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TCM Investment Outlook & Strategy - April, 2025

Tue, 08 Apr 2025 05:00:00 +0000

Stephen M. Mills, CIMA® Partner

Chief Investment Strategist

There is an old adage most everyone is familiar with that warns about the consequences of someone’s desires, “Be careful what you wish for.” In our January 2025 Investment Outlook & Strategy letter, we indicated the possibility of a correction in the stock market sometime in the first half of the year.¹While we were optimistic about the continuation of the bull market that we believe started in October 2022, we noted that corrections of 5-10% are normal in a bull market trend. On average, the S&P 500 Index has historically experienced a 10% correction at least once per year since 1929.²During this current bull market, the S&P has risen approximately 70% from the October 2022 low through the end of 2024.² During that 27 month stretch, the S&P 500 has only experienced one 10% correction which occurred in the fall of 2023.²

Although we didn’t necessarily wish for a correction in stocks earlier this year, we understood that bull markets don’t just go up in a straight line and corrections are a normal part of the process. Market corrections in long-term bull markets in the 10% to 20% range can help temper excessive investor optimism and bring stock valuations back down to more attractive levels. We believe that’s what’s happening now. As of the market close on Monday April 7, the S&P 500 Index had fallen 17.6% from its February 2025 all-time high. Year-to-date, the S&P 500 is down 14%.²While we didn’t expect a decline in stocks of this magnitude in the first half of the year, we still view this recent downturn as a “healthy” correction in a long-term bull market. The market valuation of many stocks, in particular certain technology stocks, had become stretched by the end of 2024. With this recent correction, we believe equity valuations now look more attractive.

The recent decline in stocks is directly related to the Trump Administration’s announcement on Wednesday, April 2 of what it referred to as “reciprocal” tariffs on virtually all U.S. trading partners. Investors were expecting new tariffs but not to the extent of what the administration announced on April 2. Equity markets fell sharply on the Thursday and Friday following the announcement. For the two days, the S&P 500 fell a total of 10.5%.²At one point during the trading session on the following Monday, the S&P 500 was down an additional 4.7% from Friday’s closing price but the S&P 500 recovered to end the trading session almost flat.

After the November elections, we felt that the incoming Trump administration and the Republican controlled House of Representatives and Senate, would move to put in place measures that would benefit both businesses and consumers. The Trump administration’s agenda included extending the 2017 Tax Cuts and Jobs Act (which expires at the end of 2025), implementing broad-based regulatory reform, dealing with illegal immigration, reducing the flow of fentanyl into the U.S., addressing the growing government budget deficit, and implementing tariffs to achieve fairer trade with our trading partners. We believed this pro-growth agenda would have a positive impact on the economy and the U.S equity markets although it would not be without “growing pains.”¹ We also wrote in our letter that “aggressive new tariffs could set off a trade war with other countries which could negatively impact the global economy.” We added that increased tariffs would “likely create volatility and economic uncertainty.” In our view, that is exactly what has happening since the April 2 tariff announcement.

The speed of the implementation of the Trump administration’s agenda, especially on the issue of trade, is causing significant disruption in the business community. It appears that many business owners and corporate executives are holding off on plans to expand operations and hire new employees until there is more clarity on the nature

and impact of tariffs on their businesses. In addition, consumers are growing more concerned about how the new Trump policy measures will impact their pocketbooks. This is reflected in the recent drop in consumer confidence for the economy to the lowest level since January 2021, according to the latest survey from The Conference Board.⁴ Consumers have been cutting back on spending until they have more confidence that their jobs are more secure and inflation will not increase significantly due to higher tariffs.

Another popular consumer sentiment survey, done by the University of Michigan, was revised lower in March to 57 points, down from the December level of 74 points.⁵ This is the lowest level for the index since June 2022. However, this is not all bad news. The index has frequently signaled turning points for the stock market as indicated in the chart to the left. The average return for the S&P 500 Index for the 12 months subsequent to a trough level in the sentiment index is 24.1% going back to 1971. Of course, we may not be at a cycle low for the sentiment index just yet. It has been lower three times since 1980. Nonetheless, we believe there is a reasonable chance that consumer sentiment is nearing a trough for this cycle and will begin to improve over the next few quarters as many of the Trump administration policies take effect and the uncertainty around budget cuts and trade policy subsides.

In the near term, the deceleration of both business and consumer spending is putting downward pressure on economic growth. In light of this, many economists have raised their probabilities of a recession for the U.S. economy this year. Adding fuel to the recession speculation, is the recent Atlanta Fed GDP estimate for the first quarter of 2025 of a negative 2.8%.⁶ But when you drill down into the details of their estimate, you find that the negative number is mainly due to the large trade deficit that they are projecting for the first quarter. We saw this same situation occur in 2022 when GDP was negative for the first two quarters of the year because of a large trade deficit and first quarter inventory build-up. GDP rebounded enough in the last two quarters of 2022 that the full year GDP came in at a positive 1.94%.⁷ While the Atlanta Fed’s GDP estimate is concerning for investors, it does not necessary signal that a recession is on the horizon for the U.S. economy.

We agree that the risk of a recession has increased with the implementation of the Trump administration tariffs. However, we believe the resilience of the U.S. economy will allow us to avoid an outright recession this year. Over the past five years, the U.S. economy has been hit with a global pandemic that killed millions of people and virtually shut down the entire global economy for several months, it experienced unusually high inflation that was exacerbated by a spike in energy costs caused by the start of the war in Ukraine in February 2022, and the economy

was burdened by an aggressive tightening of U.S. monetary policy by the Federal Reserve in 2022 to combat the inflation problem. Throughout that difficult five-year period, the economy grew by a total of 12.1%, including a small decline in GDP in 2020 of 2.2%.⁷ In our view, the U.S economy will be able to withstand the negative impact of the new tariffs. We see the Trump administration’s efforts to reduce government regulations on businesses, the extension of the 2017 tax cuts as well additional tax cut measures which should be passed by Congress this year, and the recent decline in interest rates, all working to offset the drag the new tariffs may have on the economy. Our base case remains, no recession this year, and for the U.S. economy to grow at a low single digit rate for 2025.

The Federal Reserve (Fed) could play an important role in how the economy deals with the negative economic impact of tariffs and budget cuts. The Fed’s policy committee that implements monetary policy, the Federal Open Markets Committee (FOMC), lowered the fed funds rate three times in the second half of 2024 by a total of 1%. Since the beginning of 2025, the FOMC has held the fed funds rate steady in their first two meetings of the year and indicated that the committee needs further clarity on how tariffs will impact both inflation and employment before considering further rate cuts. The chart to the right shows both the FOMC’s and the market expectations for the fed funds rate. The current level of the fed funds rate is an average of 4.38%. The expectation is for the rate to be cut three times in 2025 by .25% each. However, the number of cuts for 2025 could increase if the economy weakens significantly in the first half of the year. Typically, in periods of financial and economic weakness, the Fed would lower interest rates to help stimulate the economy.

The current negative sentiment about the economy and the impact of broad-based tariffs can leave investors very worried and even cause investors to reduce equity positions. While the “tariff tantrum” we are experiencing in the financial markets may persist for a while longer, we believe it is important to try to look past the near-term economic uncertainty and market volatility and focus on the longer-term picture where we see tremendous opportunity for growth. In our view, the U.S. remains the best place in the world to invest capital. We believe our constitutionally based government and judicial systems, the strength of our military power, the depth and liquidity of our financial markets, and our free-market-based economy, creates a very attractive environment for investors to put their capital to work. This “exceptionalism,” a term many have used to describe the U.S., is driving billions of dollars of capital investment into the U.S. economy, especially since the most recent federal

elections. U.S. companies have already begun the process of moving manufacturing facilities that they had moved offshore over the past 20 years back to the U.S. In addition, foreign companies have been building manufacturing facilities in the U.S. for years and are looking to accelerate that process, particularly in light of potential higher tariffs on goods they export to the U.S. We believe this activity will lead to a manufacturing renaissance in the U.S. over the next several years and will help to accelerate overall economic growth.

We believe the future looks very bright for the U.S. economy and financial markets. Of course, the road to prosperity will have its bumps and detours as we are experiencing currently. We feel that the economic uncertainty and the recent volatility of the U.S. financial markets will likely remain for the near-term until there is more clarity on the economic impact of President Trump’s agenda, especially his trade policies. However, in the second half of 2025, we believe the tariff issue will be mostly resolved and the focus of investors will shift to the positive impact of the deregulation efforts, progress on cutting the government deficit, and tax reduction through the extension of the 2017 Tax Cuts and Jobs Act as well as new tax relief. We also see overall U.S. employment remaining healthy and an acceleration of both business and consumer spending in the back half of the year. If we are correct, these positive developments could drive stock prices higher as investors become more positive about the U.S. economic outlook.

In closing, we recognize that the current situation in the financial markets can be both frustrating and stressful for our clients. Our recommendation is to remain patient and hold current allocations where appropriate. Tactical portfolio adjustments like shifting cash reserves to stocks could be considered depending on the circumstances. 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.

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

Your Trinity Capital Management Team

TCM Tyler, TX Location

821 ESE Loop 323, Suite 100

903-747-3960

Webite:www.tcmtx.com

Footnotes*

¹ TCM Investment Outlook & Strategy, January 2025. https://www.tcmtx.com/blog

² Thompson One charts

³https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/

⁴ CNN article, “Consumer Confidence Plummets to the Lowest Level Since January 2021.” March 25, 2025

⁵ https://tradingeconomics.com/united-states/consumer-confidence

⁶ https://www.atlantafed.org/cqer/research/gdpnow

⁷ https://fred.stlouisfed.org/series/GDPC1

* To view the footnote links, press and hold the Ctrl key on your keyboard, hover over the link and left click your mouse.

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.

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.

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. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT).

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

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.

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.

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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TCM Investment Outlook & Strategy - January, 2025

Mon, 13 Jan 2025 06:00:00 +0000

Stephen M. Mills, CIMA® Partner

Chief Investment Strategist

Introduction

Although Santa Claus left a lump of coal for investors in the last trading week of 2024, both the U.S. economy and equities markets chalked up another year of gains. The economy was on pace to expand at an inflation-adjusted rate of just under 3% for 2024, according to recent year-end estimates for U.S. Gross Domestic Product (GDP).¹The economy was supportive of stock prices as the S&P 500 Index achieved a second straight year of double-digit returns surging 25%, while the Dow Jones Industrial Average recorded a 15% total return.²The S&P 500 Index notched 57 record all-time highs during the year as the economy remained healthy, inflation and interest rates moved lower, and the technology-led rally continued.²

We began 2024 with a cautiously optimistic outlook for the U.S. economy and financial markets based on favorable monetary conditions, the overall financial health of U.S. consumers, and the resilience of the U.S. economy that continued to grow despite a few near-term economic headwinds. Our reasons for caution this time last year were concerns regarding continued geopolitical risks in both the Middle East and Ukraine, as well as the uncertainty around the presidential election. These risk factors ended up having little impact on U.S. economic growth or the stock market as the U.S. economy continued to grow modestly and the major U.S. stock market averages surged ahead.

We are again optimistic for continued economic growth and favorable equity markets in 2025. Our optimism is based on what we believe are strong fundamentals for the U.S. economy. We see GDP growth for the U.S. economy in the 2.5-3% range for 2025. Specifically, we see declining interest rates after the Federal Reserve began cutting rates in September of last year, the potential for job and wage growth, and a more pro-business environment in Washington after the November election as key factors supporting our positive economic growth in 2025. The increased levels of both business and consumer confidence since the election may be a reflection of these potential fundamental developments.

We believe the incoming Trump administration and the Republican control of both the House of Representatives and the Senate will usher in a wave of legislation that will benefit both businesses and consumers. Both the Trump administration and congressional leaders are looking to get off to a fast start and put in place legislation that will include: extending the 2017 tax cuts (which expire at the end of 2025), implementing broad-based regulatory reform, dealing with illegal immigration, and addressing the growing government budget deficit.

We see this pro-business agenda having a positive impact on the economy and the U.S equity markets, although, it will not be without growing pains. Lower taxes, less government interference in business, and the potential reduction of government deficit spending will encourage businesses to expand their operations, encourage foreign capital investment in the U.S. economy, and improve labor markets, in our view. We believe corporate earnings will benefit from these positive developments which in turn could help propel the U.S. stock markets higher in 2025.

For a more in-depth analysis of the economy and the financial markets, including our investment outlook and strategy, please read on.

U.S. Economy

The U.S. economy continued to show remarkable resilience in 2024 in spite of the headwinds the economy has faced over the last couple of years with rising interest rates, persistently high inflation, recession fears and a very controversial presidential election cycle. The higher interest rates alone would have normally thrown the economy into at least a mild recession. The U.S. Federal Reserve (Fed) aggressively raised interest rates in 2022 & 2023 to battle inflation before finally beginning to lower rates in September of this past year. The Fed’s aggressive monetary tightening paid off as inflation receded from the nearly 9% level in mid-2022 to the current level of about 2.7%, according to the November Consumer Price Index date released by the U.S Bureau of Labor Statistics.³One key element supporting the economy in our view, has been the strength of consumer spending. Since consumer spending accounts for approximately two-thirds of U.S. GDP, the economy was able to maintain a reasonable growth rate for 2024.

As the calendar turns to 2025, we remain optimistic that the U.S. economy will continue to grow at a moderate pace. The three primary conditions supporting our optimism include:

1. Continued Federal Reserve loosening of monetary conditions

As we mentioned earlier, the Federal Reserve began to lower short-term interest rates in September 2024 through cutting the Fed funds rate by .50%.⁴They had previously raised the rate from a historic low of .25% in January 2022 to 5.25% by August 2023.⁴The Fed followed up the September rate cut with two more 25 basis point (.25%) cut rates at their November and December meetings, bringing the Fed funds rate down to the 4.25% to 4.5% range where it currently sits.⁴The Fed indicated in the December meeting that they would consider additional downward adjustments to the Fed funds rate based on future incoming data regarding inflation and economic growth.⁵The Fed has a mandate for an inflation rate in the 2% range while also maintaining a healthy labor market. The FOMC (Federal Open Markets Committee) that drives Fed policy, had year-end estimates of four rate cuts in 2025 while the Market expectations are for two additional rates cuts this year. The fact that the Fed has now pivoted from tapping the economic brakes through aggressive monetary tightening to now providing economic stimulus through lowering interest rates, is very positive for both the economy and the stock market, in our view. Lower interest rates are particularly important for businesses because as their cost of capital declines their profits potentially rise allowing them to more aggressively expand their operations.

2. Employment and wage growth for the labor market

Lower cost of capital for business should translate into more hiring of workers as companies expand their operations. Labor growth slowed in 2024 and the unemployment rate rose modestly as some businesses laid off workers to cut costs. However, we see this trend reversing in 2025 for several reasons including: lower interest rates, a more favorable business environment and an expansion of U.S. manufacturing after decades of decline. Wage growth has been strong for the past two years peaking at nearly a 7% annual growth rate in the first quarter of 2022.⁶Granted, some of that growth was due to the high inflation rate in the economy at the time however, wage growth has stayed above a 4% annual rate through November 2024, according to the Federal Reserve Bank of Atlanta Wage Growth Tracker.⁶We believe the combination of job gains and wage growth will continue to support strong consumer spending for 2025, which as we mentioned earlier, is a key component of U.S. GDP growth.

3. A more pro-business administration in Washington

As we mentioned earlier, we believe economic fundamentals will improve with the incoming Trump administration and the Republican control of both the House of Representatives and the Senate. The administration will push for legislation to extend the 2017 tax cuts and possibly even lower corporate and individual tax rates from current levels. We also believe the administration will seek broad-based regulatory reform to free up businesses from burdensome regulations that hamper productivity and drive up costs. Lower taxes and deregulation will provide incentives for companies to manufacture products in the U.S. instead of in foreign countries. These measures will also benefit consumers through keeping tax rates low and reducing prices, which is a byproduct of deregulation. Reduced regulation improves efficiency, reduces the cost of production, and lowers barriers of entry for small businesses. Deregulation often results in lower prices of goods and services. In addition, we believe the Trump administration will seek to reduce government spending which will help strengthen the U.S. government’s fiscal position and support the U.S dollar. A stronger U.S. fiscal position will potentially encourage foreign investment in the U.S. Although it will take a little time to get these pro-business and pro-consumer policies implemented, the long-term impact on the U.S. economy could be significant over the next few years.

These three factors support our optimistic view of the economy and the financial markets however, there are other reasons for our optimism including, improved business and consumer confidence, productivity gains from implementation of artificial intelligence applications, increased investment in the energy grid, and the overall attractiveness of the U.S. markets to foreign investors. We believe the U.S. will continue to outperform the rest of world and attract capital from both domestic investors as well as foreign investors for the next several years. To be sure, there will be potholes along the road of progress, but we see little on the horizon that could derail the economy.

Economic Risk Factors

Of course, there are risks to our view which we would be remiss not to mention. We still face geopolitical risks associated with the wars in the Middle East and Ukraine, such that if either were to escalate into a more regional war, it could have a negative impact on global economic activity. At this point, neither conflict appears to be widening. On the contrary, both may be closer to some sort of resolution and peace accord this year. It appears that Israel military operations have gained the upper hand in the war against both the Hamas in Gaza and the Hezbollah in Lebanon. Both terrorist groups have been severely weakened by the war and may move to seek an end to the fighting. In addition, the war in Ukraine appears to have reached a stalemate which could move both Russia and Ukraine to seek a negotiated peace soon. We believe the Trump administration will be very active in negotiating an end of the hostilities in both regions.

Another risk factor for the U.S. economy is the possibility of new tariffs imposed by the Trump administration on certain of our trading partners. Tariffs can be a double-edged sword. While they may punish a wayward trading partner, they can potentially hurt the economy by raising prices of imported goods and services and contributing to higher inflation. Aggressive new tariffs could also set off a trade war with other countries which could negatively impact the global economy. Trump has suggested that he will use tariffs to encourage fairer trading, curb illegal immigration, reduce fentanyl from coming into the U.S. and revitalize U.S. manufacturing. While Trump may achieve these goals over the long-term, in the short-term, we believe that increased tariffs are likely to at least create volatility and economic uncertainty.

Lastly, there is the possibility of a resurgence of inflation. Inflation has come down significantly since 2022 but still remains stubbornly above the Federal Reserve’s 2% goal at just under 3% on an annualized basis, as sited above. The combination of increased tariffs, lower taxes and continued government deficit spending could push inflation higher in 2025. Any surge in the monthly inflation statistics, could force the Federal Reserve to keep interest rates at what most economist view as a restrictive level or worse, influence the Fed board to raise interest rates at some point during the year. While we believe the prospect of higher inflation is low, we feel it is a risk that should be taken into consideration.

Equities

Although the stock market finished December on a negative note, 2024 was a strong year for the U.S. equities markets as the major stock market indices posted double-digit gains for the year. Lower interest rates and robust corporate earnings growth were the key drivers of stock prices in 2024, in our view. The Federal Reserve had indicated in its November meeting in 2023, that it may begin lowering short-term interest rates in 2024. This was a significant pivot away from its monetary tightening policy that had been in place since early 2022 and signaled to investors that the Fed was shifting into an easing mode for the next several quarters. Although the Fed waited until its September 2024 meeting to begin lowering the Fed funds rate, there was a positive reaction in the stock market almost immediately after the Fed’s November 2023 meeting which continued for most 2024. Investors generally view lower interest rates as a positive for the economy.

While the Fed was doing their part in supporting stock prices, corporate earnings continued to show strong growth for most S&P 500 companies. After posting a nearly flat year for earnings growth in 2023, S&P 500 earnings is estimated to have grown at 9.4% in 2024, according to research firm Factset.⁷ Factset estimates S&P 500 earnings will grow at nearly 15% for 2025, which is above the 10-year annual earnings growth rate of 8% (2014-2023)⁷ Earnings growth was concentrated in a small number of large company growth stocks in 2024. As we have noted in previous letters, the S&P 500 Index gains have largely come from what is referred to as the “Magnificent 7” companies and a few other technology stocks over the past two years. We anticipate a broadening of earnings growth in 2025 and believe that both earnings growth and market gains over the next couple of years will also come from other sectors of the stock market. Factset estimates that while the “Magificent 7” companies will grow earnings at 21% in 2025, they expect the rest of the 493 companies in the S&P 500 will report earnings growth of 13% in 2025 verses just 4% for 2024.

As we mentioned in our July 2024 TCM Investment Outlook & Strategy letter, we believe a new bull market in stocks began in the fall of 2022 when the S&P 500 Index bottomed with a peak-to-trough decline of 27% from January 7, 2022 to October 13, 2022.⁸ From that October low, the S&P 500 has gained 68% as of December 31, 2024, not including dividends.² The average bull market since January 1, 1926 has gained 220% and lasted 4.9 years according to a joint Bloomberg and Wells Fargo Investment Institute study.⁹ While past performance is no guarantee of future results, we feel there is potentially more upside for this current bull market in equities that could propel the major averages higher over the next 12-18 months.

Some argue that after two straight years of 20% plus gains for the stock market that now is the time to be a little more cautious. As we mentioned earlier in the section on the economy, there are a few potential risks that could derail the bull market and support a more cautious investment posture. In addition, valuations for the overall market are above average as indicated in the chart on the left which shows the Price to Earnings ratios (P/E) for the S&P 500 Index as well as the MSCI EAFE and Emerging Markets indices. Currently, the P/E ratio for the S&P 500 is 21.9, as of November 30, based on Well Fargo Investment Institute’s estimate for Earnings Per Share. While this P/E ratio is above the historical average of 17.2, we believe that based on the potential earnings growth of the S&P 500 for 2025 as we mentioned above, it is a reasonable valuation and not a level that we are concerned about at this time.

Despite the risk factors mentioned above and the higher-than-normal market valuation, we are optimistic about a continuation of the bull market. However, we will almost certainly have corrections along the way. Corrections of 5% to 10% are normal in a Bull market trend as history has shown. On average, the S&P 500 Index has historically experienced a 10% correction at least once per year in our observation. Our last 10% correction was in the summer and fall of 2023 so we may be due for one in the near future.²Timing such corrections is very difficult so we recommend staying fully invested. However, when such a correction does occur, we recommend using it as a buying opportunity for those who are desiring to put cash to work in equities.

We continue to favor value stocks for conservative investors seeking both dividend yield and lower volatility. The chart on the right shows the relative valuations for value vs growth stocks. The green dotted line shows the average relative value over the past 25 years. When the solid black line is above the green dotted line growth stocks are cheap relative to value stocks. When the black line is below the green dotted line value stocks are cheap relative to growth stocks. We believe that over the next several years, value stocks will outperform growth stocks.

We continue to favor companies that have a history of raising their dividends each year as well as high dividend yielding stocks. (Dividends are not guaranteed and are subject to change or elimination.) We also believe there is opportunity in certain high-quality growth stocks, especially those involved in cloud computing, software and hardware development and artificial intelligence (AI) technologies. We believe there will be widespread adoption of AI across all industry groups over the next several years that will impact both businesses and consumers as more applications are developed. This will help drive the need for more data centers and both hardware and software applications to drive the massive compute requirements.

Small-cap stocks look attractive to us on a valuation basis and could finally for the first time in years, out-perform large and mid-cap stocks in 2025. Lower interest rates and economic growth in the U.S could positively impact smaller companies this year and perhaps over the next few years. We have been bearish on this area for the last few years but we think it may be time for this area of the market to shine.

We believe it will continue to be a challenging environment for international stocks which substantially under-performed U.S. markets in 2024.²Our economic outlook points to little or no growth for most foreign economies in 2024, particularly China and many European countries. At some point, we feel both developed and emerging markets will become attractive for investment however, we continue to 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 additional exposure to this area until fundamentals improve.

Fixed Income

While the stock markets rewarded equity investors with attractive gains in 2024, the fixed income markets were not quite as generous. As you can see in the graph on the left, total rates of returns for most high-quality bond sectors ranged between 2.2% on the low end for U.S. Treasuries, to 4.1% on the high end for U.S. Corporates. We expect increased volatility in the fixed income space in 2025. We believe that fixed income yields will be range-bound and perhaps end the year a bit below current levels.

We continue to see good value for investors in the fixed-income markets. We believe that high-quality fixed income instruments provide historically attractive risk-adjusted returns for conservative investors at current levels. For investors seeking to generate income as well as for portfolio diversification purposes, we continue to favor U.S. Treasuries, high-grade corporate bonds, mortgage-backed securities, prime money market funds, and tax-free municipal bonds. Current interest rates for money funds and shorter-term securities, and yields on intermediate-to-long-term bonds are in the 4-5% range.²We view tax-free municipal bonds, with current yields ranging from 3% to 4% 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 40% tax bracket of 5% to 6.6%. Although prime money markets yields are still in the 4.5% range,²investors who are holding significant cash type instruments may want to consider locking in the current yields on intermediate fixed-income instruments. If inflation continues to trend lower and the Federal Reserve implements additional rate cuts this year, money funds yields will continue to decline. One wild card for the bond market would be if the Trump administration makes good on promises to reign in government spending resulting in lower budget deficits. We believe this would positively impact fixed income markets. Using the 10-year Treasury note as our benchmark which is currently yielding 4.6%, we see the range for the 10-year note over the next 12 months between 4% and 5%. We recommend that fixed income investors remain flexible with bond portfolios. For instance, you could extend maturities if the 10-year note yield rises to the upper end of the range from current levels, and shorten maturities if the 10-year note yield declines to the lower end of the range during the year.

Commodities:

The commodities market rebounded from a loss of 5.5% in 2023 to post a gain of 8.5% in 2024, as measured by the S&P GSCI Commodity Index (GSCI). In our 2024 January TCM Outlook and Strategy letter, we saw prices of most commodities stabilizing in the first half of the year but resuming their upward trend that began in 2020 in the second half of the year.⁸The GSCI was virtually flat from the beginning of January until September 11 but then over the last four months of the year gained a little over 8%. Through modern history, commodity prices have tended to move in long-term bull and bear cycles. We believe a new long-term bull market in commodities started in May 2020. Commodity bull cycles typically last 10-15 years, however, like the equity markets, they are subject to corrections along the way.

We continue to favor energy, copper, silver and agricultural commodities. We see long-term upside opportunity in both crude oil and natural gas as demand for energy resources increases with population growth, industrial expansion and increase use of data centers to drive cloud computing and AI applications. Supplies of both oil and natural gas have remained sufficient to meet demand over the past two years. However, we believe that over the next couple of years, supplies will diminish as demand grows. We continue to favor energy equities especially companies involved in both the production and transportation of oil and gas products. Dividend yields for many companies in these two sectors are well above the dividend rate for the S&P 500 which currently stands at 1.2%.²(Dividends are not guaranteed and are subject to change or elimination.) We also see demand for copper and silver rising with the expansion of the use of both solar and wind power to meet increasing energy demands as well as the continued adoption of the use of electric vehicles. These technologies use a great deal of both copper and silver in the manufacturing of these products. Both copper and silver face significant supply constraints over the next few years, according to our research. Lastly, we are bullish on agricultural commodities with positive demographic and industrialization trends in emerging economies driving higher demand for food, especially protein-based products.

The Bottom Line

It has been a prosperous couple of years for most equity investors as well as businesses and consumers. Equity markets are up significantly from the lows in 2022, the economy continues to grow moderately, and inflation has receded to more normal levels. We see many more positives than negatives for 2025 which we believe will help sustain economic growth and propel equity markets higher. However, with two back-to-back 15% plus gains for the major U.S. stock market averages, we believe gains for 2025 could be somewhat lower, perhaps more in the 7-10% range for equities, using the S&P 500 Index as our benchmark. Intermediate bonds and bond funds could provide a return in the 4-5% range in our view.

We see long-term developments like the rebuilding of U.S infrastructure, manufacturing reshoring from China and other foreign countries, and the implementation of robotics and AI technologies, driving capital investment for several years. We believe the U.S. will continue to have a competitive advantage over the rest of the world making it attractive for investors.

For most investors, we believe a portfolio that is balanced between stocks, bonds, and money funds is appropriate. We will inevitably see more volatility in the financial markets in 2025, so having exposure to fixed income and cash would potentially reduce overall portfolio volatility. Stock market corrections after a strong couple of years of strong gains are certainly a possibility during 2025 as we discussed. We would use any corrections to add to stocks, where appropriate.

We believe the beginning of the new year is a very good time to review your long-term investment goals and to evaluate your current asset allocation strategy and to make sure that your portfolio is in line with your 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 all of our client relationships and for the confidence and trust you place in us. We are honored and blessed 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

Website:www.tcmtx.com

TCM Tyler TX Location

821 ESE Loop 323, Suite 110

Tyler, Texas 75701

903-747-3960

Footnotes

1 Trading Economics https://tradingeconomics.com/united-states/gdp-growth

2 Thompson Charts

3 https://www.bls.gov/news.release/cpi.nr0.htm

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

5 Wells Fargo Investment Institute, FOMC Meeting: Key Takeaways, December 18, 2024

6 https://www.atlantafed.org/chcs/wage-growth-tracker

7 Factset Earnings Insight, December 20, 2025. https://www.factset.com/earningsinsight

8 https://www.tcmtx.com/blog

9 Wells Fargo Investment Institute Economic and Market Commentary, June 10, 2024

To view the above links, press and hold the Ctrl key on your keyboard, hover over the link and left click your mouse.

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 commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

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

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.

Bloomberg U.S. Corporate Bond Index includes publicly issued U.S. corporate and Yankee debentures and secured notes that meet specified maturity, liquidity, and quality requirements.

Bloomberg U.S. Corporate High Yield Bond Index covers the universe of fixed rate, non-investment grade debt.

Bloomberg U.S. Mortgage-Backed Securities Index measures the performance of investment grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA and FHLMC.

Bloomberg U.S. Municipal Bond Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds.

Bloomberg U.S. TIPS Index is an unmanaged market index comprised of all U.S. Treasury Inflation-Protected Securities rated investment grade, have at least one year to final maturity, and at least $500 million par amount outstanding.

Bloomberg U.S. Treasury Index measures the total return US dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury.

JPMorgan Emerging Markets Bond Index (EMBI Global) covers 27 emerging market countries. Included in the EMBI Global are U.S.-dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities.

JPMorgan Government Bond Index Global ex-U.S. measures the performance of non-U.S. government bonds.

The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The index consists of 24 commodities from all commodity sectors - energy products, industrial metals, agricultural products, livestock products and precious metals but its exposure to energy sector is much higher than other commodity price indices.

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.

P/M Tracking Number: 07072026-7504601.1.1

TCM Market Outlook and Strategy - October 21, 2024

Mon, 21 Oct 2024 05:00:00 +0000

Stephen M. Mills, CIMA® Partner

Chief Investment Strategist

As we turn the page on the third quarter of the year and move into what is likely to be a very interesting and eventful fourth quarter, stocks are at record highs, interest rates are trending lower, inflation is subsiding and the U.S. economy just keeps chugging along like the “Little Engine That Could.” Many investors are enjoying the second year in a row of double-digit gains in their stock portfolios as well as getting respectable annualized returns in the 4-5% range for high-quality bonds and cash equivalent investments.¹As one of the lines in Andrew Lloyd Webber’s Broadway musical, Whistle Down the Wind goes, “It just doesn’t get any better than this.”

Global stock markets continue to show strength despite the growing instability in the Middle East, the ongoing war of attrition in Ukraine, mixed U.S. economic data and perhaps the strangest U.S. presidential election in history. Through all of this uncertainty, the S&P 500 Index has made 44 new all-time highs this year, as of the date of writing.¹

In our view, one word describes the U.S. stock market: resilient. It seems like no matter what negative news gets thrown at investors, the market continues to march higher. Of course, there have been a few bumps in the road so far this year like the unwinding of the Japanese yen carry trade in August that led to a 6% drop in the S&P 500 over four trading days and the 4% decline in the S&P 500 in early September following a weaker than expected employment report. But, for the most part, the stock market has been remarkably strong in the face of numerous headwinds.

As we stated in our July 2024 letter, we believe stocks are in a bull market trend that started in the fall of 2022 when the S&P 500 bottomed out after a peak-to-trough decline of 24% from January 7, 2022 to October 13, 2022.²From that October low, the S&P 500 has risen by a total of 57%, as of September 30 (not including dividends).¹We believe the Federal Reserve added fuel to the bull market fire in September when it moved to lower the benchmark Fed funds rate by .5% at its FOMC meeting.³This move signaled a change in the direction of Fed monetary policy from neutral to easing. The Fed had raised the Fed funds rate from nearly zero in January 2022 to 5.5% by July 2023, at which time they paused further rate-hikes. In November 2023, the Fed signaled the possibility of rate-cuts in 2024 if the inflation statistics continued to trend lower. However, the Fed waited until September to make its first cut after seeing enough evidence that inflation was continuing to move toward its 2% target rate and economic growth was moderating. Federal Reserve Chairman Jerome Powell indicated in the September FOMC post-meeting press conference, that the Fed would continue to carefully assess incoming data for both inflation and economic growth in considering additional rate adjustments.³According to the Fed’s own forecast for interest rates, they anticipate the possibility of an additional 50 basis points (.5%) of rate cuts through the rest of 2024 with an additional 100 basis points (1%) of cuts in 2025.⁴

While the potential for interest rates to decline is positive for the stock market, we believe corporate earnings have been the key driver of stocks prices so far this year. According to FactSet’s Earnings Insight report as of September 27, the third quarter of 2024 will mark the fifth straight quarter of year-over-year earnings growth for the S&P 500.⁵We feel the consistency of this earnings growth has helped to fuel the S&P 500 Index to a 22.1% total return for the first nine months of the year. In addition, the widely followed Dow Jones Industrial Average has posted a double-digit gain this year with a total return of 14%, as of September 30.¹

Based on investment industry analysts’ estimates, S&P 500 earnings for 2024 are projected to come in at about $240 per share, a 10% increase from 2023.⁶Wells Fargo Investment Institute is projecting S&P 500 earnings to hit $260 per share in 2025, indicating the potential for another strong year for earnings growth. We believe this strong earnings growth will continue to be a positive catalyst for stocks over the next 12-18 months.⁷

The Fed’s easing of monetary conditions could also be a strong tail wind for the stock market going forward. The Fed’s initiation of rate cuts in September has historically been very positive for stocks when a rate cut did not correspond with a recession for the U.S. economy. According to the chart below, since 1974, when the Fed cut rates and there was no recession, the S&P 500 Index rose on average 30% over the next eighteen months. However, when the cuts corresponded with a recession, the S&P 500 Index performance was choppy before ending mostly flat for the period.

We believe this easing of monetary conditions will help support U.S. economic growth over the next 12-18 months as interest rates for things like home mortgage loans, auto loans, installment notes, and credit cards potentially move lower. Recent economic data has been mixed with manufacturing data showing weakness but consumer spending holding up well. The most recent jobs report for September showed that the U.S. economy added 254,000 jobs, well above consensus estimates and the strongest in six months.⁷We believe U.S. consumer finances are still in pretty good shape which could continue to support spending, especially as we get into the holiday season. Since consumer spending accounts for two-thirds of U.S. GDP, we believe the U.S. economy will continue to grow moderately for the next several quarters.

However, there are a couple of near-term risks to our somewhat rosy picture for the economy and the stock market. Topping the list is the war in the Middle East between Israel and the Iranian proxies Hamas and Hezbollah. Continued escalation of hostilities between Israel and Iran poses a risk to oil supplies in the region. Oil prices have risen significantly over the past two weeks as investors grow more concerned about a disruption in Iran’s oil production as well as the possibility that Iran could attempt to close the Strait of Hormuz where one-fifth of the world’s oil supply passes daily. Higher oil prices, if sustained for several months, would potentially have a negative impact on both inflation and global economic growth. While we believe neither Israel or Iran desire to see the conflict escalate much further, this remains a risk factor for the financial markets in the short-term. In addition, we continue to worry about the war in Ukraine escalating and becoming regional, as neither side seems to be interested in negotiating peace. The longer the war goes on, the greater the risk of escalation, in our view.

We believe the other significant near-term risk factor is the upcoming U.S. elections. A close presidential election could result in voter recounts in key closely contested states which could take days or even weeks to resolve. The uncertainty in the interim could create volatility in the financial markets. As far as the intermediate term impact of the election on the economy and the equity markets, we believe the most likely outcome will be a divided government with neither major party having control of the White House as well as both Houses of Congress. In our view, such an outcome would mean continued gridlock in Washington making it difficult for either party to implement much of its agenda. Even if one party does manage to gain control of both the executive and legislative branches of government, it would most likely have very narrow control of the legislative branch making it difficult for the party in control to pass legislation involving taxes or spending without the other party’s help. The bottom line is, we believe the election outcome will not have a meaningful negative impact on either the U.S. economy or the financial markets for 2025.

So far, this election year has been exceptionally strong. Election years often bring volatility, especially prior to the election as investors wrestle with the uncertainty surrounding a potential leadership change in Washington. With the added uncertainty around this year’s presidential election, one would have thought the stock market would have sold off significantly by now. However, despite two assassination attempts on President Trump’s life, and a last-minute change at the top of the Democratic ticket, investors have shrugged off these events and continue to push the stock market higher.

So far, this election year is shaping up to be the best presidential election year for stocks in nearly 90 years. As you can see in the chart above, by the end of September, the S&P 500 Index had posted a total return of more than 22%, the highest return during an election year since 1936.⁸In our view, strong corporate earnings and the Fed’s shift to a looser monetary policy has kept market sentiment buoyant despite the uncertain political backdrop.

In summary, we continue remain bullish on stocks. However, stocks don’t go straight up and there are always corrections along the way. It would not surprise us to see a 5-10% correction in the overall stock market at some point in the next few quarters, perhaps even before the end of the year. If the presidential election results are unclear for an extended period of time after election day, we believe this could be potentially negative for stocks in the short-term. We would use any correction in stocks as an opportunity to add to equity exposure, where appropriate. We continue to focus primarily on high-quality large company stocks, high-grade fixed income instruments and cash type marketable securities like prime money funds. We see opportunities especially in the energy and commodity sectors that have lagged behind the rest of the stock market this year. In addition, we continue to like technology, healthcare, and consumer discretionary stocks. We continue to shy away from adding to small cap and international equities at this time. At some point in this bull market cycle, we believe these asset classes will become more attractive. However, we will be patient and wait for fundamentals to improve before committing funds.

We have always believed that uncertainty often presents opportunity. We believe now is the time to be making preparations to take advantage of any market volatility around the election or possibly an increase in geopolitical risks. Once the election is settled and investors know who will be occupying the White House and what the makeup of Congress looks like, we feel 2025 could be another good year for the financial markets.

As always, we are very grateful for the confidence and trust you place in us and will continue to work diligently to keep you informed and seek to provide you with outstanding service.

Your Trinity Capital Management Team

Tyler TX Location
821 ESE Loop 323, Suite 100
Tyler, Texas 75701
903-747-3960

Webite:www.tcmtx.com

Footnotes

¹ Thompson One charts

² TCM Investment Outlook & Strategy, July 2024

³ Wells Fargo Investment Institute, FOMC Meeting: Key Takeaways, September 18, 2024

⁴ Riverfront Investment Group, Fed Rate Cutting Cycle Begins with a Bang, September 24, 2024.

⁵ FactSet Earnings Insight, September 27, 2024. https://www.factset.com/earningsinsight

⁶ U.S. Bank Wealth Management, “Investors Focus Attention on Corporate Earnings.” September 4, 2024

⁷ Wells Fargo Investment Institute, 2024 Midyear Outlook, June 2024

⁸ Bureau of Labor Statistics U.S. Department of Labor Employment Report, October 4, 2024. https://www.bls.gov/news.release/pdf/empsit.pdf

⁹ U.S Global Investors, October 7, 2024.

To view the footnote links, press and hold the Ctrl key on your keyboard, hover over the link and left click your mouse.

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.

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.

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.

Compliance Tracking Number: PM-04102026-7175466.1.1

TCM Market Outlook and Strategy - July 25, 2024

Thu, 25 Jul 2024 05:00:00 +0000

Stephen M. Mills, CIMA® Partner

Chief Investment Strategist

The U.S. financial markets continue to reward patient investors. Stocks, as measured by the popular benchmark S&P 500 Index, recorded a 15.3% total return in the first half of the year as of June 30, while the tech-heavy NASDAQ Index posted a gain of 14.5% after surging 44.6% in 2023.¹ Both indices were primarily driven by large tech stocks that are investing heavily in artificial intelligence (AI) related solutions. AI has been the dominant theme for the stock market for the past 18 months. There is a great deal of investor optimism about significant efficiencies and productivity gains for many businesses from AI applications that could significantly enhance corporate profits over the next several years. Many strategists believe that AI could have a bigger impact on people’s lives in the future than the impact of smart phones and the internet has had over the past 25 years. We believe that we are in the very early stages of a ramp-up of the use of AI by both businesses and individuals over the next few years, that will positively impact many areas of our personal lives including healthcare, financial, travel, entertainment, and nutrition to name a few. We will explore more on this subject in future letters but for now, we wanted to point out how the growing use of AI is impacting the performance of the financial markets and investors pocket books.

U.S. Economy

Overall, the U.S. economy remains in a positive growth mode. GDP (Gross Domestic Product) estimates from many economists have the economy growing in the 2.0% to 2.5% range after inflation for the first half of 2024 after posting a 2.5% inflation adjusted increase in 2023.²While recent economic data for employment, manufacturing, and consumer spending indicate a mild deceleration in economic growth, we believe the economy remains very resilient despite higher interest rates and an inflation rate that has remained stubbornly above 3%. Inflation has improved significantly since peaking at a 9% annualized rate in June of 2022 but still remains above the Federal Reserve’s target rate of 2%.

In our view, both consumers and business continue to suffer from the lag effect of higher-than-normal inflation. Higher costs for things like groceries, restaurant meals, auto and property insurance coverage, healthcare, and energy are straining consumers pocketbooks. Inflation tends to dampen demand for goods and services which we believe is being reflected currently in economic data such as weaker retail sales, increased credit card debt and delinquencies, and a slowdown in home and automobile sales and other durable goods. Yet despite this weakness, the overall economy remains resilient and continues to grow modestly.

With the recent deceleration of economic growth, many economists believe that the Federal Reserve (Fed) could begin lowering interest rates soon. Back in the fourth quarter of 2023, the Fed halted further rate increases and indicated at the November FOMC meeting that it could begin lowering the Fed funds rate sometime in 2024. The Fed raised the Fed funds rate by a total of 5.25% from March 2022 to July 2023 and it currently sits at 5.5%.³At the beginning of this year, many economists and market strategists were projecting as many as six Fed rate-cuts totaling about 1.5% in 2024. However, when inflation statistics in the first half of the year began indicating that the decline in the inflation rate may have stalled out at around a 3% annualized rate, the Fed backed off its rate-cut talk. As a result, many economists and market strategists are now projecting only one or two rate-cuts for 2024.

We believe inflation will need to resume its downward trend toward the Fed’s 2% target rate before the Fed moves to lower interest rates. We wouldn’t be surprised if the Fed waited until after the November election to begin cutting rates. However, if the economy continues to weaken, the Fed may move sooner to stimulate economic activity. The Fed’s objective when it began tightening monetary policy in early 2022, was get inflation back down to its 2% target rate without hopefully causing a recession. Fed officials have been able to walk this tight rope thus far but time will tell if the Fed will be successful in achieving that objective.

Equities

In our January 2024 client letter, we projected more gains for stocks in 2024 after a strong 2023.⁴In this letter, we pointed out that in our view, the key drivers for the continued rise in stocks were a continuation of declining inflation, a more accommodating Fed monetary policy that included possible rate-cuts in 2024, continued moderate economic growth, and most importantly, improving corporate earnings. Although we have yet to see Fed rate-cuts so far this year, many investors continue to anticipate the Fed cutting the Fed fund rate in the second half of the year. We believe this optimism regarding looser Fed monetary policy has motivated investors to put idle cash to work in the stock market which has helped to push the major stock averages to repeated all-time highs this year. In addition, first quarter corporate earnings registered an 8% year-over-year growth rate, better than the 4% analyst consensus estimate.⁵We believe corporate earnings will continue to surprise to the upside for the rest of 2024. We see the possibility of a more favorable interest rate environment, coupled with strong earnings growth, potentially driving the major stock market averages higher over the next 6-12 months.

We believe that a new bull market in stocks began in the fall of 2022 when the S&P 500 Index bottomed out with a peak-to-trough decline of 24% from January 7, 2022 to October 13, 2022.¹From that October low, the S&P 500 has gained a total of 57% as of June 30, 2024, not including dividends.¹According to the chart, the average Bull market since January 1, 2026 has gained 220.7% and lasted 4.9 years while the average Bear market decline was 29.8% and lasted 1.5 years. While past performance is no guarantee of future results, we feel there is still gas in tank of this current bull market in stocks that could propel the major averages much higher. However, even in bull markets, corrections of 5% to 15% are normal. We experienced a 10% correction in the S&P 500 Index during this current bull market in 2023 from August 1 to the end of October.¹The S&P Index fell nearly 6% in April of this year as well.¹In both instances, stocks rallied and went on to make new all-time highs. It would not surprise us to see a 5-10% in the S&P index sometime between now and the end of the year. As we have stated in our previous letters, if such a correction were to occur, we recommend using it as a buying opportunity for those who are desiring to put cash to work in equities. Our favorite equity class continues to be high-quality U.S. large company stocks in the technology, industrial, consumer discretionary, and energy sectors. Small and mid-cap stocks continue to underperform as well as international and emerging market stocks. For investors seeking high dividend options, we favor utilities, selected real estate investment trusts, oil & gas pipeline stocks, and telecommunications stocks.

Fixed Income

As we mentioned earlier in this letter, several recent economic data points indicate that the economy is experiencing a mild growth deceleration. In our view, a slowing economy is a positive for fixed income investors. In our experience, a slowdown in economic activity tends to push interest rates lower and bond prices higher. We believe the decline in the 10-year U.S. Treasury Note yield from 4.7% in late April of this year to the current yield of 4.3%, is reflecting the possibility of continued economic weakness this year.¹

While economic activity can impact the bond market, another key driver of bond yields is inflation. The chart below shows the trend of CPI (Consumer Price Index) over the past 50 years and the most recent spike in 2022 where the CPI peaked out at 9% year-over-year (y/y). Since July 2022, the CPI has been trending lower with the latest reading in May coming at a y/y 3.3% increase. The Fed’s preferred gauge of inflation is the Personal Consumption Expenditures Deflator (PCED). After reaching 5.6% y/y in February 2022, the core PCED fell to 2.6% y/y in May of this year. If Core CPI and Core PCED continue their downward trend over the next 6-12 months, we could see the Fed cut the Fed funds rate 3-4 times over that time period. This would create a very favorable environment for fixed income investors, in our view. Although it is unclear as to when the Fed will begin cutting the Fed funds rate, we believe now is the time to begin moving cash into fixed income instruments, where appropriate. Over the past 18 months, prime money market mutual fund yields have topped 5%. With near risk-free yields that high, many investors saw little reason to lock up funds in longer maturity fixed income investments. However, if economic conditions allow the Fed to lower the Fed funds rate over the next few quarters, we believe money both market yields and bond yields will likely follow suit.

We continue to favor adding funds to fixed income instruments like high-grade corporate or municipal bonds with maturities in the 10-to-15-year range as well as U.S. Treasury securities with maturities in the 5-to-10-year range. We also favor high-grade mortgage-backed securities with yields in the 5-6% range at current levels.¹

Strategy

We believe the positive equity market performance this year is reflecting a favorable economic environment that typically leads to positive performance. We currently have relatively low inflation, only moderately restrictive interest rates for business and consumers, and moderate economic growth. In such an environment, both stocks and bonds should perform reasonably well. We believe even at current valuation levels with the major indices at all-time highs, stocks can still achieve an annualized rate of return in the 8-10% range and bonds can provide investors with stable income in the 4-5% range over the next few years. (Forecasts, targets, and estimates are based on certain assumptions and our current views of the market and economic conditions, which are subject to change.)

We recommend that most investors diversity their portfolios by balancing between stocks, bonds, and cash, where appropriate. This type of allocation helps to cushion downside risk when the stock market enters a correction or a bear market. This diversified approach also provides a source of funds to buy stocks when they become more attractively valued as they did in the fall of 2022 when the S&P 500 Index had fallen 24% from its highs. In such circumstances, investors can shift funds from bonds or cash into stocks, where appropriate. Currently, with the S&P 500 Index trading at the higher end its normal valuation range, investors who desire to lock in gains and reduce downside risk could shift funds out of stocks and into bonds and/or cash, particularly if their equity allocation has risen above their long-term strategic target level. For instance, for the investor that has a target allocation of 60% equities and 40% cash and bonds, and has seen their equity allocation rise to 65% or 70% due to the recent stock market rally, they could shift 5% to 10% out of equities and into either bonds or cash to bring their equity allocation back down to their strategic target percentage. We believe now may be a good time for investors to consider such an allocation shift.

Our guidance continues to remain focused on holding high-quality investments in equities, fixed income and cash equivalent instruments. In this current environment, we feel that investors are not being rewarded for venturing into more risky areas of the market. Economic uncertainty, geopolitical risks and the November elections could create near-term volatility in the financial markets and we believe portfolios that focus more on higher quality investments will fare better than ones that have significant allocations to riskier areas of the market. The key to handling volatility is to have a plan, be patient and stay focused on your long-term financial goals and objectives.

As always, we are very grateful for the confidence and trust you place in us and will continue to work diligently to provide you with the best service possible.

Your Trinity Capital Management Team

Tyler TX Location
821 ESE Loop 323, Suite 100
Tyler, Texas 75701
903-747-3960

Webite:www.tcmtx.com

Footnotes

¹Thompson One charts

²Bureau of Economic Analysis U.S. Department of Commerce.https://www.bea.gov/

³Forbes Advisor, “Federal Funds Rate History 1990-2024.” https://www.forbes.com/advisor/investing/fed-funds-rate-history/

⁴https://www.tcmtx.com/blog/post/tcm-2024-investment-outlook-strategy-january-12-2024

⁵Wells Fargo Investment Institute Economic and Market Commentary, June 10, 2024

To view the footnote links, press and hold the Ctrl key on your keyboard, hover over the link and left click your mouse.

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.

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.

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.

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.

P/M Tracking Number: 01102026-6778211.1.1

TCM Investment Outlook Strategy July 2024.pdf

TCM Market Outlook and Strategy - April 5, 2024

Fri, 05 Apr 2024 05:00:00 +0000

Stephen M. Mills, CIMA_®Partner

Chief Investment Strategist

The performance of the U.S. stock market has been nothing short of remarkable for the past five months as March marked the fifth consecutive month that the U.S. stock market recorded a positive gain, as measured by the S&P 500 Index.¹ Since 1950, there have only been 30 instances where the S&P 500 posted a five-month winning streak. In all but two of those instances, the S&P 500 was higher 12 months later with an average gain of 12.5%.² (Past performance is not a guarantee of future results)

Since bottoming out in October 2022, the S&P 500 has increased by nearly 50% after suffering a decline of 27% from January 2022 to the October ’22 low.¹ As we pointed out in our January 2024 letter, the majority of the gains for the market S&P 500 Index in 2023 were attributed to a few mega-cap large-company growth stocks, particularly companies that were involved in artificial intelligence (AI) related technologies. However, since the beginning of the fourth quarter of 2023, we have seen broad-based participation among many sectors of the market. Value stocks and higher dividend-yielding sectors like utilities, energy, financials, consumer staples and REIT’s (real estate investment trusts) which lagged growth stocks for most of 2023 have begun to participate in the market rally. Even small company stocks, which have been badly lagging behind their large cap counterparts, have started to show some signs of life so far in 2024.

This year, the stock market is off to its best start since 2019 with the S&P 500 rising nearly 10% and the closely watched Dow Jones Industrial Average (DJIA) gaining 5.5% as of March 31.¹ Any weakness in the market has not lasted more than a few days, with investors buying the dip and sending both the S&P 500 and the DJIA to new highs again and again. The S&P 500 posted 22 all-time highs in the first quarter.² In our observation of the stock market over the past 30 years, strength tends to beget strength. We wouldn’t be surprised to see stocks continuing to make new highs over the near term, though we could see a period of consolidation of the recent gains at some point in the near future. The S&P 500 has not fallen more than 2% since the rally began in October of last year.³ A 3-5% correction in the major stock market averages could certainly occur sometime in the next few months. However, we would view such a correction as a potential buying opportunity.

We believe the strength behind the move in stocks over the past five months is a combination of the Federal Reserve (Fed) ending its rate-hike cycle in the fourth quarter of last year, the potential of Fed rate cuts in 2024 and 2025, and the anticipation of stronger corporate earnings this year. The Fed paused rate-hikes at the September FOMC meeting last fall after raising the benchmark Fed funds rate from .25% at the beginning of 2022 to 5.5% as of the July 2023 meeting. The Fed kept rates unchanged in its November meeting and also indicated that with the improvement in the inflation data, it may begin lowering the Fed funds rate in 2024. This set off a wave of stock buying that has carried over into 2024. In addition, corporate earnings have been surprisingly strong despite higher interest rates. Fourth quarter 2023 earnings grew by approximately 7% as of March 18, significantly higher than the consensus estimates of a 1.5% increase.⁴ Many market analysts expect companies in the S&P 500 to report the third straight quarter of earnings growth in the first quarter of 2024. For the year, analysts expect earnings to grow between 7% to 11%.⁵ A combination of more favorable monetary policy and stronger corporate earnings is a recipe for higher stock prices in our view.

We believe another factor contributing to higher stock prices is the resiliency of the U.S. economy. Many strategists and financial advisors, including ourselves, began 2023 anticipating that the U.S. economy would fall into a mild-to-moderate recession by the end of the year. Thus far, the much-anticipated recession has yet to materialize. In fact, we are becoming more and more convinced that we may be able to avoid a recession altogether. Although the jury is still out, the latest economic data is signaling continued economic growth. One indicator we like to look at is the Conference Board Leading Economic Index. (LEI). The latest release on March 21 showed a .1% increase for February 2024.⁶Although that is not much of an increase, it is the first time the LEI had risen on a monthly basis since February 2022. The increase was fueled by strength in the manufacturing and residential construction sectors, two components of the economy that often lead more robust economic activity. Employment growth has continued to be positive with the overall unemployment rate remaining below 4% at 3.9%, according to the February 2024 Employment Situation report released by the Bureau of Labor Statistics (BLS). The U.S. jobs picture remains healthy and supportive of continued economic growth.

Going into 2024, we were cautiously optimistic about the outlook for the U.S. economy and financial markets. Our optimism was based on the resilience of the economy in spite of the sharply higher interests from the Federal Reserve’s 18-month monetary tightening strategy to combat high inflation. The economy grew at an inflation adjusted rate of 2.5% in 2023, according the Bureau of Economic Analysis February 28, 2024 revised GDP report. We believe the growth is due largely to consumer spending which accounts for approximately two-thirds of U.S. economic output. Business spending and manufacturing output has also remained robust over the past year, helping the economy to avoid a recession. We believe that U.S. economic growth will slow in the first half of 2024 but begin to reaccelerate as we move into the second half of the year. At this point, we don’t see a recession developing in the next 12-18 months.

With the stock market is making new highs almost daily, many investors are concerned that valuations are getting too rich and that we may be setting ourselves up for a significant fall in stock prices. As indicated on the accompanying chart, the S&P 500 is trading at a price-to-earnings ratio (P/E) of 20.9 times projected earnings of $245 for 2024.⁷This P/E ratio is somewhat higher than the 30-year average of 16.6 but below the P/E ratio of over 24 times earnings at the peak of the dot com era of the 90s. However, if you strip out the top 10 companies in the S&P 500 that trade at over 30 times earnings, the current P/E of the remaining stocks falls to 18 and closer to the long-term average.⁸

Another concern on investors’ minds is the upcoming Presidential and Congressional elections. Many investors worry that inability of Washington to address major policy issues like the budget deficit, immigration, and geopolitical crises in Ukraine and Israel, as well as the uncertainty surrounding the two Presidential candidates, could have a negative effect on both the economy and the stock market. However, historically the stock market has shrugged off these types of election year concerns. Since 1950, the S&P 500 has risen in a presidential-election year 83% of the time with an average gain of 7.3% gain in those years.³ (Past performance is not a guarantee of future results) It’s difficult to say what impact the election will have on the stock market in the short-term, but we believe that regardless of the outcome and who occupies the White House in 2025 and which party controls Congress, we feel the positive fundamentals of the economy and the strength of corporate America will provide a favorable environment for stocks. More than likely, we end up with no party controlling the White House and Congress resulting in continued grid-lock in Washington. Frankly, in our observation, grid-lock is good. It means that it is unlikely that there will be any major legislation coming out of Washington that could harm business or the economy like tax hikes, or massive spending bills or anti-business legislation.

While the situation with this year’s election may not have much of a impact on the financial markets this year, we believe the direction of the Fed’s monetary policy will certainly play a key role in both the economy and stock market for 2024 and 2025. Coming into the year, investors were expecting the Fed to cut its benchmark short-term rate six times in 2024. That turned out to be overly optimistic, as Fed officials indicated in their March FOMC meeting that they are forecasting only three rate cuts this year. They also indicated that any rate cuts will be dependent on inflation continuing to move toward the Fed’s 2% target annual inflation rate. Inflation, as measured by the Consumer Price Index (CPI), has fallen from an annualized rate of 9% in July 2022 to about 3% at the end of 2023. However, the January and February CPI report indicated a slight uptick in the annual inflation rate which certainly caught the attention of the Fed. The Fed will continue to closely monitor the direction of inflation as well as the employment data in determining when to begin cutting rates. Any further downshifting in the Fed’s rate cut forecast could lead to volatility in the market. We feel this is perhaps the area where the stock market is most vulnerable in the near-term.

While the stock market has been very good for many equity investors lately, the fixed-income markets have been fairly steady this year. Interest rates for money funds and shorter-term securities, and yields on intermediate-to-long-term bonds remain where they started the year in the 4-5% range.¹ We continue to see good value for investors in the fixed-income markets. The current level of interest rates for high quality fixed-income instruments provide historically attractive risk-adjusted returns for conservative investors in our view. For investors seeking to generate income as well as for portfolio diversification purposes, we continue to favor U.S. Treasuries, high-grade corporate bonds, mortgage-backed securities, prime money market funds, and tax-free municipal bonds. We view tax-free municipal bonds, with current yields ranging from 3% to 4% 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 40% tax bracket of 5% to 6.6%. Investors who are holding significant cash in money funds may want to consider locking in the current yields on intermediate fixed-income instruments in the event the Fed begins lowering the Fed funds rate in 2024.

In summary, we remain very positive on both stocks and bonds for the next 12-18 months. We will likely see greater volatility in the financial markets as we get closer to the election and the uncertainty regarding who will be in control of government weighs on investor sentiment. It is important that investors not overreact to this volatility but continue to focus on long-term goals and objectives and maintain asset allocations. We could use any corrections in stocks and/or bonds as an opportunity to put cash to work where appropriate.

As always, we are very grateful for the confidence and trust you place in us!

Your Trinity Capital Management Team

Tyler TX Location
821 ESE Loop 323, Suite 100
Tyler, Texas 75701
903-747-3960

Webite:www.tcmtx.com

Footnotes

¹Thompson charts

²Yahoo Finance, “The S&P 500 is up 5 months straight…” March 27, 2024

³ The Wall Street Journal. “The S&P 500 Is Poised for Best Start to Year Since 2019.” March 28, 2024

⁴ Wells Fargo Investment Institute, Investment Strategy report, March 25, 2024

⁵Barron’s, The Stock Market Rally Keeps Going. March, 27, 2024

⁶https://www.conference-board.org/topics/us-leading-indicators

⁷Factset, Earnings Insight, March 28, 2024.

⁸ Professor Jeremy Siegel interview on CNBC.

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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.

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.

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.

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.

P/M Tracking Number: 10022025-6521254.1.1

TCM Investment Outlook Strategy - April 2024.pdf