You may remember that we titled last quarter’s market summary “On the Verge of a Recession.” Our Investment Committee continues to see a recession signal on our radar — and we may even be in a recession now. It takes two consecutive quarters of negative GDP growth to technically fall into recession territory, so we won’t know until end-of-month metrics come in.

The Atlanta Fed GDPNow, a widely followed forecasting model for GDP, already predicts Q2 to be negative (-1.9%, to be exact). The model considers several leading indicators to predict where the economy is headed. With negative growth in Q1 already realized, negative growth in Q2 would put the US economy into recession.

In the meantime, the big two topics on investors’ minds this quarter were monetary policy and market cycles. Let’s dive in!

Understanding Monetary Policy

To better understand what’s going on with monetary policy, let’s take a look behind the scenes at how the Fed influences markets.

The Fed has two primary methods of impacting markets:

1) raising or lowering rates at the window

2) talking about their forecasted policy in the future (“jawboning”).

The Fed releases its monetary policy updates — called the Summary of Economic Projects (SEP) — four times a year. We’ll look at their June release momentarily, but first, how does this work?

Each FOMC member forecasts a federal funds rate target range for the end of the year. Their projections are aggregated into a dot plot graph. Looking back to December 2021, they showed a forecast for 0.75-1% by the end of 2022 and a 1.5-1.75% target range by the end of 2023. We are halfway through the year, and the fed funds rate target range is already at 1.5-1.75% with expectations of an additional 75-100 basis points coming this month!

Why such a dramatic change from the previous forecast? Inflation did not turn out to be transitory. The latest CPI report at 9.1% ((all items) gives no sign of slowdown. When looking only y at the latest month, core came in at a shocking 0.7 (8.4% annualized). We tend to be pessimists, but this caught us by surprise.

Unlike 2021, where the market anticipated an accommodative fed, the 2022 forecasts (compare below to the previous image) predict a restrictive monetary policy path which the market is now anticipating a slow in the economy with inflation remaining above the longer-run neutral rate.

Simply: the market had to absorb a financial tightening cycle that was not originally forecasted entering this year.

The Market Is Forward Looking

This sounds overwhelming, but remember, the market is “forward-looking.” We see that the market is expecting the Fed to take rates to 3.5% this year, so that is what we need to focus on.

While recessions are certainly disconcerting, you don’t necessarily need to fear them. The financial cycle (stock market) goes up in anticipation of the business cycle (economy) being strong, and down in anticipation of the business cycle being weak. Or simply, the stock market leads the economy. This means the stock market may begin to rally while the economy is still deep in a recession.

We can review a few scenarios using this framework:

· No recession: The economy slows but does not fall into recession. Inflation drops back toward 2% and monetary policy does not become/remain restrictive. The future prospect of recession can be pushed out into the future, the business cycle rebounds and the market could have already put in the trough earlier in June.

· Current recession: The economy enters recession in 2022. Inflation remains sticky through the end of the year but starts to ease which allows the Fed to only remain restrictive for a couple of quarters. Most of the market decline would be priced in during the 1H, a trough could not be put in until a path out of recession emerges (likely Q4). Meaning most of the pain is over, but a sharp rally is still months away.

· Persistent Inflation: The Federal Reserve tries a balancing act by raising rates, but not to a sufficient pace to slow inflation. This could disrupt businesses that struggle to calculate where to deploy resources and labor causing a ‘stagflationary” environment where hiring slows but prices rise. Look at the 1970s as an example.

So What to Consider

Continue to pay close attention to the market while keeping in mind your financial goals. Inflation is and is likely to remain above the average bond yield. Look for more defensive positions to offset any growth names in your portfolio. If the third scenario becomes the base case (currently it is not), we would want to consider commodities and real estate since they have historically appreciated in a prolonged inflationary environment.

Our Commitment

As always, the GWS Investment Committee is committed to the following investment management goals for our clients in 2022:

1. To pursue long-term returns that first and foremost strive to help clients work toward all goals in their financial plans.

2. To seek excess return above each portfolio’s benchmark over a three-year trailing period and a full market cycle, to hopefully cover client fees and add surplus to their portfolios.

3. To implement investment strategies that align with each client’s volatility and benchmark sensitivity to help them remain confidently invested and long-term focused.

It’s our GWS vision to provide an unparalleled enduring level of care to families on their path of giving purpose to their wealth. Please do not hesitate to reach out to your lead advisor with any questions or concerns — we are here for you!

Important Disclosures

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

Investments in real estate may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, and risks related to general and economic conditions, stage of development, and defaults by borrower. The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.

Tracking # 1-05306273

Today, many people are concerned about saving for retirement or paying for a large ticket item, such as a child’s college education. If you belong to this group, now may be the time to organize your finances. It is never too early to begin, and the sooner you start, the better. Consider the following steps to building a strong financial foundation:

1. Get organized.

Smart money management begins with organizing your financial paperwork. By grouping documents according to categories (e.g., insurance papers, account statements, bank statements, and tax returns), you will be able to find what you need quickly.

2. Determine your financial status.

Once your files are organized, construct a net worth statement and a cash flow statement. Your net worth is the difference between your assets (what you own) and your liabilities (what you owe). A cash flow statement itemizes all your sources of income (e.g., salary, interest, and rental income) and all your expenses (e.g., mortgage payments, food, clothing, etc.).

A firm financial foundation includes having a positive net worth (meaning you own more than you owe) and positive cash flow (meaning you have more money coming in than going out). Even small steps toward improved money management can help you work towards a positive outcome. Look for areas where you can curb your expenses, and put that money toward savings.

3. Set financial goals.

Once you become aware of your financial status, make the most of your money by establishing financial goals to direct your saving and spending patterns. Because your specific goals may change over time, be sure to re-evaluate your financial priorities on a regular basis.

4. Control your credit card spending.

Although it is convenient to say “charge it,” buying on credit tends to cater to more impulsive shopping urges. Credit cards also can create an illusion of wealth, tempting you to buy things you cannot afford. If you carry large balances and make only the minimum monthly payments, the interest charges alone may exceed whatever amount you saved buying at bargain prices, and will take a long time to pay off. A practical guideline for controlling credit card spending is to have enough cash available (for example, in your checking or money market account) to pay off your credit card balances immediately to avoid interest charges.

5. Develop a tax strategy.

Many people start thinking about taxes only when the time comes to file their tax return. However, if you wait until tax season, it may be too late to benefit from some tax-saving strategies. Developing some strategies beforehand with the help of a tax professional may be beneficial in the long run.

Sound money management starts with organization—knowing where your hard-earned dollars are going. If you follow the steps outlined above, you will be on the path to building a strong financial foundation.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This article was prepared by Liberty Publishing, Inc.

LPL Tracking #1-05219161

Aaron Tuttle, CFA®, CFP®, CLU®, ChFC

GWS Chief Investment Officer

Are we on the verge of a recession? That seems to be the number one question on all investors’ minds. In this quarterly market summary, we’ll take a deep dive into this and other key market themes from Q1 2022. As always, we’re here to give you actionable advice so you can make informed decisions with your money.

Theme #1: Recession Signals Historically, one of the most accurate predictors of a coming recession has been an inverted yield curve — exactly what we’re experiencing in the market today. Typically, the yield curve is upward sloping. When it inverts, it signifies that short-term debt vehicles have higher yields than similar long-term instruments. As we always take care to mention, no one has a crystal ball to know what the market will do. Still, having kept an eye on the yield curve and other economic factors, our investment committee anticipates we are approximately six months out from a recession.

Theme #2: Markets Moving Past Headlines Given the Ukraine-Russia war, it’s easy to blame Russia for inflation. In reality, monetary policy, lockdowns, and other government policies laid the groundwork for inflation long before the war. Inflation will continue on as supply chains become less global and more regional. The markets are already moving past their initial reaction to the Ukraine-Russia War (even if the headlines have not). Instead, markets seem to be reacting more acutely to changes in Federal policy.

Theme #3: Low Unemployment

We’ve seen strong unemployment numbers in the last few weeks. Even if we have a recession, we could see unemployment staying low. Real wages are likely to drop through this, and companies will be more hesitant than before when it comes to letting people go. Instead of seeing more employees laid off, we anticipate a rise in the cost of energy, food, and other consumable goods.

So, What Does This Mean for My Portfolio?

Many clients have asked, “If we’re heading into a recession, should I pull out of the market now and go to cash?”

Our answer is: Not necessarily. There is still value to be had in equities, and completely pulling out causes you to miss the chance for those potential gains. Plus, with high inflation, you also risk losing your principal if it’s not growing at all.

The market typically peaks 13 months after an inverted yield curve happens. So, we need to be more diligent and ready to move on things. It makes more sense to look at more defensive equities than to complete sidestep into cash.

Conclusion

From an inverted yield curve to the Ukraine-Russia war and unemployment metrics, there’s plenty to keep an eye on as we head into Q2. We don’t anticipate that the recession will hit this quarter; however, it’s prudent to be prepared and review your portfolio strategy with your advisor if you have any questions.

Our Commitment

As always, the GWS Investment Committee is committed to the following investment management goals for our clients in 2022:

1. To pursue long-term returns that first and foremost strive to help clients work toward all goals in their financial plans.

2. To seek excess return above each portfolio’s benchmark over a three-year trailing time period and a full market cycle, in order to hopefully cover client fees and add surplus to their portfolios.

3. To implement investment strategies that align with each client’s personal volatility and benchmark sensitivity to help them remain confidently invested and long- term focused. We’ll continue to provide updates on these and other market happenings, so be sure to subscribe to our YouTube channel so you never miss a Weekly Market Insight webinar (Wednesdays at 3:30 p.m. CT). We’ll see you there! —

Disclosures

The opinions expressed are those of Aaron Tuttle and Gatewood Wealth Solutions as of the date stated on this material and are subject to change. There is no guarantee that any forecasts made will come to pass. This material is for general information only. This material does not constitute investment advice and is not intended to endorse any specific investment or security.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested directly. Returns represent past performance, are not a guarantee of future performance, and do not indicate any specific investment. Diversification and strategic asset allocation to not assure a profit or protect against loss.

When interest rates rise with fixed income securities and bonds, bond prices usually fall, because an investor may earn higher yield with another bond. Moreover, the longer the maturity of a bond, the greater the risk. When interest rates are at low levels, there is a risk that a significant rise in interest rates can occur in a short period of time and cause losses to the market value of any bonds that you own. The bond’s issuer is obligated to return the investor’s principal (original investment). As a result, high-yield bonds present greater credit risk than bonds of higher quality. Bond investors should carefully consider interest rate risk, credit risk, liquidity risk, securities lending risk, repurchase, and reverse repurchase transaction risk.

Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA & SIPC.

Our advisors tout the merits of tax-efficient planning strategies every day. At a very high level, moving money into certain types of accounts at the right time — in a way that lines up with clients’ goals — can save them substantial amounts of tax dollars. The goal is to take a broad enough view of their total financial picture that we can help them move around their money in a way that maximizes impact and minimizes taxes. After all, taxes are a cost and the more you’re paying the IRS, the less of your money you have available to become and remain financially self-reliant. That’s why tax considerations are such a crucial part of any comprehensive financial plan, or Goals Analysis as we call it at GWS.

Given the transformative power of tax-efficient planning, I thought it was worth taking time to delve more deeply into just how valuable a solid tax strategy can be. The strategies below, as well as our tax planning software that generates historical tax reports, observations and tax projection scenarios, are just some of the tools we use to help guide our clients in making tax-efficient decisions. As you work through end-of-year planning with your advisor, feel free to discuss any of these ideas with your advisor to learn if they might be appropriate for your personal situation.

1. Tax Loss Harvesting We keep an eye on your taxable investments that have lost value, replace them with similar investments, and use the investment sold at a loss to offset any gains from the new investment. By offsetting gains, we can help keep your overall tax bill lower. Please note that this strategy only applies to taxable accounts (versus non-taxable accounts such as 401(k)s and IRAs).

2. Tax Bracket Management If you’re teetering on the edge of a tax bracket, we’ll help you determine which bracket is best for you to fall into. Then, our approach is to determine how we can fill that bracket all the way up to the top without going over. For instance, a recent client had $30,000 of room left in a low-income tax bracket, and we suggested taking a extra distribution from a qualified plan that year to maximize the tax bracket. Over time, we can help clients reduce taxes in future high-income years by realizing more income in their low-income years. This type of strategy is particularly relevant with today’s historically low tax brackets and high-income ranges.

3. Roth IRA Conversions (or Contributions) A Roth IRA is a special retirement account where you pay taxes on money going into your account and then all future growth is tax-free. Roth IRAs are best when you think your marginal taxes will be higher than they are right now. If you are in a lower tax bracket and have Traditional IRA assets, a Roth IRA conversion strategy could also utilize the tax bracket management approach mentioned above. With a Roth IRA conversion, we could take money from a Traditional IRA and transfer it to a Roth IRA for that year. Income tax will still need to be paid on the amount converted, however, this lets us take advantage of a smaller income bracket. in which any growth will be tax-free.

4. Back Door Roth IRA Contributions If you’re not eligible to make a Roth IRA contribution because you’ve phased out over the income thresholds, you may be able to do a non-deductible IRA contribution that converts into Roth IRA. This strategy has other considerations to keep in mind if you have Traditional IRA assets outside of your 401(k), therefore you will want to work with your Lead or Service Advisor to determine if you are eligible for this strategy.

5. Qualified Longevity Annuity Contract (QLAC) A QLAC is a deferred fixed annuity contract that can help decrease required minimum distributions (RMDs) and the associated taxes. In other words, it gives you the chance to delay a portion of your required minimum distributions from age 72 up to age 85. So, if you do not need the money now, it might be better to delay the distributions to save taxes.

6. Annuities Annuities are another way to utilize non-qualified tax deferral. You don’t have to pay taxes if the annuity is non-qualified, and you also don’t have to pay capital gains — giving you a guaranteed income stream. Do keep in mind that taxes will have to be paid at the current income tax rate at the time of distribution. *See Disclosures Below

7. Donor Advised Fund A donor-advised fund is a charitable investment account, for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities or other assets to a donor-advised fund, you are eligible to take an immediate tax deduction. If you contribute securities, you get a double tax benefit as the capital gain on the holding is not taxable when you sell the holding. Then those funds can be invested for tax-free growth and you can recommend grants (over any time period) to almost any IRS-qualified public charity.

What About Investing? Finally, making tax-efficient decisions doesn’t just apply to financial planning. It can also be a critical piece of your investment strategy. For instance, we have a specific “Tax-Wise” strategy designed especially for clients who consider low taxes as their number one priority. Maybe they’re high earners who need to keep taxes down, or maybe they simply hate paying taxes! Our Tax-Wise strategy uses a proprietary ranking model to help us avoid high turnover and short-term gains (which could have meant turning over half of someone’s earnings to Uncle Sam). In the past, we

used mutual funds for this strategy. However, we’ve since transitioned to primarily using ETFs — which reduce or avoid capital gains distributions entirely. Using this approach, we can help hold positions until they become long-term gains, with the goal of optimizing our after-tax results. *See Disclosures Below Everyone can count on taxes, but by being smart about the way you manage your tax strategy, you might be able to keep more money in your pocket than you think. Be sure to talk with your advisor if you have any further questions about how to leverage these strategies for your own financial plan (Goals Analysis) and investment portfolio.

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Disclosures

* This material was created for educational and informational purposes only and is not intended as tax, legal, or investment advice. You should consult with your attorney, tax, or financial advisor for guidance on your specific situation. All investing involves risk including loss of principal. No strategy assures success or protects against loss. * Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 1⁄2 are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

Mutual funds and ETFs are sold by prospectus. Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus and, if available, the summary prospectus contains this and other important information. You can obtain a prospectus and summary prospectus from your financial representative. Read carefully before investing.

Executive Summary

As the market continues to bounce back post-pandemic, we’ve seen some interesting themes emerge. This quarter, we’ve reported weekly on many of these topics, such as rising inflation, signs of economic recovery, the strength of the dollar, and the seasonality of market behavior — all while keeping a sharp eye out for signs of an impending correction.

Let’s dive into the key themes that emerged in Q3 and talk about whether or not there should be a concern for a correction.

Theme 1: Cautionary Components in our Dashboards

First, we’ll start with the yield curve. As a refresher, the yield curve graph shows yields, or interest rates, of bonds with equal credit quality but different maturity dates. So, for example, a normal curve reflects higher interest rates for 30-year bonds compared to 10-year bonds, which you might expect (a higher return for holding the bond longer).

Think about it this way: banks can create money by loaning out their depositors’ cash, using a short-term payment and a long-term receipt. If the outcome is positive, it doesn’t matter where the interest rate is; banks can profit from lending long and borrowing short, which allows them to create credit (or money) in the system, bullishly affecting asset prices.

If the yield curve flips, banks begin to stop borrowing. Instead, they may call loans to pay depositors, which in turn shrinks the money supply.

This quarter, the yield curve showed a significant amount of movement. We ended the quarter close to where we started, but there was quite a bit of change over the last few weeks as rates came off their lower bound and moved back up 20 basis points (remember, a basis point is a hundredth of a percent). At the moment, we do not see a pullback. Demand for cash is greater than the demand for loans, so we likely don’t have to worry about a correction — yet.

Where is our concern coming from? We see from the following spider graphs that the money supply has dipped. Our spider graphs give a high-level look at how well the market is doing. Remember, the market is a forward-looking economic indicator, so it’s the first to dip.

In June’s graph, you can see an essentially robust economy, save for transportation and consumer sentiment. Those dips are primarily due to the chip shortage’s impact on vehicle purchases and resulting consumer sentiment.

Then, in July, we started seeing a deterioration in that bullish percent index. With the money supply dipping like this, we’re keeping a close eye on our dashboards for other signs of an impending correction. Now, moving into August, the money supply has slowed, and the bullish percent index is further down, which is concerning. But remember, it is customary to see a pullback in money supply as we get closer to September and October.

Theme 2: The Dollar as the “Fastest Turtle”

When it comes to the money supply, we see countries worldwide trying to solve the same problem: printing. Some are printing more money; others, less.

Compared to other major world currencies (e.g., the yen, euro, Canadian dollar, pound, krona, and franc), the dollar is quite strong. The continued strength is mainly because the U.S. dollar is a global currency, holding its demand. This gives the U.S. Federal Reserve an advantage over many other countries, as the global market makes the dollar more attractive.

Next, let’s look at credit spreads on BBB (“triple B”) bonds, the lowest quality while still being investment grade.

The spread, or extra yield someone gets for taking credit risk, has remained constant throughout the quarter. Bondholders did get paid to hold a little extra credit, which is what the Morningstar graph shows at the bottom: higher-yield bonds performed well.

The data tells us so far; markets are not pricing in credit risk. Interest rates are moving up, but they’re doing so across the board. If we were to be moving into a recession, the bond market hasn’t predicted it yet.

Theme 3: Global Energy Problems Emerging

Basic materials and industrials were among the lowest-performing sectors in the U.S., reflecting a broader global energy issue. We haven’t seen oil prices as high as they are now in the U.S. since 2014. Furthermore, China is suffering an energy crisis due to a general global coal shortage and an unfavorable trade policy with Australia (which has since been revised).

Still, those aren’t even the biggest energy headlines this quarter. Instead, the main story here is Europe’s sky-high natural gas prices. In April, the price was under $20, but it’s already spiked to $117. These spikes ignite shock waves through the system, impacting fertilizer prices, ammonia plants, and greenhouses. In many ways, Europe’s food sector is simply not economically viable at these prices. We guess there will be a sharp market correction as gas prices get resolved, but we don’t know what that looks like yet.

Fortunately for the U.S., natural gas issues are somewhat regional, so we see a domestic impact, but it is not proportional.

Other Q3 Observations

While not standalone themes, there were other observations worth mentioning this quarter. The observations are:

• The third wave of coronavirus did happen, but new medical options lessened its severity.

• We see exports — not imports — grow as cargo ships struggle even to make it into port in the U.S., let alone get unloaded.

• The U.S. grew more quickly than the global economy. Global GDP was only 5%, primarily due to issues with emerging markets (such as the Chinese real estate debacle).

• Municipal bonds performed well, while taxable bonds stayed reasonably flat.

• Secretary Yellen has called for a debt ceiling, saying we will default on bonds if we pass one by Oct. 18. We don’t think this will happen, as not enough people are pushing for it. If it does go through, we don’t believe the “Build Back Better Bill” will go through at its total proposed $5 trillion thresholds.

• The Federal Reserve met in September to discuss their balance sheet. While their strategy isn’t finalized, they signal they will likely reduce those assets at the end of the year and continue mid-2022. About $600-700 billion in asset purchases will be added, growing the balance sheet to a bit of shy of $9 trillion. That’s still a lot of accommodative policy, but it’s a bit of a tightening relative to where we were.

Please contact your lead advisor about how these themes impacted the market and portfolio performance this quarter.

Conclusion

While we see early signs of an impending correction in our dashboards, we don’t believe there is cause for concern just yet. Still, if the yield curve starts dropping, you’ll find us becoming more conservative. We continue to keep a finger on the pulse of the market and will be sure to update you with important updates to our dashboards.

To learn more about correction concerns in Q3 2021, be sure to listen to our recap video below.

To ensure you don’t miss an update, join our live Weekly Market Insight webinars on our YouTube, LinkedIn, and Facebook accounts. We’re here to help make sure you’re doing the right things to preserve your wealth — a crucial part of our mission to help you become and remain financially self-reliant.

As always, feel free to reach out to your lead advisor with any questions or discussion points!

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Disclosures

Securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

The opinions expressed are those of John Gatewood as of the date stated on this material and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended to endorse any specific investment or security.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested directly. Returns represent past performance, are not a guarantee of future performance, and do not indicate any specific investment. Diversification and strategic asset allocation do not assure a profit or protect against loss. When interest rates rise with fixed income securities and bonds, bond prices usually fall because an investor may earn a higher yield with another bond.

Moreover, the longer the maturity of a bond, the greater the risk. When interest rates are at low levels, there is a risk that a significant rise in interest rates can occur in a short period of time and cause losses to the market value of any bonds that you own. The bond’s issuer is obligated to return the investor’s principal (original investment). As a result, high-yield bonds present greater credit risk than bonds of higher quality. Bond investors should carefully consider interest rate risk, credit risk, liquidity risk, securities lending risk, repurchase, and reverse repurchase transaction risk.

One of the most rewarding parts of our work at GWS is when we hear clients tell us that we have provided them with greater confidence. They feel better about addressing their family’s needs if something should happen to them. They have confidence toward pursuing their goal of retiring when they want. And they know their legacy and philanthropic goals will be addressed.

To help clients understand their “probability of success” with a given financial situation and plan, our advisors run what is called a “Monte Carlo Analysis.” This analysis considers a complicated algorithm based on various nuanced factors, mainly varying rates of return and inflation. Then, within seconds, it computes 1,000 different scenarios based on those factors. The result is a percentage — the probability of success — which we then use to identify whether the client is on track or if we need to tweak certain aspects of their plan.

In this video, I unpack exactly what a Monte Carlo analysis is and how we use it to form a client’s Goals Analysis (or a financial plan). Take a look! And don’t hesitate to reach out to your advisor with any questions.

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Disclosures:

Economic forecasts may not develop as predicted, and there can be no guarantee that strategies promoted will be successful. Therefore, the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance references are historical and are no guarantee of future results.

Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. All investing involves risk, including possible loss of principal. No strategy assures success or protects against loss.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.

When it comes to choosing funds to invest your money, there are virtually infinite possibilities in the market. At GWS, our Investment Committee has meticulously whittled down our approach to just a handful of strategies that we find most effective for our clients.

Think of our investment strategies like a menu. As the client, you can order whatever you like. But, as a good server, we’re going to recommend specific strategies to you based on your preferences, lifestyle, goals, and financial plan. So, even though the pasta special is award-winning, a chicken and vegetable dish might be more aligned with your health goals and palate!

Ultimately, the decision is yours, but the onus is on us to educate you on what strategy likely aligns better with your goals and financial plan.

High Risk, High Reward? The Role of Beta in the Market

Have you ever heard the phrase, “High risk, high reward?” That quip references beta or risk. Beta measures a portfolio’s volatility relative to its benchmark. A beta greater than one suggests the portfolio has historically been more volatile than its benchmark. Conversely, a beta less than one indicates the portfolio has historically been less volatile than its benchmark.

So, let’s say you have a beta of 2 or double the market. If the market goes up 10%, you go up 20%. 1 But if the market goes down 10%, you’ll also go down 20%. That’s where the idea of “high risk, high reward” comes from.

In general, the amount of risk you take should be correlated to the length of your time horizon or when you’ll need the money. For example, if you’re 30 years old and investing in your retirement, you have a long-time horizon and can take on more risk. On the other hand, if you’re 30 and investing money you’d like to use to purchase a home in the next five years, you have a short time horizon. Therefore, you would want to invest in a strategy that posed less risk.

Unpacking Investment Strategies

Read on for a description of our investment strategies and how to determine which is best for you. We are entirely agnostic to these strategies, meaning we don’t favor one over the other. For a deeper dive into each, feel free to reach out to me or any member of our investment committee.

Not yet a client of ours? Then, select “Request a Meeting” in the upper right-hand corner of the page, and we’d be happy to connect with you.

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Strategy #1: Builder Works Well For Early Investors; Wealth Accumulators

This strategy is all about the long game. It is most appropriate for people with a long-time horizon who can get compensated for bearing volatility. The Builder strategy is meant to leave benchmarks in the dust!

This is one of our flagship strategies, and even though it’s geared toward younger investors, some of our clients keep them forever and contribute to the account over time. So, if you’re an aggressive investor and want to hold forever, this could be an option for you at any age.

Strategy #2: Tax-Wise

Works Well For High Earners Who Need to Keep Their Taxes Down; People Who Generally Hate Paying Taxes

This strategy is all about keeping as much of your wealth for you (and out of taxes) as possible. To aim towards this, we are cautious with capital gains. This is because your earnings net of taxes matter. So, for example, in retirement accounts [e.g., 401(k), IRA, SEP IRA], you can trade as much as you want and never pay a capital gains tax.

But in taxable accounts, you must pay very close attention to how often you trade. For example, if you trade within 12 months, you’ll have short-term capital gains losses. However, once you hit 12 months and one day, you’ll instead be counted as a “long-term” hold from a tax perspective, which is more favorable.

Historically, we used mutual funds for this strategy, but we’ve transitioned to using nearly all ETFs. Why? A benefit of ETFs is that they reduce — or in some cases, avoid entirely — capital gains distributions. That means they’re more tax-efficient compared to similarly structured mutual funds.

ETFs can also be traded during the day, so we’re not held to a single end-of-day value. Thus, if we have to trade quickly, ETFs are much more favorable. In most cases, they also come at a lower cost (although we don’t shy away from using more expensive funds if we think we can make the client more money from a net standpoint).

We, of course, try to beat benchmarks, but that’s not the goal with this strategy – lowering taxes is. So, the performance may zig-zag much more closely to the benchmark in this approach than Builder, for example. (We call that difference a tracking error; this strategy would be considered low to medium.)

Strategy #3: Moat

Works Well For Investors that Love Individual Stocks

Maybe your parents told you fairy tales when you were little or asked them about your kids. Either way, chances are, when we say “moat,” you know exactly what we mean. Just like a moat was a small border of water around a castle intended to keep intruders out, this moat keeps competitors of high-performing stocks at bay.

The story goes that this is the analogy Benjamin Graham taught Warren Buffet when he mentored him on stock picking. “If you’re Coca-Cola, what’s your competitive advantage that keeps your competitors at bay?” That competitive advantage is the moat.

At GWS, our Investment Committee does extensive research to determine what companies have an “X-Factor” advantage to outperform their competitors continually. Our relationship with Morningstar allows us to dig deeply into stocks for these qualities, and then we add a quantitative layer of analysis over the top. Typically, this strategy aligns with our tax-wise strategy’s quantitative buy/hold timings, but not always. So instead, it’s more about specific companies who are outperforming (and suggest that they will continue to exceed).

We typically see a lot of “DIY” investors in this strategy. They like following individual stocks and tracking performance, and they tend to shy away from ETFs and Mutual Funds out of personal preference.

Strategy #4: Signal

Works Well For: Clients Who Have Rollovers, Are Approaching Retirement, or Are Retired

Some would consider this our flagship strategy. We use a time-tested approach to following quantitative indicators – a firm’s trade secret rooted in following a technical signal.

How does it work? The signal we have developed broadly pinpoints where dollars flow globally to see where we’re getting exposure. For example, last year, this strategy picked up on high-performing categories like technology and stay-at-home stocks. At the same time, it avoided types like cruises and airlines, and as a result, we had significant exposure to those categories that did well. This is a disciplined, daily trading strategy that closely follows a rules-based process and algorithm.

The driving factor behind the algorithm is momentum. We won’t catch performance perfectly at the bottom of the peak (no one can), but if we can catch it in between over and over with your holdings, you may outperform the markets. Many advisors in our firm hold their money – particularly for retirement – in this type of account. It’s a significant reason for the firm’s success.

Ultimately, an essential part of your investment strategy has the right amount in the market for the right amount of time in the market. Our Planning Committee does a great job helping you figure out exactly how much you should keep as a cash buffer, so the rest can be in the market growing and working for you. Watch this video from Chief Planning Officer Christina Shockley for more on that topic.

We discuss these strategies and themes – especially beta – each week in our Weekly Market Insights broadcast. Be sure to subscribe to our GWS YouTube channel, so you never miss an episode, and download a calendar hold here.

Note: We also have a tactical bond and qualified bond strategy; ask your advisor for more details.

1 This is a simplification and does not extract the risk-free rate. It is immaterial on return and overly complicated to include.

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Disclosures:

Economic forecasts may not develop as predicted, and there can be no guarantee that strategies promoted will be successful. Therefore, the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance references are historical and are no guarantee of future results.

Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. All investing involves risk, including possible loss of principal. No strategy assures success or protects against loss.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.

Chinese real estate developer Evergrande had global markets on edge this week. As loyal listeners to our Weekly Market Insights might recognize, we called out the potential of China’s rapid expansion of their money supply to disrupt the market about two weeks ago (watch the replay here). Let’s dive into what caused China’s housing bubble, as well as what this could mean for the future of the global economy.

Chinese Housing: Bubble Decades in the Making​

China’s real estate market leverage has been excessive for over a decade. As a result, there have been reports of substantial concrete structures being built. China has over-leveraged with more concrete units than households. Now, because China has been in a bubble for some time, they created a “three red line” policy.

With this policy, China will slow down its bubble and hope for a soft landing. Here are the metrics of the guidelines:

1. 70% ceiling on the debt to asset ratios after excluding advanced receipts

2. 100% cap on the net debt ratio

3. 100% cap on short-term debt cash rate

According to a sales manager of Evergrande Wealth, “more than 80,000 people – including employees, their families, and friends as well as owners of Evergrande properties – bought WMPs that raised more than 100 billion yuan in the past five years.” They call themselves a conservative company; however, they promoted 11-13% rates of return for real estate and leveraged unconditional marketing tactics — such as giving away Gucci bags — to attract customers.

Overleverage

When we look at Evergrande as a whole, they have about $300 billion in total liability, and $7.4 billion of that is due over the next year. Then diving a little deeper, $850 million in interest payments is anticipated over the next year, and $150 million of that is due in the next two weeks.

Rising Risk

Many are calling this the Lehman Moment, which is referencing a contagion. We do not think China will make the same mistake; however, this does not prevent them from making new mistakes. In short, we do not believe it is a Lehman Moment, but there is a contagion. It will be felt throughout the economy. All economic activity is interconnected. For example, the risk of default and a distressed lender is moving high yield debt rates up in general. Other marginal borrows or distressed borrows are seeing their lending costs increase. It is being felt across the entire debt market. Or it is contagious. Is it enough to create a domino effect; unlikely since the PBOC will step in before this occurs.

A typical retort to the Lehman Comparison is Evergrande debt has tangible assets, not financial assets. First, real estate is both a tangible and financial asset. But the problem is not the physical aspect, but what people are willing to pay for something. Second, if real estate prices drop precipitously, it will not matter how tangible they are if they are pennies on the dollar. (As an example: here is a viral video of 15 tangible buildings being destroyed which were never completed:

The Debt Limit

Another headline is the spending and debt limit bill that passed in the House on September 21st. It is currently sitting in the Senate. The bill has a suspension of the debt attached, but since it is a spending bill, the Republicans can filibuster it. They likely will play this game of chicken. The House Speaker is scheduled to deal with the infrastructure bill on the 27th. In short, there is little time, and the U.S. government could default in October if the debt limit is not extended. We expect accusations to fly, but ultimately the debt limit increase will be a separate bill that can be passed through reconciliation (Republicans cannot filibuster); however, the debt limit will not be suspended but only increased, meaning the big spending bill will be delayed. We are watching closely. We consider a default unlikely, but then the political climate is not conducive.

Keep up to date with the rising risk of Evergrande in China and more every Wednesday at 3:30 p.m. C.T. And to learn more about this week’s Weekly Market Insights, be sure to listen to our recap video on our YouTube channel and SUBSCRIBE!

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Disclosures:

Economic forecasts may not develop as predicted, and there can be no guarantee that strategies promoted will be successful. Therefore, the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance references are historical and are no guarantee of future results. In addition, all indices are unmanaged and may not be invested directly.

Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. All investing involves risk, including possible loss of principal. No strategy assures success or protects against loss.

The opinions in this material do not necessarily reflect the views of LPL Financial.

LPL Financial does not provide tax advice. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.