believe the higher levels of inflation could help boost corporate earnings even higher.

We see this earnings growth, coupled with a favorable monetary environment, propelling the stock market higher in 2022. We believe, however, that market volatility will be high and there will be corrections during the year. Over the past several months, both the Dow and the S&P have remained above key technical support levels even though we experienced several 2-3% pullbacks in the S&P 500 and a near 5% correction in September.11 Each of these corrections led to a rally back to the new highs.11 We believe as long as these support levels hold, the upward trend that has been in place since March 2020 remains intact. However, we caution that the major averages, particularly the

S&P 500, are due for a larger correction. We think it is possible we could see as much as a 10-15% decline in 2022 in the S&P 500 Index. We are particularly concerned about such a correction in the first half of the year as potential Fed rate hikes and the Congressional elections in November begin to weigh on investor sentiment. We feel any meaningful pullback in stocks will be an opportunity for investors to put idle cash to work in selected stocks and market sectors.

There are some concerns among investors that equity valuations are too high, especially for the S&P 500 Index. There are many factors that need to be considered when assessing whether stocks are under or overvalued.

In our view, the primary factors are earnings, interest rates, and projected earnings growth rates. Currently, the S&P 500 Index is priced at about 23 times estimated 2021 earnings and about 20.5 times projected earnings for the coming year using Wells Fargo Investment Institute earnings forecast.1 Those levels are indeed high when compared to the long-term historical average going back to 1935 of 16 times earnings. Some have even suggested that the stock market has not been this overvalued since the dot.com bubble in the late 90s when at the end of 1999, the S&P 500 Index traded at over 30 times earnings.16 But there was a big difference in the level of interest rates at the time verses today. In early 2020, the 10- year Treasury note yield was over 6% as you can see in the chart compared to a 10-year T-note yield of around 1.5% today. We would argue that today stocks are actually undervalued given the current level of interest rates and growth prospects for corporate earnings.

In our view, the stock market has a lot more fuel in the tank. There is still a lot of cash on the sidelines looking for an opportunity to invest in stocks. Goldman Sachs reported recently that cash in money market funds is near $4.7 trillion as of mid-December 2021.17 Annual yields on most high-quality money market funds are currently less than .1%. With inflation running over 6%, investors in cash are losing a lot of purchasing power. Goldman sees big investors moving out of money funds and into stocks in 2022.17 This reallocation could fuel the next leg of the bull market.

Fixed Income

Unlike 2020 when most investors enjoyed positive returns for high quality fixed income investments, 2021 was a mixed year for fixed income instruments. The major high quality corporate and government bond indices showed small losses for the year. The U.S. Aggregate Bond Index, which is a measure of the performance of high-grade corporate bonds, recorded a loss of 1.3% for 2021.18 The U.S. Gov/Credit Bond Index which is a mixture of U.S. Government bonds and high-grade corporate bonds lost 1.4%.18 However, tax free municipal bonds were able to record a positive return of 1.3%, as measured by the Bloomberg Barclays Muni Bond Index.18 In our Outlook and Strategy letter at the beginning of 2021, we stated that we believed the risk-reward for owning longer term fixed income investments was not very favorable going forward. Despite this, we stated in that letter that high-quality fixed income investments in balanced portfolios would serve as an anchor in stormy seas if things got rough in the stock market. Currently, we view fixed income in the same way. Although we don’t anticipate fixed income will contribute much return in 2022, we feel it will help reduce downside volatility when the stock market suffers corrections.

We continue to recommend keeping bond maturities under 10 years with an emphasis on high-grade corporate, mortgage and municipal bonds. We view tax-free municipal bonds as attractive for those investors in higher income tax brackets particularly considering the possibility of higher tax rates for high income individuals in 2022. We see moderate increases interest rates across the yield curve in response to more persistent inflation data and anticipation of Fed rate hikes in 2022 and 2023. Conceivably, we could see the 10-year Treasury note yield, which is now 1.5%,1 pushing up through 2% and perhaps even approaching 2.5% in 2022 if inflation remains high. Such a rise in yields would put downward pressure on most bond prices which is why we advise keeping maturities shorter. Overall, we don’t see meaningful returns from fixed income investments in 2022 with yields so low. Income hungry investors will likely have to look elsewhere to generate cash flow from their investments. We will discuss this in the next section.

Asset Allocation

We continue to believe a diversified portfolio of high-quality stocks will outperform bonds and cash type investments over the next 3-5 years. Currently, high grade corporate bonds with an average maturity around ten years are yielding about 2.3% using the iShares IBoxx Investment Grade Corp Bond ETF (LQD) as a benchmark. A portfolio of dividend paying stocks is currently paying an average dividend yield of between 1.5% and 3% depending on the type of stocks used in the portfolio. That compares very favorable to the average yield on corporate bonds. However, unlike bonds, dividend stocks have the potential for the yield to rise over time as the earnings of the underlying companies increase and they in turn boost dividend payments. Of course, dividends could also fall if earning decline.

Historically, earnings on the S&P 500 have risen on average about 7% per year dating back to 1926.19 Add to that percent increase an average dividend yield of 2% and you get a very respectable 9% average annual return. That total return calculation is supported by history. According to the chart below, the average annual rate of return for the S&P 500 index for the 70-year period ending December 31, 2019 was 11.2%. However, the negative to investing in stocks is the investor must endure market volatility and other risks of stock ownership. There can be substantial drawdowns in the portfolio value from time to time especially on a one-year basis as you can see on the chart. When you lengthen the holding period for stocks to five, 10 and 20 years, the potential downside risk falls substantially.

Source: Barclays, Bloomberg, FactSet, Federal Reserve, Robert Shiller, Strategas/Ibbotson, J.P. Morgan Asset Management Guide to the Markets. Returns shown are based on calendar year returns from 1950 to 2019. Stocks represent the S&P 500 Shiller Composite and Bonds represent Strategas/Ibbotson for periods from 1950 to 2010 and Bloomberg Barclays Aggregate thereafter. Growth of $100,000 is based on annual average total returns from 1950 to 2019.– U.S. Data are as of September 30, 2020.

Given the current economic environment, we believe the advantage of owning stocks is even greater than in the past given the level of interest rates and the potential for rising inflation. But again, one must be able to tolerate the principal volatility and occasional bear market in stocks when the stock market falls 20% or more. On average, the S&P 500 Index has suffered 26 bear declines of 20% or more going back to 1928 with an average decline of 36%.20

In every case, these bear markets were followed by bull markets where the losses were recovered.20 Although we don’t see a bear market any time in the near future, investors must always be prepared. The best way to prepare in our view is to have an asset allocation strategy that can help reduce downside volatility to a level that is appropriate for the investor. Some investors believe they can predict the onset of a bear market and get out of stocks before it occurs.

You can turn on CNBC and get all kinds of advice about when to get in and get of the stock market. From our experience, this type of market timing does not work in the long run. In our nearly 40 years of investment experience, we have yet to find anyone who has consistently been able to time major market movements. We feel strongly that trying to time the onset of a bear market is futile and typically ends up hurting portfolio returns. Since the stock market is rising about 80% of the time, it makes more sense to us to build a solid portfolio that is designed to withstand the ups and downs of the economy and the stock market and simply stay the course.

While we still favor an allocation to equities, with the S&P 500 Index at all-time highs, bargains in the stock market are much harder to find. One of our jobs is to find those bargains. In the currently environment, we feel one must be very selective in building an equity portfolio in order to achieve favorable portfolio returns. We see value in several areas of the stock market. In particular, we think sectors and stocks that are more sensitive to overall economic growth have good upside potential. These types of stocks have generally underperformed over the past few years as investors tended to migrate more toward growth stocks that are less economically sensitive. Technology and consumer discretionary stocks generally fall into the growth category as companies in these sectors are less vulnerable to the ups and downs of the economy. We continue to favor this growth sector as companies continue to invest in new technology to help make their business more competitive.

On the other hand, sectors like energy, financials, industrials, and materials have underperformed particularly since last summer when the Delta variant caused an economic slowdown. Stocks in these sectors were starting to recover in the fourth quarter when the Omicron variant emerged, stoking fears of another economic slowdown and sending these stocks downward once again. We feel these economically sensitive sectors are bargains and have a lot of room on the upside as the economy recovers from what we believe will be a temporary Covid induced slowdown.

We particularly like the energy sector. After years of under investment in our nation’s energy infrastructure, we now find ourselves with potential supply constraints for fossil fuels. Currently, according to the U.S. Energy Information Administration (EIA), nearly 80% of our nation’s energy needs come from crude oil, natural gas, and coal.21 However, over the past few years, environmental groups and government regulatory actions have pressured energy companies to reduce their carbon footprint by curtailing capital investments for energy production activities. These factors, along with the global coronavirus pandemic which has depressed demand for energy, have led to a reduction of the amount of fossil fuels produced in the U.S. According to the EIA, in 2019 the U.S. crude oil production peaked at 13 million barrels per day and averaged 12.29 million barrels per day for the year.22 Average daily production declined to 11.28 million in 2020 and is estimated to average 11.18 million in 2021.22 U.S. oil production is set to rise in 2022 as high oil prices are attracting more drilling activity. But we believe global demand for energy products will continue to recover while supplies will remain tight which could potentially drive crude oil prices higher. Currently, the West Texas Intermediate (WTI) crude oil price is trading at about $79 per barrel.1 We believe WTI will trade between $70 and $85 per barrel in 2022. There are some energy analysts who are forecasting that oil prices could break through $100 per barrel in 2022. Goldman Sachs is predicting high demand for oil in 2022 and that oil at $100 was a possibility.23 In our price range scenario, we believe energy companies can be very profitable in 2022. In our view, this makes energy related stocks very attractive. We particularly like the big integrated oil stocks as well as the mid-stream pipeline sector. We feel many stocks in these sectors have strong balance sheets, favorable earnings growth potential and good dividend yields. But investors need to be careful about high dividend yielding energy stocks that could have too much debt on the balance sheet. Too much debt can be a killer in a market downturn.

In terms of asset classes, we still favor U.S. large capitalization (Large Cap) stocks. U.S. Large Cap stocks were the best performing asset class of all of the major asset classes for 2021 as of November 30, 2021 as you can see in the accompanying chart. We believe one of the primary reasons for this outperformance rests in the fact that the U.S. has been and will likely continue to be stronger and more resilient than other economies around the world.

Sources: Bloomberg, ©Morningstar. All Rights Reserved.⁽ⁱ⁾, and Wells Fargo Investment Institute. Total return as of November 30, 2021. YTD=year-to-date. Index return information is provided for illustrative purposes only. Performance results for the Moderate Growth & Income Liquid (3AG) Portfolio are hypothetical. Index returns do not represent investment performance or the results of actual trading. Index returns reflect general market results, assume the reinvestment of dividends and other distributions and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment. Unlike most asset class indices, HFR Index returns reflect deduction for fees. Because the HFR indices are calculated based on information that is voluntarily provided actual returns may be higher or lower. than those reported. Hypothetical and past performance does not guarantee future results. Composition of the Moderate Growth & Income Liquid (3AG) Portfolio, the asset class risks associated with the representative asset classes and the definitions of the indices are provided at the end of the presentation.

In our view, the U.S. has generally suffered less from the pandemic because we have been less restrictive on the activities of businesses and consumers. Like the rest of the world, the U.S economy went into lockdown mode in March 2020. But in May, President Trump, realizing that continued lockdowns could potentially have a disastrous impact on the U.S economy, encouraged states to relax lockdown measures and begin the process of reopening their economies. Many state governors agreed and slowly began allowing businesses to reopen which we believe helped lead to a strong rebound in economic growth in the third and fourth quarters of 2020.

However, most of Europe, China, Japan, Canada, Australia and other countries continued to enforce very restrictive coronavirus protective measures for 2020 and into 2021. Even to this day, many of these countries maintain tight restrictions on business and consumer activity. As a result, these counties are struggling to regain economic growth. To be expected, the stock markets of these countries as a whole have underperformed the U.S. markets as indicated in the chart which shows the Developed ex-U.S Equity index with a rate of return of only 6.3%.

We have continued to favor U.S. Large Cap stocks over the past few years. Moving into 2022, while we still like the large cap sector we see value in Small Cap stocks. This asset class underperformed Large Caps in 2021 as shown on the chart. We believe Small Caps could see strong performance for the next few years as they benefit from the continued improvement in U.S. economic growth. Many smaller companies have been hurt by the pandemic and the global supply chain issues which may account for their underperformance verses the Large Cap sector in 2021. We feel the global supply chain bottleneck will improve in 2022 which could positively impact smaller companies. If the U.S. economy performs as we expect, we believe these stocks could have a very good year.

We have favored Emerging Market (EM) stocks for the past few years. Unfortunately, these stocks did not perform well in 2021. We believe this was due primarily to the coronavirus restrictions put in place by many of these countries to reduce the spread of the disease. The coronavirus restricted consumer and business activity and added to the supply chain problems that hampered global trade which hurt the economies of many EM countries. We still like the EM sector and continue to hold an allocation to it in our diversified portfolios. We see EM stocks on the whole as undervalued when factoring in current earnings as well as future earnings growth potential. We particularly like EM countries in Asia where we think economic growth will be very strong once the pandemic finally subsides. Nearly two-thirds of the world’s population lives in emerging countries. We see strong economic growth in many of these countries fueled by manufacturing, exports, and consumer spending. We believe this presents tremendous upside opportunity for EM stocks. However, we think we will need to be patient because it may take some time for these countries to regain economic growth.

We are less positive on Developed Country international stocks in Europe, Japan, and Australia. We feel these economies are going to take years to recover from their pandemic induced recessions. Their economies were somewhat stagnant even before the coronavirus pandemic due to high debt levels and socialist economic policies. During the pandemic, these countries created even more debt and implemented massive social spending programs that in our view will be very difficult to reverse. However, we believe there are selected opportunities for companies domiciled in these countries that have demonstrated the ability to grow their business in spite of economic difficulties. Like our Emerging Markets allocation, we use professionally managed funds to identify opportunities in Developed Country stocks.

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. Although the Fed has begun to withdrawal the pandemic induced liquidity support for the economy, we believe monetary policy will still be very supportive of economic growth and equity markets. We see gridlock in Washington in 2022 preventing any major legislation that could potentially hurt the economy. Although the 2022 mid-term elections may cause some volatility in the stock market this year, we believe the election will result in continued gridlock for the rest of the Biden presidency.

Although we are optimistic about the U.S. economy and financial markets for 2022, 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 another volatile year for the financial markets. The beginning of the year is a good time to evaluate your current asset allocation to ensure your portfolio is in line with your long-term goals and objectives. This could also be a good time to rebalance portfolios back to long-term target allocations.

Lastly, Trinity Capital Management celebrated its 10-year anniversary in October. We continue to grow our business and add financial advisors and staff. In July, Buchanan Wealth Management from Nacogdoches headed up by Wendy Buchanan, affiliated with our firm. In December, Staci Madsen joined our Tyler office as an administrative assistant. In January of this year, Jason Grigsby joined our team as a financial advisor from a local bank. These additions bring our total assets under management to over $1 billion as of December 31, 2021, a milestone we have strived to achieve since we formed Trinity Capital Management ten years ago. We are excited about our growth and about the future for TCM. However, we couldn’t have done this without our clients who have supported us over the years. We thank you for your confidence and trust you have placed in us. We are honored to serve you and your families.

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

TheTrinityCapitalManagementTeam

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

Footnotes

¹Wells Fargo Investment Institute, 2022 Outlook December 2021

²https://coronavirus.jhu.edu/

³https://www.cdc.gov/media/releases/2021/s1227-isolation-quarantine-guidance.html

⁴ NPR.org, “New Antiviral Drug Are coming For Covid.” November 30, 2021

⁵ FDA.gov, Coronavirus Update: FDA Authorizes Additional Oral Antiviral Treatment of Covid-19 in Certain Adults. December 23, 2021

⁶https://www.investopedia.com

⁷https://www.spglobal.com “Global Corporate Capex Poised for Biggest Surge Since 2007” August 2, 2021

⁸https://www.federalreserve.gov/releases/z1/dataviz/z1/balance_sheet/chart/

⁹ Forbes, “December 2021 FOMC Meeting: Fed Quickens the Taper as Inflation Concerns Grow.” December 15, 2021

¹⁰https://www.newyorkfed.org/markets/reference-rates/effr

¹¹ Thompson charts

¹² Wells Fargo Investment Institute, State of the Markets: 2021 – The year that wasn’t

¹³ https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm

¹⁴Market Watch, “If Inflation is More Than Transitory, Consumer Prices and Stocks Could Both Keep Climbing” By Mark Hulbert, November 13, 2021

¹⁵ Seeking Alpha, “S&P 500 Earnings Update” June 6, 2020

¹⁶ Macrotrends.com, S&P 500 PE Ratio – 90 Year Historical Chart https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart

¹⁷ CNBC, “Big Wealth Investors Are Likely to Put Money to Work in Stocks After Amassing Record Levels of Cash” December 16, 2021

¹⁸ Wells Fargo Advisory Services, “Capital Market Index Returns through December 31, 2021

¹⁹ “Stocks for the Long Run” by Professor Jeremy Siegel

²⁰ Hartford Group, “10 Things You Should Know About Bear Markets.” https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/CCWP045.pdf

²¹https://www.eia.gov/energyexplained/us-energy-facts/

²² CNBC, “U.S. Oil Production Set to Increase Further in 2022” December 29, 2021

²³ CNBC.com, Goldman Says Oil Could Hit $100…” December 17, 2021

Wells Fargo Advisors Financial Network is not a legal or tax advisor. Consult your tax advisor or accountant for more details regarding your specific circumstance.

Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns nor can diversification guarantee profits in a declining market. Diversification does not guarantee profit or protect against loss in declining markets.

N.A. is a bank affiliate of Wells Fargo & Company.

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

U.S. TIPS Index; U.S. Corporates: Bloomberg Barclays U.S. Aggregate Corporate Bond Index; U.S. High Yield: Bloomberg Barclays U.S. Corporate High Yield Index; Emerging Market: JPMorgan Emerging Markets Bond Index. Index return information is provided for illustrative purposes only. Index returns do not represent investment performance or the results of actual trading. Index returns reflect general market results, assume the reinvestment of dividends and other distributions and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment.

Dow Jones Industrial Average: The Dow Jones Industrial Average is an unweighted index of 30 "blue-chip" industrial U.S. stocks.

The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions.
Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet- related stocks smaller, less-seasoned companies, tend to be more volatile than the overall market.
Risks associated with investment in the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment.
Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector.
There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance.
Materials industries can be significantly affected by the volatility of commodity prices, the exchange rate between foreign currency and the dollar, export/import concerns, worldwide competition, procurement and manufacturing and cost containment issues.

Past performance is no guarantee of future results and there is no guarantee that any forward-looking statements made in this communication will be attained.

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