Investment Commentary – Q1 2021

Dear Valued Client:

 

Ok, now rotate! Volleyball players recognize these instructions as those in front move to the back and vice versa. So it is in the investing world that leaders will eventually move to the back and laggards move to the front. Picking up where we left off in Q4, financial markets embraced the “reflation” trade, rewarding energy, financial, and industrial companies and leaving behind utilities, staples, and the beloved technology stocks.
The quarter was marked by the rise of the small investor whose social media driven frenzy made quite the impression on the old guard on Wall Street. In fact, as of mid-February, retail stock traders represented 23% of all U.S. equity trading (by dollar volume), more than double the 10.1% they account for in 2010 (Bloomberg Intelligence). The trend seems in place to grow as an increase in new money in investor pockets seems poised to add fuel to an increasingly hot market.
Other trends we are seeing include major supply chain disruptions that are impacting production at car factories, the rollout of routers in the broadband market, and delays in shipments of many common popular home products. For the golfers out there, the pandemic proved to be a major boost. The rounds of golf played in Massachusetts alone surged 40% last year over 2019-Hit ‘em straight!

First Quarter Market Review

The sentiment at the end of 2020 continued into the start of 2021 as the equity markets saw positive returns for the quarter. U.S. markets led the way with dollar strength weakening the results seen from international markets as only two developed markets saw negative returns in local currency during the quarter.

Source: AssetMark Quarterly Market Review dtd March 2021 FactSet financial data and analytics

Looking at the past 12 months following the bottom of the market crash on March 23, the S&P 500 saw a return of 56.4%, ranking it in the top 5 occurrences since 1925.[i] Coming back from an oversold position the market was supported by extensive support from the Fed and fiscal stimulus along with the economy reopening with vaccine development.
All sectors remained in positive territory for the quarter with results ranging from a positive 30.9% for energy to a down 1.2% for consumer staples.[ii] Energy saw broad based strength leading to its second-best quarter since 1972, while re-openings across the country led to a shift in sentiment away from the stay-at-home trade. The rising interest rate environment helped lift financials to second spot with a return of 16.0%. Negative returns from some of the 2020 markets leaders, like Amazon, Apple, and Netflix led to weaker returns for technology (2.0%).
Value and small cap saw another quarter of strong double-digit returns. Value outperformed growth by over 800 basis points across large, mid and small caps while small caps outperformed large caps by over 1200 basis points. Over the last six months, small cap has outperformed large cap by 36.2% points, which is the most on record since 1994.
Currency shifts impacted international returns as many developed countries outperformed the U.S. in local currency terms. Emerging markets saw the greatest weakness with Latin America returning -5.3% while five of the nine counties in Emerging Asia experienced negative returns, including China which returned -0.4%.
The rise in bond yields, especially in longer durations, led to negative returns across most bond sectors. The U.S. Aggregate index returned -3.4% for the quarter led lower by longer maturity Treasuries which fell 13.5% for the quarter. The first quarter marked the worst first quarter for both the U.S. Aggregate and long-term Treasuries since 1980. The bright spots in the fixed income markets were leveraged loans and high yield which returned 1.8% and 0.9% for the quarter, respectively.
REITs made a comeback in the first quarter, returning 8.3% having trailed the broad markets for 2020 and commodities continued to rally, up 6.9%. All REIT sectors saw positive returns with malls up over 30% for the quarter, benefiting from the re-openings across the country. The rally in commodities was also relatively broad based with only precious metals being down 9.3%, led by a fall in gold as investors moved out of the safe haven with no yield.

Interest Rates

Interest rates matter. They matter a great deal to consumers, businesses, and the markets. Deciphering the projected path of interest rates is key to making good financial decisions. The consumer consults the level of rates when deciding to buy a new home or refinancing an existing one. Businesses refer to the current level of interest rates for debt and equity financing decisions. Market valuations hinge on interest rates to determine the risk premium investors are willing to pay for common stocks. The level of interest rates also helps determine the asset allocation of individual and institutional portfolios. When rates rise by a small amount, those small higher payments can entice investors to make small shifts out of stocks and into bonds. When rates rise by a larger amount, larger allocation shifts can occur. When large asset allocation shifts occur, they do so by buying and selling large amounts of stock, bonds and other asset classes. Substantial amounts of buying and selling can, and usually do, mean large price dislocations. So… rates matter.

As illustrated in the chart above, interest rates have been in a long and steady downtrend since the 1980’s and that is a long time! Way back in the 80’s, the Fed helped to engineer a break in the very high levels of inflation that the economy (and consumers) were suffering from. Relief from ever increasing prices of goods and services was quite welcome at that time and we have enjoyed low levels of inflation since. Typically, interest rates track inflation rates. Interest rates are, after all, the price of money. The aforementioned long and steady downtrend in interest rates seems to have finally ended. At best, we can hope for a lower for longer rate environment where interest rates trade in a constrained band into the future. This lower band would be the best of all worlds. Many would like to see the bellwether U.S. Treasury 10 Year yield (rate) stay in a limited range of 2% on the upside and perhaps 1% on the downside. However, right now, and over the last several months, the market is a bit worried that rates might rise above a comfortable lower band.

Currently, we have a tug of war as it relates to interest rates. On one side, pulling hard, is the U.S. Federal Reserve. The Fed has reiterated its intention to keep interest rates at ultra-low levels until it sees what it deems as maximum employment and inflation steadily above 2%. This Fed policy calls for near zero short term interest rates and a $120 billion a month debt securities buying program to help orchestrate low interest rates. Some have labeled this “financial repression” where the Fed is gaming the system to achieve their end goals. The Fed has been at this game since 2008 and these policies have largely been successful in helping to stabilize markets and increase investor confidence. On the other side of this tug of war are market participants who feel the Fed’s game will have increasingly less ability to hold rates lower. While the Fed can control the short end of the yield curve by buying short-term bonds and other debt securities, it cannot control the longer end of the yield curve unless it starts to buy longer dated bonds.

Longer dated bonds, which the Fed currently is not buying, have seen quite a move up in their yields (rates). The rate on the 10 Year U.S. Treasury Note has increased from 50 basis points (.5%) in August to over 160 basis points (1.65%) currently. This year alone, the rate has doubled as the 10 Year started the year at 80 basis points (.8%). When rates double, or triple, people get concerned, even if these moves do come off a low base. It is important to note that home mortgage rates are often set off the 10 Year note.

Some question the wisdom of holding bonds at this time. Many of these observers are citing the recent mega stimulus packages passed by Congress which could end up being quite inflationary. Some strategists are taking a middle ground view in this tug of war. Scott Minerd, global chief investment officer at Guggenheim Investments, penned in a recent note that the recent run up in yields is typical of what happens in an economic recovery. Historically, rates run up and then are later reversed. History may rhyme again, Minerd says. There might be an initial surge in inflation from a burst of demand related to the reopening of the economy and from stimulus checks. However, supply bottlenecks emerge and eventually supply catches up with demand. Minerd concedes that nobody can pick a top and he would not be surprised to see the 10 Year note climb to a rate of 2-2.5% in the near term.

What does that mean for PRW bond allocations? We have taken, and will continue to take, a cautious approach. We feel that our client’s bond allocation should act as ballast in their portfolio and this part of the portfolio should be conservatively managed. We have shortened the overall duration (interest rate sensitivity) of our portfolios. Should we see interest rates continue to lift, we may look to extend duration. Until that time, we remain cautiously prudent.

Outlook

There is little argument that the U.S. economy is headed for robust growth this year. Federal Reserve Chairman Jerome Powell recently told “60 Minutes” that the economy is at an “inflection point” and that growth and job creation is poised to accelerate. The abundance of new cash injected into consumer pockets, accommodative monetary policy, and significant pent-up demand set the stage for potentially gaudy growth numbers. The influx of cash to consumers boosts what is already a double-digit savings rate, well above the historical average. In theory, the consumer (at about 67% of GDP) should be well positioned to keep the spending rolling for some time.
Of course, there are many things that could curtail the emerging animal spirits. The emergence of variants has already caused a spike in new Covid-19 cases in the U.S. and harder hit areas in Europe and the emerging markets. Supply chain bottlenecks are also rising as a risk. These could prove temporary or could have more lasting impact. As noted above, rising interest rates can have a negative impact on higher growth companies as their earnings are discounted using a higher rate. So, while the vaccine makes its way into arms around the world, the path to normalization could prove more difficult than expected although hopes are high that “the new normal’ will be good enough.
The new administration is making its mark on the global landscape in several ways. The focus on vaccinations seems to be working and that has correlated to a pickup in dining, expected summer travel, and general optimism for economic recovery. The passage of $2.1 trillion (about $6,500 per person in the U.S.) in stimulus and the proposal for additional infrastructure stimulus is certainly ‘goosing” the equity markets. Reengagement with many sidelined trading partners is also a potential positive. The next battle lines being drawn surround how the country will pay for all the newly created money (hint- taxes) and we expect more clarity on this topic later this year.

Below we have updated some of our Headwinds/Tailwinds thoughts at present.
Headwinds
• Newly discovered variants continue to pose a threat to recovery.
• Equity and Fixed Income valuations are high on an historical basis.
• Elevated corporate and government debt levels
• Market bullishness is often a contrarian sign, with speculators causing us some concern.
• Higher tax rates are expected in coming year(s) as are more regulations that could crimp growth.
• Inflationary pressures mounting as are supply chain issues.

Tailwinds
• More fiscal support approved and moving into the economy.
• Accommodative monetary policy
• Healthy consumer and corporate balance sheets
• Vaccinations have been rolled out with most American able to be vaccinated this month.
• Potential for improving trade globally under new U.S. administration.

Equity markets have been in a steady bull-phase since the middle of last year. The fastest decline followed by the fastest recovery in history. When allocating capital, we consider the data above when considering over or underweights to risk assets within the context of pre-defined ranges associated with our clients’ risk tolerance and time horizon. Currently, we remain more constructive on equities vs fixed income.
We have a neutral stance between value and growth now that value stocks have rallied nicely and the spike in rates has settled down. Value still has a way to go to “catch up” but may take a breather near-term. We continue to favor the U.S. as we see that the country has pulled ahead of many other nations in the fight against Covid and has backed that up with enormous stimulus. The rise in rates has also pushed the dollar higher, a headwind for international stocks.
While we see many reasons for optimism, we acknowledge that bull markets are susceptible to pullbacks. We can and do expect them. Near term, we are seeing a pickup in leverage that, when unwound, could accelerate a decline as we witnessed with hedge fund Archegos. The housing market frenzy that has sent prices to the roof is seen in many commodity prices as well. In addition, the popularity of Special Purpose Acquisition Companies (SPACs) could be a sign of speculation that bears watching.
On our radar, potential targeted inflation hedges as well as ways to find yield in a challenged fixed income

market. We are also reviewing other non-correlated asset classes for the diversification benefits they could bring to our portfolios.

PRW News
We are very pleased to announce the promotion of Jared Sweeney to Senior Wealth Advisor. Jared has become an integral part of our team during his three years at the firm. He has become a trusted resource to many clients and a leader on our investment and operations initiatives. We salute him for this accomplishment.

On another staff related note, Rob Reilly recently left the firm to join a start-up as chief operations officer, and we wish him well. We will soon be announcing and introducing our newest team member in this Senior Wealth Advisor role.

Elliot helped kick off the 2021 New England Private Wealth Management conference held virtually last month. He moderated a panel discussion with several East Coast based wealth advisors and market specialists on the topic of alternative investments. Lively discussions ensued around private debt, royalty programs, cryptocurrencies, and other non-correlated asset classes.

Life Insurance Strategies Group featured Janice Forgays, Esq., AEP, ® CLU, ® our Estate and Wealth Management Counsel, in an interview highlighting her lengthy career working with affluent clients and advisors on comprehensive, complex, and effective wealth accumulation, conservation and transfer planning using life insurance and other financial products.

Janice also spoke to The Planned Giving Group of New England. Her presentation, Breathing New Life into Planned Giving, explored the significant role life insurance can play in charitable giving including funding major gifts, building endowments, and replacing family wealth after substantial gifts.

Hope springs eternal as we put winter behind us and seek to usher in better days ahead. The following quote caught our attention, and we think it is great advice. “Surround yourselves with the dreamers and doers, the believers and thinkers, but most of all, surround yourself with those who see greatness within you, even when you don’t see it yourself. Happy Spring!
Sincerely,

William A. Payne Richard A. Renwick Elliot B. Herman

1 Pine Hill Drive #502, Quincy, MA 02169 ♦ 617-745-0900 (ph) / 617-745-0910 (fx) ♦
prwwealthmanagement.com
PRW Wealth Management, LLC is a registered investment advisor (“RIA”) with the U.S. Securities and Exchange Commission. Investment Advisor Representatives offer financial advice through PRW Wealth Management, LLC. Registered Representatives offer securities through Lion Street Financial, LLC; member FINRA/SIPC. PRW Wealth Management, LLC and Lion Street Financial, LLC are not affiliated. PRW Wealth Management, LLC and Lion Street Financial, LLC do not provide legal or tax advice and are not Certified Public Accounting (CPA) firms

[i] Source: AssetMark, Quarterly Market Review dtd March 2021
[ii] Ibid p.1
[iii] Ibid p.1
[iv] Ibid p.2
[v] Ibid p.2
[vi] Ibid p.2

IMPORTANT INFORMATION

This material is for informational purposes only and not meant as tax or legal advice. Please consult with your tax or legal advisor regarding your personal situation. PRW Wealth Management LLC does not provide legal or tax advice. Some of this material is written by Assetmark Inc. and is provided with permission. The material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by PRW Wealth Management LLC for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor. Neither the information presented, nor any opinion expressed, constitutes a solicitation for the purchase or sale of any security. The indices mentioned are unmanaged and can’t be directly invested into. Past performance doesn’t guarantee future results; one can’t directly invest in an index; diversification doesn’t protect against loss of principal. All investing involves risk, including the potential loss of principal; there is no guarantee that any investing strategy will be successful. Neither the information nor any opinion expressed herein constitutes a solicitation for purchase or sale of any securities and should not be relied on as financial advice.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
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Index Definitions

Bloomberg Commodity – measures the price of physical commodities futures contracts traded on U.S. exchanges, except aluminum, zinc and nickel, which trade on the London Metal Exchange. Weightings are determined by rules designed to insure diversified commodity exposure.
Bloomberg Barclays Emerging Markets USD Aggregate – The index is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate U.S dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country classification.
Bloomberg Barclays Global Aggregate – An index of global investme.nt grade debt from twenty-four local currency markets including treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. The index also includes Eurodollar, Euro-Yen, and 144A index-eligible securities, and debt from five local currency markets.
Bloomberg Barclays Global Aggregate ex USD – The index is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate U.S. dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country classification.
Bloomberg Sub Gold- measures the price of gold futures contracts, reflecting the return of underlying commodity futures contract price movements quoted in USD.
Bloomberg Barclays U.S. Aggregate- measures the performance of USD-denominated, investment-grade, fixed-rate taxable bond market of SEC-registered securities. The index includes Treasury bonds, Government-related corporate, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS sectors.
Bloomberg Barclays U.S. Corporate High Yield – The index measures the market of USD-denominated, non-investment grade, fixed- rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.

Bloomberg Barclays U.S. Treasury Long – The index measures the performance of long-term government bonds issued by the U.S. Treasury. It includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are non-convertible, are denominated in U.S. dollars, are rated investment grade, are fixed rate, and have $250 million or more of outstanding face value.
FTSE U.S. NARIET all Equity REITs – measures the performance of publicly traded U.S. real estate securities, such as real estate investment trusts (REITS) and real estate operating companies.
MSCI ACWI – A free float-adjusted capitalization weighted index that is designed to measure the equity performance of countries considered to represent both developed and emerging markets.
MSCI EAFE – A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of countries considered to represent developed markets, excluding the U.S. and Canada.
MSCI Emerging Markets – A free float-adjusted, market capitalization index that is designed to measure the equity market performance of countries considered to represent emerging markets.
S&P 500 – An unmanaged index that is generally considered representative of the U.S. equity market, consisting of 500 leading companies in leading industries of the U.S. economy (typically large-cap companies) representing approximately 75% of the investable U.S. equity market.

Investment Commentary – Q2 2021

Dear Valued Client:

 

Graduation season across the country this quarter launched a huge wave of students into new territory. Whether on to a new K-12 school , college , graduate
school ,or into the work force, the graduation ritual signifies a major change and embarkation point. For those graduating in 2021, the year they have experienced as students has been unlike anything that they could have prepared for or imagined. Graduation speakers reminded students of the hardships they have endured this past year and encouraged them to look for the joy.
Speakers told college graduates that they will face a myriad of challenges and opportunities in a profoundly uncertain world. That is certainly not a stretch! The graduates of today have just come through a once in a 100-year pandemic, witnessed intense polarization in Washington and partaken in social, environmental, and racial justice marches the likes of which have not been seen in decades. They have been challenged to reinvent ways of learning and to be resilient in the face of adversity. All lessons that should serve them well moving forward.
Inspirational speaker John O’ Leary suggests that graduates adhere to the advice that success won’t be found in moving faster, striving incessantly, living selfishly, playing shallowly, or judging others but rather by the gift of slowing down, recognizing what really matters, identifying what really doesn’t, and embracing
the awesome gift that this life is. Words to live by.

Second Quarter Market Review
• As the global economy recovers from the pandemic with varying degrees of success, global stock and bond markets posted broad gains in the second quarter.

Source: FactSet financial data and analytics

• Notable among them was US equities which gained 8.5% for the second quarter and 15.3% for the year led by easy monetary and fiscal policy, like potential infrastructure spending, strong economic recovery and robust corporate earnings. In the first half of 2021, US equities marked 34 record highs and the largest gains since 2019[i]. As equity markets have rallied, volatility fell to pre- pandemic lows[ii].

Source: FactSet, CNBC, CNN, Reuters, Yahoo Finance, NY Times, JPMorgan, US Bureau of Labor Statistics

International markets trailed US equity markets for both the quarter and the year. Developed international markets gained 5.4% and trailed US equities due to negative returns in Japan over slow vaccination efforts[iii]. Finally, regulatory and policy tightening concerns in China held back emerging market equities to a 5.1% gain for the quarter.

Within the US sector, performance was varied with results ranging from 13.1% for real estate to -0.4% for utilities. Real estate continued its climb benefiting from the re-openings across the country. Energy was the third best performing sector which gained 11.3%, as Brent crude oil prices crossed $75 per barrel for the first time since 2018[iv]. Energy remains the top performing sector for the year, up 45.6% as oil prices commensurately climbed 50% in 2021. Finally, the strong economic recovery made a traditionally defensive sector like utilities less attractive relative to other sectors and lost -0.4%

The outperformance of economically sensitive value stocks that dominated the market since the news of an effective vaccine in late 2020 reversed course in the second quarter. Growth stocks outperformed value stocks as technology shares surged on falling interest rates and better earnings expectations. For the quarter, large- and mid-cap growth stocks beat their value counterparts, but small-cap value still led small-cap growth.

In the bond market, after the Federal Reserve acknowledged it was on watch for inflation, the yield of the 10-year Treasury note fell 30 basis points to 1.45% from a high of 1.74% in March[v]. As rates fell US bonds gained 1.8% during the quarter but was unable to reverse the losses from prior quarter and remains negative (-1.6%) for the year. High-yield bonds gained 2.7% for the quarter and 3.6% for the year and continues to outpace government and corporate bonds.

REITs continued its climb, returning 12% for the quarter and 21.3% for the year. Commodities also gained 13.3% in the second quarter, led by energy which was up 23% for the quarter. Inflation concerns also led gold and silver higher by 3.5%, and 6.2% respectively for the quarter. However, gold remains down -7% for the year. In REITS, with the exception of hotels, all other REIT sectors saw positive returns with self-storage up nearly 24% for the quarter.

SPACS
What do Shaquille O’Neal, former speaker of the house Paul Ryan, hedge fund manager Bill Ackman, tennis superstar Serena Williams, and musician Jay-Z all have in common? All of them have a SPAC! This acronym has been in the financial press an awful lot lately, so we wanted to explain what a SPAC is and what it means for you as an investor.
What is a SPAC?
A Special Purpose Acquisition Corporation (SPAC) is a way for companies to go public without going through the traditional arduous IPO process.

 

How it works

A SPAC is listed on an exchange, just like a regular stock, but at the time it is created it does not own any underlying business. This is why a SPAC is often referred to as a “blank check” company. The SPAC sponsor sells shares to investors and with the proceeds they are tasked with targeting a private company, getting the company to agree to go public, and convincing shareholders to approve the merger. Once the merger is approved, the acquired company takes over control from the SPAC sponsor and starts trading under its own name and ticker symbol. If the SPAC sponsor can’t complete a merger within a set time period, usually two years, they must return the money to their investors.

In the past 20 years or so, more and more companies have decided to remain private and have been hesitant to go through the IPO process, which takes a long time and exposes them to a high level of scrutiny. These companies have waited as long as possible before going public, so investors have not been able to participate in as much of their early growth as they could in the past. Facebook, for example, went public in 2012 at a valuation of over $100 Billion as an already very large and established company. In another era, they would have gone public well before reaching that stage.
WeWork is a recent example of a high-profile private company that started the IPO process and it nearly killed the company. They wilted under the scrutiny, resulting in the near-bankruptcy of the company and the ouster of their founder/CEO. (WeWork is also an example of the allure of the SPAC process, as they just announced they are going public via a SPAC, 2.5 years after their failed IPO).
SPACs have been around since the 1980’s, but just started to gain in popularity in recent years. In 2020, this trend skyrocketed, with over 248 SPACS created and $83 billion in proceeds raised. In 2021, the trend has continued, with 349 SPACs created and $108 billion raised, in only the first 6 months of the year! For perspective, just 5 years ago, only 13 SPACs were issued raising $3.5 billion for the entire year.

Source: www.spacanalytics.com
Many of these companies have little to no revenue, but offer investors a chance to invest in exciting, next- generation industries, like electric vehicles (Nikola, Lucid Motors) or rockets (Virgin Galactic). For example, when Galactic went public in 2019 at a valuation of $1.5 billion, 2020 revenues were expected to come in at
$31 million. The actual revenue in 2020: $238,000.
SPACs also include companies in mature industries as well, like Hostess (the makers of Twinkies) and Topps (sports cards) among many others.
In 2020, the performance of many of these high-profile SPACs was spectacular, drawing even more interest from investors and creating more demand for new issues and also the proliferation of celebrity-backed SPACs.
In 2021, at the time of this writing, the performance of these once highfliers has slowed, with an ETF

investing in SPACs about 25% below its highs. The market has become very saturated with the explosion of new SPACs all looking for attractive private companies to acquire. This may lead to less-than-stellar deals, given the pressure to close a transaction within two years and the competition flooding into the market all looking for acquisitions.
Should I Invest in a SPAC?

Investing in SPACs is nearly the definition of speculation: you invest without knowing which company you are buying! This harkens back to a famous offer during the South Sea Bubble, of “a company for carrying out an undertaking of great advantage, but nobody to know what it is.”
Without knowing the company to be acquired, you are basically betting on the jockey: the SPAC sponsor. You must also consider that SPACs are a better deal for insiders than they are for end investors. Early investors in SPACs have options that allow them to buy more shares at a preset price in the future. They also can sell their shares before deals are completed to limit their risk. SPAC sponsors generally receive 20% of the company as payment for setting up the blank check structure and finding the target. Most other investors, on the other hand, buy at the market price and are taking the risk of getting a bad deal. SEC Chairman Gary Gensler has been raising red flags and recently testified “It may be that the retail public is bearing much of the costs,”
Investors should be cautious investing in IPOs in general, which historically on average have been a better deal for insiders than they have for end-investors. SPACs are a step above IPOs in risk, as the company is unknown and does not have to go through the same public scrutiny as an IPO. Also, on average, most SPACs have performed worse than the overall market and worse than IPOs. Again, this is on average, there have been notable exceptions that have posted amazing returns. These risks do not mean that SPAC’s cannot be great investments, it just means that extra research and caution are required.
SPACs are likely here to stay and will be used by more and more companies in the future, perhaps even supplanting the traditional IPO process as the preferred method to go public. As this market matures, investor protections are likely to be increased and costs will come down – we have even seen the traditional 20% sponsor fee start to decline in some cases. In the end, a thriving SPAC market could be a great positive for investors, allowing access to companies at earlier stages in their development. As always, we are here to help you with any questions you may have about SPACs or any other investment vehicle.

Outlook

The news is replete with stories of the recovery and the drive to get “back to normal”. Along the way, supply chain hold-ups and excessive pent-up demand have served to drive food, energy, and travel related expenses through the roof. Speaking of roofs, it is not lost an anyone looking to purchase a home that the prices in many parts of the country have reached ridiculous levels with little end in sight. Labor shortages have driven prices higher in many industries with restaurants just one example of a recovering group that cannot find help and must increase pay to attract workers.

In May, many States began to rebel against the Federal government’s employment benefits by withdrawing

from programs created under the CARES Act of March 2020. These programs had raised the amount of weekly aid, extended its duration, and offered funds to workers who do not typically qualify for state benefits. By removing this stimulus, States hoped to push people back into the work force and reduce the strain on employers.

As noted above, the Federal Reserve has termed this inflation as “transitory”. We believe that we will see a downward movement in inflation later next year but that the higher wages being paid to employees will be difficult to reverse. It is hard to put the genie back into the bottle. There are some signs of material prices retreating but there is much movement to be done to get close to pre-pandemic levels. As an example, lumber prices have moved from $400 per thousand board feet pre-pandemic to $1,700 in May and now hover in the $800 range.1 High prices have been the elixir here as they have led to postponed purchases while mills get back online.
We expect global growth will continue to accelerate through early 2022 and that fiscal and monetary stimulus, while waning, will continue to be supportive near-term. For the year, US GDP is expected to grow more than 6.5% and more than 4% in 2022, a run-rate significantly above the 2-3% range since 2014.2 One would expect that the bond markets would have continued their move higher given this expected growth yet the yields on long-bonds have actually gone in reverse. What is this telling us?
Former Defense Secretary Donald Rumsfeld passed away recently. A controversial figure, he famously said “As we know, there are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns- the ones we don’t know we don’t know.” Without a clear answer to what the bond market is seeing, we will chalk it up to some unknown unknowns and some expectation that slowing stimulus, a still lingering concern about the Delta variant, hot inflation, and overly optimistic earnings estimates could be waiting to upset the applecart.
Meme stocks, cryptocurrencies, and space X are just a few of the stories that captured headlines this quarter. For some, these offer warning signs of speculation over investing. The jury remains out on the crypto world, but we believe that digital currencies are here to stay and that a further shakeout will occur amongst the over 5,000 cryptocurrencies resulting in some form of government back digital currency and some non- government backed currency that has matured enough for prime time.
Equities continue to look better than fixed income as growth around the world continues. Fixed income remains challenged but has surprised us and many with the decrease in rates leading to some short-term positive performance for longer-duration fixed income. Much of our decision regarding allocations overseas is driven by the dollar and we see the dollar remaining is fairly tight range for now. We continue to look to global managers to provide some active management between US and non-US companies with dedicated international managers making up a smaller part of our overall international allocation.
We have allocated capital to several alternative managers in the private equity, private debt, and alternative lending space as we look to further diversify portfolios. We anticipate adding more of these investments into portfolios this quarter. Hedged equity ETFs have also been a staple of our portfolios as we believe that the risk/return they offer is attractive. A next iteration of these investments is also on the table and we will

1 NASDAQ, Bloomberg
2 Bloomberg, Federal Reserve Bank of Atlanta GDP Now model be in touch to discuss in the coming weeks/months. Our headwinds/tailwinds summary is below.
Headwinds
• Covid variants impacting non-US more than the US at this time
• Inflation risks
• Equity and Fixed Income valuations are high on an historical basis
• Elevated corporate and government debt levels offset in part by healthier consumer balance sheets.
• Government stimulus sill on the way but winding down.
• Cyberattacks
• Higher tax rates expected in coming year(s)

Tailwinds
• More fiscal support approved and moving into the economy
• Accommodative monetary policy
• Healthy consumer and corporate balance sheets
• Vaccines are working and enabling the economy to reopen
• Potential for improving trade globally under new US administration

PRW News
We are thrilled to announce that Nate Baldwin has joined the firm as senior wealth advisor. Nate
brings to the firm over 22 years of financial planning and investment management experience. Nate’s primary responsibilities are providing financial planning and investment services to clients, drawing on his own expertise while collaborating with tax, legal, and other internal and external
professionals to develop truly comprehensive strategies for clients. He is a CERTIFIED FINANCIAL PLANNER™ and a CFA® charter holder.

Bill Payne attended a Board meeting in May in Texas for Lion Street. The Austin-based company serves PRW Wealth Management and our clients in several capacities, including as our Broker Dealer. Lion Street has continued to distinguish itself as a premier financial services entity with national recognition.

We are also excited to announce that Duncan Payne has joined the firm as Business Development Officer. Duncan is a 2013 graduate of Northeastern University and joins the team after 8 years of active duty with the Navy SEALs where he achieved the role of chief medic. We look forward to introducing you to him.

PRW baseball phenom Ted Dziuba penned a piece in June discussing the buzz about Bobby Bonilla Day celebrated every July 1. A snippet of the piece is below.

Bobby Bonilla was a 6‐time Major League All‐Star and 1997 World Series Champion who played for 9 different teams across a successful 16‐year career in the big leagues. His name is familiar to many outside of the game of baseball because of some savvy financial planning that he implemented when he was released by the New York Mets in 1999. Still owed $5.9 Million on his contract with the Mets, an agreement was made to defer that payment for 10 years, with an agreed‐upon annual interest rate of 8%. Mr. Bonilla’s eventual payout would grow to $29.8 Million, which was annuitized to provide annual payments of $1.19 Million per year for the next 25 years. The full article can be found here https://prwwealthmanagement.com/bobby-bonilla-day-and-the-power-of-deferred-income-annuities/

We wish you a very happy and healthy summer filled with fun new memories. We look forward to connecting with you.
Sincerely,

William A. Payne Richard A. Renwick Elliot B. Herman

1 Pine Hill Drive #502, Quincy, MA 02169 ♦ 617-745-0900 (ph) / 617-745-0910 (fx) ♦
prwwealthmanagement.com
PRW Wealth Management, LLC is a registered investment advisor (“RIA”) with the U.S. Securities and Exchange Commission. Investment Advisor Representatives offer financial advice through PRW Wealth Management, LLC. Registered Representatives offer securities through Lion Street Financial, LLC; member FINRA/SIPC. PRW Wealth Management, LLC and Lion Street Financial, LLC are not affiliated. PRW Wealth Management, LLC and Lion Street Financial, LLC do not provide legal or tax advice and are not Certified Public Accounting (CPA) firms

1 NASDAQ, Bloomberg

2 Bloomberg, Federal Reserve Bank of Atlanta GDPNow model

[i] https://www.marketwatch.com/story/sp‐500‐books‐34th‐record‐of‐2021‐as‐dow‐closes‐up‐over‐200‐points‐nears‐may‐7‐record‐ high‐2021‐06‐30
[ii] https://fred.stlouisfed.org/series/VIXCLS
[iii] https://am.jpmorgan.com/ch/en/asset‐management/adv/insights/market‐insights/monthly‐market‐review/
[iv] https://www.macrotrends.net/2480/brent‐crude‐oil‐prices‐10‐year‐daily‐chart
[v] https://www.treasury.gov/resource‐center/data‐chart‐center/interest‐rates/pages/TextView.aspx?data=yieldYear&year=2021

Asset classes are represented by the following indexes:
US Equities S&P 500 – is an unmanaged index that is generally considered representative of the US equity market, consisting of 500 leading companies in leading industries of the US economy (typically large cap companies) representing approximately 75% of
the investable US equity market.
International
Equities MSCI EAFE – is a free float-adjusted market capitalization weighted index that is designed to measure the equity market
performance of countries considered to represent developed markets, excluding the U.S. and Canada.
Emerging Markets
Equities MSCI Emerging Markets – is a free float-adjusted, market capitalization index that is designed to measure the equity market
performance of countries considered to represent emerging markets.
US Bonds Barclays US Aggregate — measures the market of USD-denominated, investment grade, fixed-rate taxable bond market of SEC-registered securities, including bonds from the Treasury, government-related, corporate, mortgage-backed securities (agency fixed-rate and hybrid ARM passthroughs), ABS and CMBS sectors. US Agency Hybrid Adjustable Rate Mortgage
(ARM) securities were added to the US Aggregate Index on April 1, 2007.
International Bonds Bloomberg Barclays Global Aggregate ex USD – is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank
income group and International Monetary Fund (IMF) country classification.
Emerging Markets Bonds Bloomberg Barclays Emerging Markets USD Aggregate – is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank
income group and International Monetary Fund (IMF) country classification.
Small Caps S&P 600 – measures the performance of 600 small-sized companies in the U.S. Constituents generally have a market-cap
between $400 million and $1.8 billion and meet criteria to ensure they are liquid and financially viable.
Energy S&P 500 Energy Sector -measures the performance of companies in an array of diversified financial service firms, insurance,
banks, capital markets, consumer finance and thrift companies.
Real Estate S&P 500 Sector Real Estate – measures the performance of companies from the following industries: real estate
management & development and REITS, excluding mortgage REITS.
Technology S&P 500 Technology Sector – measures the performance of companies that product, generate, transmit or distribute electricity, water or natural gas, and also includes power producers & energy traders and companies that engage in generation
and distribution of electricity using renewable sources.
Utilities S&P 500 Sector Utilities – measures the performance of companies that product, generate, transmit or distribute electricity, water or natural gas, and also includes power producers & energy traders and companies that engage in generation and
distribution of electricity using renewable sources.
EM Latin America MSCI Emerging Markets Latin America – measures the performance of USD-denominated, investment-grade, fixed-rate taxable bond market of SEC-registered securities. The index includes Treasury bonds, Government-related Corporate, MBS
(agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS sectors.
China MSCI China – measures the performance of small-cap equities in developed market countries around the world, excluding the
U.S. and Canada. The index covers approximately 14% of the market cap in each country.
Long term Treasuries Bloomberg Barclays US Treasury Long – measures the performance of US Treasury and US Agency markets. The index includes USD-denominated fixed-rate, nominal US Treasuries and US agency debentures (securities issued by the US
government-owned or sponsored entities), and explicitly guaranteed by the US government.
High-Yield Bonds Bloomberg Barclays US Corporate High Yield – measures the market of USD-denominated, non-investment grade, fixed- rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is
Ba1/BB+/BB+ or below. The index excludes emerging market debt.
Leveraged Loans S&P/LSTA Leveraged Loans – measures the performance of investment-grade fixed-rate mortgage-backed pass-through
securities of GNMA, FNMA and FHLMC.

Commodities Bloomberg Commodity.- dynamically rebalances exposure to maintain a 10% volatility target and represents portfolios consisting of the S&P 500 index and a cash component accruing interest. Uses S&P 500 methodology and overlays
algorithms to control the index risk at specific volatility targets.
Precious Metals Bloomberg Precious Metals – measures the price of gold futures contracts, reflecting the return of underlying commodity
futures price movements quoted in USD.
US REITs FTSE NAREIT All Equity REIT – measures the price of physical commodities futures contracts traded on US exchanges, except aluminum, nickel and zinc, which trade on the London Metal Exchange. Weightings are determined by rules designed
to insure diversified commodity exposure.

IMPORTANT INFORMATION

This material is for informational purposes only and not meant as tax or legal advice. Please consult with your tax or legal advisor regarding your personal situation. PRW Wealth Management LLC does not provide legal or tax advice. Some of this material is written by Assetmark Inc. and is provided with permission. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by PRW Wealth Management LLC for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.
Neither the information presented, nor any opinion expressed, constitutes a solicitation for the purchase or sale of any security. Neither the information nor any opinion expressed herein constitutes a solicitation for purchase or sale of any securities and should not be relied on as financial advice.

The indices mentioned are unmanaged and can’t be directly invested into. Past performance doesn’t guarantee future results; one can’t directly invest in an index; diversification doesn’t protect against loss of principal. All investing involves risk, including the potential loss of principal; there is no guarantee that any investing strategy will be successful. Alternative investments, including hedge funds, commodities, and managed futures involve a high degree of risk, often engage in leveraging and other speculative investments practices that may increase risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are subject to the same regulatory requirements as mutual funds, and often charge higher fees. ETFs trade like stocks, fluctuate in market value and may trade either at a premium or discount to their net asset value. ETF shares trade at market price and are not individually redeemable with the issuing fund, other than in large share amounts called creation units. ETFs are subject to risk similar to those of stocks, including those regarding short-selling and margin account maintenance. Hedged equity ETFs involve use of derivative instruments. Derivatives can be volatile, and a small investment in a derivative can have a large impact on the performance of the Fund as derivatives can result in losses in excess of the amount invested. Options used to reduce volatility and generate returns may not perform as intended.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or
estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
PRW Wealth Management, LLC (“PRW”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PRW and its representatives are properly licensed or exempt from licensure.
Securities offered through Lion Street Financial, LLC. (LSF), member FINRA & SIPC. Advisory services are offered through PRW Wealth Management, LLC (“PRW”). Advisory services are only offered to clients or prospective clients where PRW and its representatives are properly licensed or exempt from licensure.
For additional information, please visit our website at www.prwwealthmanagement.com.

For current PRW Wealth Management, LLC information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with PRW’s CRD #284669.

Investment Commentary – Q3 2021

Dear Valued Client:

 

Fall is in the air here in New England and stocks have done what they historically have done more often than not this time of year‐ Fall! Well, put into context, a tough September was not enough to ruin what has so far been another positive year for most asset classes. The wall of worry is building daily highlighted by another debt ceiling battle in polarized Washington, inflation looking to be more than a bit temporary, and a Fed ready to tap the brakes. Add to that concerns about China’s corporate governance and a troubled real estate market, oil spikes, tax hikes on the way, and supply chain issues and we have a wall that the American Ninja Warriors would find challenging.

 

Fortunately, there is some positive news out there as well. Covid cases from the Delta variant are falling as are deaths from the virus. The economy remains healthy, and spending has picked up dramatically. Corporate and household balance sheets are in solid shape with household savings having increased $2.5 Trillion (10% of GDP!) since last March. Josh Feuerman, Senior Global Strategist at JP Morgan, shared with us on a recent call that corporate cash as a percentage of current asset is at 35% and that this cash is expected to be deployed in part to fund stock buybacks and dividend payments that could be supportive of the markets in the coming months. Service sector and manufacturing sector readings are still in expansionary territory as the unemployment rate heads back to pre‐pandemic levels.

 

Today’s macroenvironment is quite different than the one we have been in for the last 4 decades. Inflation is meaningfully impacting us for the first time thanks to supply constraints and increased demand from fiscal and monetary stimulus. While this in fact may be temporary until supply chains catch up, there is certainly a palpable impact on consumer sentiment as seen in the most recent readings last month. As noted in our last letter, the cost of higher wages will be challenging to reverse. Coupled with higher taxes and slowing growth, the impact on corporate margins should be negative suggesting a reset of expectations already happening in estimates and the cooling stock market. Fortunately, employment is improving, and the economy continues to benefit from further reopening.

 

Like a box of chocolates, we do not know what we are going to get this coming quarter or beyond. The underlying gyrations jockeying for leadership between re‐opening stocks and one time “growth” leaders has been dizzying the last 6 months. As such, we believe that staying well diversified is the best course of action currently.

Third Quarter Market Review

Source: FactSet financial data and analytics

US equities eked out a 0.6% gain for the third quarter driven by a select handful of large technology companies. Despite the pause, it maintains a strong lead of 15.9% for the year. After setting new records in the summer, US equities finally took a breather and saw a correction of ‐5.0% for the first time since November 2020. The selloff was caused by fears of a contagion from potential default of Chinese real estate developer Evergrande, rising inflation pressures, uncertainties about the US government’s debt ceiling and potential for government shutdown.


Source: FactSet, CNBC, Newsweek, NY Times, JPMorgan, IG.com, US News, Barron’s

International markets once again trailed US equity markets for both the quarter and the year. Emerging markets sold off sharply and fell 8.0% for the quarter and are now negative ‐1.0% for the year. The selloff was led by fears of regulatory crackdowns in China in the name of promoting “common prosperity” and the potential default of highly levered property developer Evergrande. Developed international equity markets, on the other hand, were mixed in Q3. For example, Japan outperformed the US, as it made rapid gains in its vaccination rate, while broad European markets performed in line with the US in their local currencies but had negative US dollar returns.

Within the US sector, performance was varied with results ranging from 2.7% for Financials to ‐4.2% for Industrials. Industrials, Materials, and Energy, some of the most economically cyclical US sectors, underperformed as economic growth slowed and supply chain constraints continued to limit some production. Sectors with a mix of cyclical and secular growth tailwinds generally outperformed, including Information Technology, Financials, and Health Care sectors.
Concerns of the COVID Delta variant slowing economic growth caused economically sensitive value stocks to once again underperform growth stocks. It also was the second straight quarter in which large caps outperformed small caps. Large growth outperformed small value by nearly 6.0% during the quarter. However, small value still maintains the lead for the year up 25.3%.

In US fixed income markets, 10‐year Treasury rates declined early in the quarter, as concerns escalated over the Delta variant’s potential economic impact. However, interest rates retraced earlier declines in the back half of the quarter as the Federal Reserve signaled it is ready to taper bond purchases. US bonds were flat and gained 0.1% during the quarter but were unable to reverse the losses from prior quarter and remains negative (‐1.6%) for the year. High‐yield bonds gained 0.9% for the quarter and 4.5% for the year and continue to outpace government and corporate bonds.
Commodities surged 6.6% in the second quarter and remains up 29.1% for the year driven by inflation concerns and supply chain disruptions. US REITs were flat for the quarter, but still maintain a healthy return of 21.6% for the year.

Outlook
The kick the can down the road game in Washington has set up a Game of Thrones like battle in December but temporarily cooled the immediate pressure on Congress. Until then, we will be focused on earnings, the historic driver of market returns, over time. According to NASDAQ, Q3 earnings for the S&P 500 Index are expected to show growth of 26% from the same period last year on 13.7% higher revenues. Rising cost pressures amid supply‐chain disruptions and labor/material shortages are key factors that will influence forward guidance. Q3 estimate revisions trend remains positive but not as strong as we have seen, and Q2 GDP is already expected to be in just the 2% range.

 

On the campaign trail in 2016, Donald Trump famously invoked the name of China in his speeches to the point where tik tokers drew millions of views with their montages. Well, China is one of our hot spots to watch as they have cracked down on private companies, find themselves amid a bursting property bubble and hit to growth,and they continue to saber rattle with Taiwan and allies (read: United States). China may have flat growth for the first time in years. China leaders will need to try and clean up the leverage in their economy and reevaluate the relationship between the almighty government and the private sector. The country has also adopted a zero‐ tolerance approach to COVID‐19, resulting in a strict response function from policymakers for even a single case detected in some cities, further weighing on activity. Finally, nationwide energy shortages continue to bedevil the country and create an additional headwind to growth.

 

The US is facing decelerating growth, tax hikes, and less accommodative monetary policy on the way. Shortages of labor and materials are hindering growth and those factors are likely to remain well into the new year. China and the US combined make up roughly 31% of global GDP. The International Monetary Fund forecasts global growth will expand 6% this year and 4.9% in 2022 (IMF World Economic Outlook Update, July 2021). As such, as these countries go, so goes a big part of the growth equation.

 

Recent history has shown us that the world’s governments and central banks have a propensity to act together to avert financial crises. They have gone “all‐in”. It is fair to question how this can continue as we borrow from the future. For now, we believe that the backstop powers will remain in place for the near future. We believe that the pause in economic growth and commensurate market pullback may have reset expectations lower and could set up for continued albeit moderated growth ahead.

 

The market will be eyeing corporate earnings near term and debt ceiling/infrastructure dealings post‐earnings. The spike in energy prices and transport issues will continue to be a headwind for the economy. It seems likely that the $3.5 trillion bill advocated for by President Biden will be scaled down. A smaller package means a reduced amount of revenue (taxes) would be needed to offset proposed spending. The uncertainty surrounding the tax package does make planning more challenging.

 

Markets are trading at elevated valuations relative to history. Small value stocks currently look the most attractive from a valuation standpoint, but most equity asset classes still look attractive when looked at in relationship to fixed income. Davin Gibbins, CFA, CAIA®, Deputy Chief Investment Officer at AssetMark, Inc., noted the following in his recent commentary, focused on “how concerns loom about the absolute valuation of some portions of the equity market, such as growth/technology stocks, and how this might affect broad market indices.

 

He notes “Take the S&P 500, for example. The chart below shows that, while nowhere near its historic buying opportunity lows of the early 1980s, when compared to bonds, large cap stocks may still have some gas in the tank. That is, the earnings yield on the S&P 500 (as defined by Robert Shiller’s Cyclically Adjusted Price‐to‐ Earnings yield) is still attractive relative to that of the U.S. Ten Year Treasury. Indeed, today’s 3.2% differential compares quite favorably to its 2007 peak of 1.2% and remarkable ‐1.5% in March 2000!

Shiller Excess CAPE Yield
Source: Robert Shiller, “Irrational Exuberance”
In addition, the global equity landscape is not just U.S. large cap growth and technology stocks, which should tend to do well in the middle part of the cycle. Many pockets have lagged this year and, in some instances, for many years. Cyclical stocks such as financials and industrials, would stand to benefit in the latter stages of the economic cycle should a “soft landing” scenario materialize. Not to forget that outside of the US, many indices and regions, such as developed international markets, are more cyclical in nature and on their own recovery roads which are still in their early stages.”

 

Gibbin’s comments point to the relative attractiveness of equities versus bonds without necessarily suggesting that we can time markets or avoid downturns that come along the way during an investment horizon. We anticipate continued volatility for the remainder of the year keeping the markets in a compressed range. We have positioned portfolios fairly equally between growth and value styles without major favoritism to large or small company stocks. Recently, we have begun to introduce structured notes1 to you as we look for alternative exposures to hedge risk or provide yield in a yield starved environment. We will be discussing these notes and other thoughts during our calls with you this quarter.

 

Our headwinds/tailwinds summary is below.
Headwinds
• Inflation in a decelerating economy
• Supply chain issues hampering economic growth
• Equity and Fixed Income valuations are high on an historical basis
• Elevated corporate and government debt levels offset in part by healthier consumer balance sheets.
• Government stimulus sill on the way but winding down.
• Covid still lingering and disrupting.
• Higher tax rates expected in coming year(s)

Tailwinds
• More fiscal support on the way at some point
• Corporate buybacks likely to be supportive
• Accommodative monetary policy
• Healthy consumer and corporate balance sheets
• Vaccines are working and enabling the economy to reopen

PRW News
We are thrilled to announce that after serving as a Trustee for 16 years, Rick Renwick has been appointed an Emeriti Trustee at Babson college.

Bill Payne spoke at a national conference this quarter attended by 200 wealth management firms held in Dallas, TX on the subject: “Working Collaboratively to Serve Your Clients Well”.

PRW’s own Director of Advanced Planning Ted Dziuba was recently named the 2021 Most Valuable Player of the Boston Men’s Senior Baseball League (MSBL). Ted set a new league record with 44 Runs Batted In across a 21‐ game campaign that also saw him lead the league in Batting Average and Home Runs. https://www.bostonmabl.com/accolades/awards/msbl/2021/?fbclid=IwAR3ffHa0M2vXnpkymROCC3t3_WIH0a NdaZKaMSn8we39VxaZiL2ZdgdyRas

Elliot Herman is quoted in the Reuters article: Global ETFs draw record inflows in first half of 2021 by Gaurav Dogra, Patturaja Murugaboopathy
Global ETFs draw record inflows in first half of 2021 | Reuters PRW’s Estate and Wealth Management Counsel, Janice Forgays, who serves on the National Tax Committee of FINSECA, a financial services advocacy organization, has been following the Democrat’s Reconciliation Bill closely. In light of the possible upcoming House Vote, she provides both content and context. Janice put together a great piece which was recently emailed. She will continue to keep you abreast of updates as they materialize. Please reach out with any questions!

We look forward to connecting with you in the coming weeks as we look at planning ideas for year‐end. Thank you.

William A. Payne Richard A. Renwick Elliot B. Herman

1 Pine Hill Drive #502, Quincy, MA 02169 ♦ 617-745-0900 (ph) / 617-745-0910 (fx) ♦
prwwealthmanagement.com
PRW Wealth Management, LLC is a registered investment advisor (“RIA”) with the U.S. Securities and Exchange Commission. Investment Advisor Representatives offer financial advice through PRW Wealth Management, LLC. Registered Representatives offer securities through Lion Street Financial, LLC; member FINRA/SIPC. PRW Wealth Management, LLC and Lion Street Financial, LLC are not affiliated. PRW Wealth Management, LLC and Lion Street Financial, LLC do not provide legal or tax advice and are not Certified Public Accounting (CPA) firms

Footnote:
(1) With structured notes, protection of principal is subject to the creditworthiness of the issuer. Structured notes holders may lose up to 100% of their investment upon the bankruptcy of the issuer, even if the value of the reference asset is favorable. Creditworthiness of the issuer may change at any time during the term of the note. Generally, structured products are not listed on an exchange, do not trade, and are not liquid. The price is provided by the issuer, or an affiliate of the issuer. In addition, broker-dealers affiliated with the issuers often make a market in structured products, but may not be able to offer liquidity, or the price may be substantially less than the original payment. Investors should be willing and able to hold their structured product investment until maturity.
Structured products are complex products that involve investment and other substantial risks compared to traditional investments and may not be appropriate for all investors. Investors should consider the investment objectives, risks, charges and expenses of the structured product carefully before investing. The prospectus contain this and other important information about the product. Clients should read the prospectus carefully before investing.
Asset classes are represented by the following indexes:
US Equities S&P 500 – is an unmanaged index that is generally considered representative of the US equity market, consisting of 500 leading companies in leading industries of the US economy (typically large cap companies) representing approximately 75% of
the investable US equity market.
International
Equities MSCI EAFE – is a free float-adjusted market capitalization weighted index that is designed to measure the equity market
performance of countries considered to represent developed markets, excluding the U.S. and Canada.
Emerging Markets
Equities MSCI Emerging Markets – is a free float-adjusted, market capitalization index that is designed to measure the equity market
performance of countries considered to represent emerging markets.
US Bonds Barclays US Aggregate — measures the market of USD-denominated, investment grade, fixed-rate taxable bond market of SEC-registered securities, including bonds from the Treasury, government-related, corporate, mortgage-backed securities (agency fixed-rate and hybrid ARM passthroughs), ABS and CMBS sectors. US Agency Hybrid Adjustable-Rate Mortgage
(ARM) securities were added to the US Aggregate Index on April 1, 2007.
International Bonds Bloomberg Barclays Global Aggregate ex USD – is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank
income group and International Monetary Fund (IMF) country classification.
Emerging Markets Bonds Bloomberg Barclays Emerging Markets USD Aggregate – is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank
income group and International Monetary Fund (IMF) country classification.
Small Caps S&P 600 – measures the performance of 600 small-sized companies in the U.S. Constituents generally have a market-cap
between $400 million and $1.8 billion and meet criteria to ensure they are liquid and financially viable.
Energy S&P 500 Energy Sector -measures the performance of companies in an array of diversified financial service firms, insurance,
banks, capital markets, consumer finance and thrift companies.
Real Estate S&P 500 Sector Real Estate – measures the performance of companies from the following industries: real estate
management & development and REITS, excluding mortgage REITS.
Technology S&P 500 Technology Sector – measures the performance of companies that product, generate, transmit or distribute electricity, water or natural gas, and also includes power producers & energy traders and companies that engage in generation
and distribution of electricity using renewable sources.
Utilities S&P 500 Sector Utilities – measures the performance of companies that product, generate, transmit or distribute electricity,
water or natural gas, and also includes power producers & energy traders and companies that engage in generation and distribution of electricity using renewable sources.
EM Latin America MSCI Emerging Markets Latin America – measures the performance of USD-denominated, investment-grade, fixed-rate
taxable bond market of SEC-registered securities. The index includes Treasury bonds, Government-related Corporate, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS sectors.
China MSCI China – measures the performance of small-cap equities in developed market countries around the world, excluding the
U.S. and Canada. The index covers approximately 14% of the market cap in each country.
Long term Treasuries Bloomberg Barclays US Treasury Long – measures the performance of US Treasury and US Agency markets. The index
includes USD-denominated fixed-rate, nominal US Treasuries and US agency debentures (securities issued by the US government-owned or sponsored entities), and explicitly guaranteed by the US government.
High-Yield Bonds Bloomberg Barclays US Corporate High Yield – measures the market of USD-denominated, non-investment grade, fixed- rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is
Ba1/BB+/BB+ or below. The index excludes emerging market debt.
Leveraged Loans S&P/LSTA Leveraged Loans – measures the performance of investment-grade fixed-rate mortgage-backed pass-through
securities of GNMA, FNMA and FHLMC.
Commodities Bloomberg Commodity. – dynamically rebalances exposure to maintain a 10% volatility target and represents portfolios consisting of the S&P 500 index and a cash component accruing interest. Uses S&P 500 methodology and overlays
algorithms to control the index risk at specific volatility targets.
Precious Metals Bloomberg Precious Metals – measures the price of gold futures contracts, reflecting the return of underlying commodity
futures price movements quoted in USD.
US REITs FTSE NAREIT All Equity REIT – measures the price of physical commodities futures contracts traded on US exchanges, except aluminum, nickel and zinc, which trade on the London Metal Exchange. Weightings are determined by rules designed
to insure diversified commodity exposure.

IMPORTANT INFORMATION

This material is for informational purposes only and not meant as Tax or Legal advice. Please consult with your tax or legal advisor regarding your personal situation. PRW Wealth Management LLC does not provide legal or tax advice. Some of this material is written by Assetmark Inc. and is provided with permission. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by PRW Wealth Management LLC for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.
Neither the information presented, nor any opinion expressed, constitutes a solicitation for the purchase or sale of any security. The indices mentioned are unmanaged and can’t be directly invested into. Past performance doesn’t guarantee future results; one can’t directly invest in an index; diversification doesn’t protect against loss of principal. All investing involves risk, including the potential loss of principal; there is no guarantee that any investing strategy will be successful. Neither the information nor any opinion expressed herein constitutes a solicitation for purchase or sale of any securities and should not be relied on as financial advice.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The information contained above is for illustrative purposes only.

PRW Wealth Management, LLC (“PRW”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PRW and its representatives are properly licensed or exempt from licensure.
Advisory services are offered through PRW Wealth Management, LLC (“PRW”). Advisory services are only offered to clients or prospective clients where PRW and its representatives are properly licensed or exempt from licensure.
For additional information, please visit our website at www.prwwealthmanagement.com.

For current PRW Wealth Management, LLC information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with PRW’s CRD #284669.

Investment Commentary – Q4 2021

Dear Valued Client:

 

Congratulations to the class of 2022. As Cat Steven’s song goes, “Oh baby, baby it’s a wild world, it’s hard to get by just upon a smile….” The pandemic tested graduates now face a world like the one that their parents may have witnessed if they grew up in the 70’s. In our office, we have a copy of Time Magazine, October 14, 1974, with a picture of Gerald Ford rolling up his sleeves with the headline “Trying to fight back- inflation, recession, oil.” As Mark Twain said, “history does not repeat itself, but it often rhymes.”

The good news for graduates is that the June employment report showed that, despite recession fears, the labor market remains strong. The net job gain of 372K was in line with the average job creation in the prior three months. Wage growth is moderating but the market remains tight- a factor that will likely support the Fed in its July 27th rate hike decision expected to be 75 basis points. While we expect an easing in demand as companies cope with cost pressures, the outlook for qualified workers is positive. It is also worth noting that, according to the Bureau for labor statistics, more Americans are self-employed than any time since the 2008 financial crisis.

The new entrants to the work force are receiving higher wages than ever before (we understand babysitters are making upwards of $25-30/hour in the Northeast!). Unfortunately, these wage increases force companies to raise prices while other input costs are high. As such, a moderation in inflation may be in the cards but we see a longer glide path to get to a manageable rate of inflationary growth. Supply chains will eventually fix themselves and a growth slowdown will curb demand so inflation will not remain at current elevated levels, but it could settle in above the 1-2% range we saw after the Global Financial Crisis due to tight labor markets, de-globalization and a commodity super cycle.

The most common question we receive is when will we hit bottom? Historically, getting to “the bottom” is a process. From a valuation standpoint, Stategas Research shared that the average P/E at “the bottom” of the bear market since 1942 has been 11.9. Today, the P/E ratio of the S&P 500 is around 15.5. They note that the composition of the index, among other variations (including profitability of firms in the S&P 500) over the years, should be considered when viewing this datapoint but it certainly allows for a further decline in equity prices on a pure valuation basis. In addition, they suggest that the Fed’s ability to tame inflation will continue to come at a cost that may not have played out. Once we see a moderation in inflation, the market could be near a good inflexion point.

We expect the summer to remain challenged with elevated volatility. Many of the moves may be further exaggerated by machine trading, leverage, and rules-based programs that are part of today’s investment landscape. On the plus side, fixed income may now be at a point where it can provide some of the ballast it has traditionally offered. Municipal bonds in particular look attractive currently. Below we discuss more of our outlook and thoughts on how we are approaching this environment.

Second Quarter Market Review

Source: Zephyr StyleADVISOR

• Record high inflation, rising interest rates, and recession fears led stocks and bonds lower in the second quarter of 2022 (2Q22). For just the second time in 40 years, bonds and stocks both posted losses for two consecutive quarters.[i] US equities ended the quarter at – 16.1% and entered an official bear market (defined as a drop of 20% from last peak). Despite the pain from the first half of 2022, US equities are still up an average of 8.4% per year over the last three years.[ii]

[i] Source: Morningstar. 14 Charts on Market’s Second-Quarter Performance

[ii] Source: FactSet

• Within US equities, all 11 sectors suffered losses in Q2 22. Amid recession fears, Consumer Staples and Utilities, often considered defensive sectors, suffered the least at -4.6% and -5.1% respectively. On the other hand, growth-oriented technology-related sectors like Communication Services and Consumer Discretionary, were the worst performers at -20.7%and -26.2% respectively. Energy is the only sector with positive returns of 31.8% for the year despite losses of 5.2% in the quarter. i
• Rising interest rates continued to hurt growth stocks. Growth stocks are often synonymous with the high-flying companies in the markets like technology while value stocks are often considered undervalued, steady, and sometimes even boring. The gap in performance between value and growth stocks across size and style was stark and was significantly in favor of larger and value-oriented segments as investors have sought safety amid looming uncertainties. Large cap value stocks outperformed large cap growth by 8.7% for the quarter and over 15% for the year. i
• International equities fared better than US equities in Q2 22 despite the ongoing war in Ukraine and China’s economic toll from zero COVID policy. Developed international and emerging markets ended 2Q22 at -14.3 % and -11.3% respectively. A strong dollar also had a significant impact. Generally speaking, a stronger dollar translates to lower returns for international investments. This can be seen in its local currency returns for developed international, emerging markets which ended 2Q22 at -7.6% and -8.0% respectively. i
• Bonds extend their losses in Q2 22. US bonds fell 4.7% in the quarter led by the Fed’s aggressive interest rate increases. After raising the rate by 0.25% in March, the Fed amped up its effort with a 0.5% increase to the funds rate in May followed by a 0.75% increase in June. Despite higher inflation, TIPS also fell 6.1% due to rising rates. Longer-term Treasuries, which have the greatest sensitivity to interest-rate changes, were the hardest hit and fell 11.9%. US high yield bonds fell 9.8% due to the flight to quality stemming from recession fears. Lastly, a stronger dollar and inflation woes also led international bonds lower for the quarter.i
• With the exception of oil prices, broad commodities and gold also fell in Q2 22. Oil prices extended their climb due to Russia’s war against Ukraine. At the same time, key commodities including gold, wheat, and copper declined over concerns of a global economic slowdown. Gold prices fell 7.6% for the quarter and are down 1.5% for the year and gold has failed to meet expectations as an inflation hedge in 2022. Expectations for higher interest rates in the US led the dollar to rally 6.3% for the quarter and 9.1% for the year. Finally, US REITs lost 14.7% over concerns of rising costs due to higher interest rates. i

i Assetmark – June 2022 Quarterly Market Revuew

Stagflation
The World Bank recently announced their concern of a possible slowdown in global economic growth and a corresponding elevated risk of stagflation[1]. Inflation has stubbornly refused to decline, despite the Federal Reserve raising rates and promising to do more. This has placed concerns of stagflation back in the consciousness of investors, prompting questions as to what stagflation even is and whether or not we should be concerned about it.

Stagflation is a term used to describe periods of high inflation accompanied by declining GDP, and increased unemployment. This is a difficult place to be for your average consumer as their spending power erodes from high inflation coupled with high levels of unemployment, effectively decreasing overall consumer spending power. Before the 1960s, stagflation was widely thought impossible among economists who believed there is always an inverse relationship between inflation and unemployment. Until that time, economists had never documented periods of economic stagnation coupled with high inflation, hence the term “stagflation”[2].

The last time the US economy wrestled with stagflation was the 1970s when increases in international competition, decreases in manufacturing jobs, and an expensive war in Vietnam made inflation and unemployment soar[3]. This led President Nixon to institute a series of policy actions, known by many as the “Nixon Shock” to remedy inflation and protect jobs[4]. These policies were largely ineffective and served as the primary catalyst for 1970s stagflation which was only worsened by OPEC’s series of oil embargos on the US. The spiraling inflation and increasing unemployment eventually forced Fed chair Paul Volker to trigger a recession to try to stop the momentum in inflation.

Fast forward to 2022 and we are experiencing soaring inflation primarily due to persistent global supply- chain disruptions, a war in Ukraine, Covid-19 lockdowns in China, and soaring wage growth. As the Fed continues to raise interest rates investors and consumers are wary of the dampening effect this could have on economic growth. This worry was only cemented by the World Bank’s announcement on June 7th. According to the World Bank, global growth is expected to decelerate by 2.8 percent from 2021[5]. The outlook for global growth remains cloudy as the war in Ukraine continues to constrict global oil and grain supplies which put upward pressure on gas and food prices.

However, there are reasons to be optimistic that stagflation is not inevitable. Our current economic situation starkly diverges from the conditions of the 1970s: the dollar remains strong relative to other international currencies, the price increases in commodities are thus far much less than those seen in the 1970s, employment is strong, and the balance sheets for major global financial institutions remain robust[6]. Additionally, and most importantly, central banks across the world now have strict price and employment mandates that they have a three-decade-long track record of achieving their growth and inflation targets. Although the momentum of inflation is expected to be felt well into 2023, we believe that the actions of the Fed, an easing of supply chains, and inflation itself will help to reduce inflation well below its current levels.

[1] https://www.worldbank.org/en/news/press-release/2022/06/07/stagflation-risk-rises-amid-sharp-slowdown-in-growth-energy-markets
[2] https://www.investopedia.com/terms/s/stagflation.asp
[3] https://www.businessinsider.com/personal-finance/stagflation
[4] ibid
[5] https://www.worldbank.org/en/news/press-release/2022/06/07/stagflation-risk-rises-amid-sharp-slowdown-in-growth-energy-markets
[6] ibid

Outlook
In our last few commentaries, we have discussed the conundrum facing the Federal Reserve. The challenge of monetary normalization after years of easy money and the significant distortions it created is quite daunting. Unfortunately, the Fed has moved at a turtle’s pace while inflation (NOT transitory), has raced ahead like a hare. The past quarter had investors sitting on edge as persistent high inflation reports suggested faster and higher rate hikes that the market quickly and painfully factored into prices. The result- the worst start to a year since 1950.
At the beginning of July, Chairman Powell indicated that the market had “gotten it right” with the current rate hike expectations. This assuaged the markets on the rate hike front leaving open the earnings season to provide signs on the health of corporate American. While we noted that the current price/earnings ratio of the S&P 500 has fallen to a level near the 25-year average, it could have further to fall if the expected earnings do not materialize as forecasted.
Below we have shared a view on earnings from Oxford Economics that is in line with many we have reviewed and makes sense to us as we feel that analysts have been slow to update their forecasts. They recently wrote that “the upcoming earnings season could prove challenging for US equities.
Expectations for the second quarter itself have been revised lower in recent months and look achievable (at -2% ex-Energy), but the focus will be on company guidance for Q2 and beyond. We think the current consensus forecast for near 10% earnings growth over the next 12 months is too optimistic and is likely to be revised lower.
Although we agree with the consensus view that revenue growth will remain relatively healthy in the context of our soft-landing view, we are less sanguine on the outlook for profit margins. The bottom-up consensus forecast would suggest that we have already seen the entirety of the margin squeeze, but this seems unrealistic in the context of slowing economic activity and fading corporate pricing power.
Indeed, our profit margin leading indicators have continued to deteriorate and now point to a much more marked decline in margins than bottom-up analysts expect. Falling profitability is likely to offset revenue growth and could drive a modest decline in US earnings over the next 12 months, even if a recession is avoided.”
Rising interest rates, shrinking money supply, persistent inflation, and a potentially challenged earnings season implies more volatility as we move through the summer. On top of these concerns, we face policy uncertainty with the mid-term elections, the continued effects from the pandemic and the war in Ukraine, and the growing chorus of economist predicting an oncoming recession. We expect we will see many fits and starts throughout driven in part by some of the worst consumer sentiment and investor confidence readings we’ve seen in years- on a positive note, a contrarian indicator. Managing through this volatility has been and will continue to be difficult. So what are doing to adjust to this environment?
We continue to introduce structured credit and hedged investments into our portfolios and have added additional exposure to real assets in both public and private real estate. During the first half of the year, we were more conservative in our fixed income positioning and held higher levels of cash but have recently begun to add to fixed income, particularly municipal bonds where the valuations have become more compelling. We are neutral on growth vs value at this point as a compelling case can be made for either depending on one’s view of the world over the coming months. As an example, the recent change in expectations suggesting that the Fed could be less aggressive and even accommodative later next year boosted growth stocks for a few day run while signs of a stronger economy (via the latest labor report) could mean faster tightening, a potential blow to growth stocks. The strong dollar has been a headwind for international stocks whose returns have been better than US returns when viewed in local currency. We continue to favor the US where we see better opportunities but will watch the dollar while we assess international investments. From a tax standpoint, the gyrations in the market continue to provide loss-harvesting opportunities that we are taking advantage of where possible.
Fund flows have not been supportive for markets as conviction remains elusive. The “buy the dip” mentality of years past is not in vogue. The good news is that according to Hartford Financial, the average length of a bear market is 289 days, or about 9.6$months. That’s significantly shorter than the average length of a bull market, which is 991 days or 2.7 years. They also point out that “A bear market doesn’t necessarily indicate an economic recession. There have been 26 bear markets since 1929, but only 15 recessions during that time” Bear markets often go hand in hand with a slowing economy, but a declining market doesn’t necessarily mean a recession is looming. This topic will continue to be debated but the odds are growing that recession will hit within the next 18 months. The key will be the severity of the recession.
If history holds, we may be stuck in this morass for the remainder of the year owing to many of the factors cited above. As we look for bright lights, we remind ourselves that the markets have already discounted a good deal of economic and earnings slowdown (how much is still unclear of course), that markets have often done quite well following times when consumer confidence was extremely low (see below), and that markets have also, often, gotten a boost from mid-term elections. Private equity, flush with cash, may also be poised to step in and purchase companies whose valuations have come down and may be quite attractive.

Our headwinds/tailwinds summary is below.

Headwinds
• Federal Reserve tightening aggressively
• Inflation (commodity prices) staying high in a decelerating economy
• Supply chain issues and declining labor participation hampering economic growth
• Equity and fixed income valuations remain high on an historical basis despite the recent pullback
• Elevated corporate and government debt levels offset in part by healthier consumer balance sheets.
• Geopolitical risks are escalated with the war in Ukraine showing no signes of abating
• Covid still impacting the world with China potentially instituting more economically hurtful lockdowns.

Tailwinds
• Strong labor market
• Corporate buybacks are likely to be supportive
• Significant cash on the sidelines- hedge funds are holding a ton of cash!
• Healthy consumer and corporate balance sheets and continued consumer spending
• Earnings expectations are still positive in 2022

PRW News
PRW’s Chief Investment Officer, Elliot Herman was quoted in the fortune.com article The Fed just raised rates by half a point. Here’s what financial advisers think you should do with your moneyi by Megan Leonhardt and also in the cnbc.com article Here’s who should consider filing a tax extension and how to do itii by Kate Dore.

We look forward to connecting with you over the coming months. Enjoy the summer.

William A. Payne Richard A. Renwick Elliot B. Herman

1 Pine Hill Drive #502, Quincy, MA 02169 ♦ 617-745-0900 (ph) / 617-745-0910 (fx) ♦
prwwealthmanagement.com
PRW Wealth Management, LLC is a registered investment advisor (“RIA”) with the U.S. Securities and Exchange Commission. Investment Advisor Representatives offer financial advice through PRW Wealth Management, LLC. Registered Representatives offer securities through Lion Street Financial, LLC; member FINRA/SIPC. PRW Wealth Management, LLC and Lion Street Financial, LLC are not affiliated. PRW Wealth Management, LLC and Lion Street Financial, LLC do not provide legal or tax advice and are not Certified Public Accounting (CPA) firms

i The Fed just raised rates by a half point. Here’s what financial advisers think you should do with your money – Fortune iiHere’s who should consider filing a tax extension and how to do it (cnbc.com)

Asset classes are represented by the following indexes:

US Equities S&P 500 – is an unmanaged index that is generally considered representative of the US equity market, consisting of 500 leading companies in leading industries of the US economy (typically large cap companies)
representing approximately 75% of the investable US equity market.
International Equities MSCI EAFE – is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of countries considered to represent developed markets, excluding the U.S. and
Canada.
Emerging Markets
Equities MSCI Emerging Markets – is a free float-adjusted, market capitalization index that is designed to measure the equity market performance of countries considered to represent emerging markets.
China MSCI China – measures the performance of small-cap equities in developed market countries around the world,
excluding the U.S. and Canada. The index covers approximately 14% of the market cap in each country.
US Small Cap
Growth S&P 600 Growth – measures the performance of the small cap growth segment of the US equity market.
US Small Cap
Value S&P 600 Value – measures the performance of the small cap value segment of the US equity market.
US Mid Cap
Value S&P 400 Value – measures the performance of the mid cap value segment of the US equity market.
US Mid Cap
Growth S&P 400 Growth – measures the performance of the mid cap growth segment of the US equity market
US Large Cap
Value S&P 500 Value – measures the performance of the large cap value segment of the US equity market
US Large Cap
Growth S&P 500 Growth – measures the performance of the large cap growth segment of the US equity market
US Bonds Bloomberg US Aggregate — measures the market of USD-denominated, investment grade, fixed-rate taxable bond market of SEC-registered securities, including bonds from the Treasury, government-related, corporate, mortgage-backed securities (agency fixed-rate and hybrid ARM passthroughs), ABS and CMBS sectors. US Agency Hybrid Adjustable Rate Mortgage (ARM) securities were added to the US Aggregate Index on April 1,
2007.
International Bonds Bloomberg Global Aggregate ex USD – is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed
annually using World Bank income group and International Monetary Fund (IMF) country classification.
Emerging Markets Bonds Bloomberg Emerging Markets USD Aggregate – is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi- sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country
classification.
TIPS Bloomberg US TIPS – measures the performance of inflation-protected securities issued by the US Treasury.
US Long Treasuries Bloomberg Long Treasuries – measures the performance of long-term US Treasury bonds, including all publicly issued securities that have a remaining maturity of ten or more years, are: non-convertible, denominated
in US dollars, rated investment-grade, fixed-rate and have $250 or more of outstanding face value.
High-Yield Bonds Bloomberg US Corporate High Yield – measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch,
and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.
Utilities S&P 500 Sector Utilities – measures the performance of companies that product, generate, transmit or
distribute electricity, water or natural gas, and also includes power producers & energy traders and companies that engage in generation and distribution of electricity using renewable sources.
Consumer Staples S&P 500 Sector Consumer Staples – measures the performance of companies involved in the development
and production of consumer products including: food and drug retailing, beverages, food products, tobacco, household products and personal products.
Communication
Services S&P 500 Sector Communication Services – measures the performance of companies from the media,
retailing, and software & services industries in the U.S.

Consumer Discretionary S&P 500 Consumer Discretionary Sector – measures the performance of companies involved in industries such as: automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media and retailing.
Real Estate S&P 500 Sector Real Estate – measures the performance of companies from the following industries: real
estate management & development and REITS, excluding mortgage REITS.
Energy S&P 500 Sector Energy – measures the performance of companies involved in the development and production
of crude oil, natural gas and provide drilling and other energy-related services.
US REITs FTSE NAREIT All Equity REIT – measures the price of physical commodities futures contracts traded on US exchanges, except aluminum, nickel and zinc, which trade on the London Metal Exchange. Weightings are
determined by rules designed to insure diversified commodity exposure.
Gold Bloomberg Sub Gold – measures the price of gold futures contracts, reflecting the return of underlying commodity futures price movements quoted in USD.
Commodities Bloomberg Commodity – dynamically rebalances exposure to maintain a 10% volatility target and represents portfolios consisting of the S&P 500 index and a cash component accruing interest. Uses S&P 500
methodology and overlays algorithms to control the index risk at specific volatility targets.
US Dollar US Dollar Index – measures the value of the US dollar relative to the value of a ‘basket’ of currencies of the majority of the U.S.’s most significant trading partners. Factors the exchange rates of six major world
currencies: euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc.

IMPORTANT INFORMATION

This material is for informational purposes only and not meant as Tax or Legal advice. Please consult with your tax or legal advisor regarding your personal situation. PRW Wealth Management LLC does not provide legal or tax advice. Some of this material is written by Assetmark Inc. and is provided with permission. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by PRW Wealth Management LLC for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.
Neither the information presented, nor any opinion expressed, constitutes a solicitation for the purchase or sale of any security. The indices mentioned are unmanaged and can’t be directly invested into.

Past performance doesn’t guarantee future results; one can’t directly invest in an index; diversification doesn’t protect against loss of principal.

All investing involves risk, including the potential loss of principal; there is no guarantee that any investing strategy will be successful. Structured products are complex products that involve investment and other substantial risks compared to traditional investments and may not be appropriate for all investors. Investors should consider the investment objectives, risks, charges and expenses of the structured product carefully before investing.

INTERNATIONAL INVESTING carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

EMERGING MARKETS INVESTING may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

Neither the information nor any opinion expressed herein constitutes a solicitation for purchase or sale of any securities and should not be relied on as financial advice.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
The information contained above is for illustrative purposes only.

PRW Wealth Management, LLC (“PRW”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PRW and its representatives are properly licensed or exempt from licensure.
Advisory services are offered through PRW Wealth Management, LLC (“PRW”). Advisory services are only offered to clients or prospective clients where PRW and its representatives are properly licensed or exempt from licensure.
For additional information, please visit our website at www.prwwealthmanagement.com.

For current PRW Wealth Management, LLC information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with PRW’s CRD #284669.

Investment Commentary – Q2 2022

Dear Valued Client:

 

Congratulations to the class of 2022. As Cat Steven’s song goes, “Oh baby, baby it’s a wild world, it’s hard to get by just upon a smile….” The pandemic tested graduates now face a world like the one that their parents may have witnessed if they grew up in the 70’s. In our office, we have a copy of Time Magazine, October 14, 1974, with a picture of Gerald Ford rolling up his sleeves with the headline “Trying to fight back- inflation, recession, oil.” As Mark Twain said, “history does not repeat itself, but it often rhymes.”

The good news for graduates is that the June employment report showed that, despite recession fears, the labor market remains strong. The net job gain of 372K was in line with the average job creation in the prior three months. Wage growth is moderating but the market remains tight- a factor that will likely support the Fed in its July 27th rate hike decision expected to be 75 basis points. While we expect an easing in demand as companies cope with cost pressures, the outlook for qualified workers is positive. It is also worth noting that, according to the Bureau for labor statistics, more Americans are self-employed than any time since the 2008 financial crisis.

The new entrants to the work force are receiving higher wages than ever before (we understand babysitters are making upwards of $25-30/hour in the Northeast!). Unfortunately, these wage increases force companies to raise prices while other input costs are high. As such, a moderation in inflation may be in the cards but we see a longer glide path to get to a manageable rate of inflationary growth. Supply chains will eventually fix themselves and a growth slowdown will curb demand so inflation will not remain at current elevated levels, but it could settle in above the 1-2% range we saw after the Global Financial Crisis due to tight labor markets, de-globalization and a commodity super cycle.

The most common question we receive is when will we hit bottom? Historically, getting to “the bottom” is a process. From a valuation standpoint, Stategas Research shared that the average P/E at “the bottom” of the bear market since 1942 has been 11.9. Today, the P/E ratio of the S&P 500 is around 15.5. They note that the composition of the index, among other variations (including profitability of firms in the S&P 500) over the years, should be considered when viewing this datapoint but it certainly allows for a further decline in equity prices on a pure valuation basis. In addition, they suggest that the Fed’s ability to tame inflation will continue to come at a cost that may not have played out. Once we see a moderation in inflation, the market could be near a good inflexion point.

We expect the summer to remain challenged with elevated volatility. Many of the moves may be further exaggerated by machine trading, leverage, and rules-based programs that are part of today’s investment landscape. On the plus side, fixed income may now be at a point where it can provide some of the ballast it has traditionally offered. Municipal bonds in particular look attractive currently. Below we discuss more of our outlook and thoughts on how we are approaching this environment.

Second Quarter Market Review

Source: Zephyr StyleADVISOR

Record high inflation, rising interest rates, and recession fears led stocks and bonds lower in the second quarter of 2022 (2Q22). For just the second time in 40 years, bonds and stocks both posted losses for two consecutive quarters.[i] US equities ended the quarter at – 16.1% and entered an official bear market (defined as a drop of 20% from last peak). Despite the pain from the first half of 2022, US equities are still up an average of 8.4% per year over the last three years.[ii]

[i] Source: Morningstar. 14 Charts on Market’s Second-Quarter Performance

[ii] Source: FactSet

Within US equities, all 11 sectors suffered losses in Q2 22. Amid recession fears, Consumer Staples and Utilities, often considered defensive sectors, suffered the least at -4.6% and -5.1% respectively. On the other hand, growth-oriented technology-related sectors like Communication Services and Consumer Discretionary, were the worst performers at -20.7%and -26.2% respectively. Energy is the only sector with positive returns of 31.8% for the year despite losses of 5.2% in the quarter. i

 

Rising interest rates continued to hurt growth stocks. Growth stocks are often synonymous with the high-flying companies in the markets like technology while value stocks are often considered undervalued, steady, and sometimes even boring. The gap in performance between value and growth stocks across size and style was stark and was significantly in favor of larger and value-oriented segments as investors have sought safety amid looming uncertainties. Large cap value stocks outperformed large cap growth by 8.7% for the quarter and over 15% for the year. i

 

International equities fared better than US equities in Q2 22 despite the ongoing war in Ukraine and China’s economic toll from zero COVID policy. Developed international and emerging markets ended 2Q22 at -14.3 % and -11.3% respectively. A strong dollar also had a significant impact. Generally speaking, a stronger dollar translates to lower returns for international investments. This can be seen in its local currency returns for developed international, emerging markets which ended 2Q22 at -7.6% and -8.0% respectively. i
Bonds extend their losses in Q2 22. US bonds fell 4.7% in the quarter led by the Fed’s aggressive interest rate increases. After raising the rate by 0.25% in March, the Fed amped up its effort with a 0.5% increase to the funds rate in May followed by a 0.75% increase in June. Despite higher inflation, TIPS also fell 6.1% due to rising rates. Longer-term Treasuries, which have the greatest sensitivity to interest-rate changes, were the hardest hit and fell 11.9%. US high yield bonds fell 9.8% due to the flight to quality stemming from recession fears. Lastly, a stronger dollar and inflation woes also led international bonds lower for the quarter.i
With the exception of oil prices, broad commodities and gold also fell in Q2 22. Oil prices extended their climb due to Russia’s war against Ukraine. At the same time, key commodities including gold, wheat, and copper declined over concerns of a global economic slowdown. Gold prices fell 7.6% for the quarter and are down 1.5% for the year and gold has failed to meet expectations as an inflation hedge in 2022. Expectations for higher interest rates in the US led the dollar to rally 6.3% for the quarter and 9.1% for the year. Finally, US REITs lost 14.7% over concerns of rising costs due to higher interest rates. i

i Assetmark – June 2022 Quarterly Market Revuew

Stagflation
The World Bank recently announced their concern of a possible slowdown in global economic growth and a corresponding elevated risk of stagflation[1]. Inflation has stubbornly refused to decline, despite the Federal Reserve raising rates and promising to do more. This has placed concerns of stagflation back in the consciousness of investors, prompting questions as to what stagflation even is and whether or not we should be concerned about it.

Stagflation is a term used to describe periods of high inflation accompanied by declining GDP, and increased unemployment. This is a difficult place to be for your average consumer as their spending power erodes from high inflation coupled with high levels of unemployment, effectively decreasing overall consumer spending power. Before the 1960s, stagflation was widely thought impossible among economists who believed there is always an inverse relationship between inflation and unemployment. Until that time, economists had never documented periods of economic stagnation coupled with high inflation, hence the term “stagflation”[2].

The last time the US economy wrestled with stagflation was the 1970s when increases in international competition, decreases in manufacturing jobs, and an expensive war in Vietnam made inflation and unemployment soar[3]. This led President Nixon to institute a series of policy actions, known by many as the “Nixon Shock” to remedy inflation and protect jobs[4]. These policies were largely ineffective and served as the primary catalyst for 1970s stagflation which was only worsened by OPEC’s series of oil embargos on the US. The spiraling inflation and increasing unemployment eventually forced Fed chair Paul Volker to trigger a recession to try to stop the momentum in inflation.

Fast forward to 2022 and we are experiencing soaring inflation primarily due to persistent global supply- chain disruptions, a war in Ukraine, Covid-19 lockdowns in China, and soaring wage growth. As the Fed continues to raise interest rates investors and consumers are wary of the dampening effect this could have on economic growth. This worry was only cemented by the World Bank’s announcement on June 7th. According to the World Bank, global growth is expected to decelerate by 2.8 percent from 2021[5]. The outlook for global growth remains cloudy as the war in Ukraine continues to constrict global oil and grain supplies which put upward pressure on gas and food prices.

However, there are reasons to be optimistic that stagflation is not inevitable. Our current economic situation starkly diverges from the conditions of the 1970s: the dollar remains strong relative to other international currencies, the price increases in commodities are thus far much less than those seen in the 1970s, employment is strong, and the balance sheets for major global financial institutions remain robust[6]. Additionally, and most importantly, central banks across the world now have strict price and employment mandates that they have a three-decade-long track record of achieving their growth and inflation targets. Although the momentum of inflation is expected to be felt well into 2023, we believe that the actions of the Fed, an easing of supply chains, and inflation itself will help to reduce inflation well below its current levels.

[1] https://www.worldbank.org/en/news/press-release/2022/06/07/stagflation-risk-rises-amid-sharp-slowdown-in-growth-energy-markets
[2] https://www.investopedia.com/terms/s/stagflation.asp
[3] https://www.businessinsider.com/personal-finance/stagflation
[4] ibid
[5] https://www.worldbank.org/en/news/press-release/2022/06/07/stagflation-risk-rises-amid-sharp-slowdown-in-growth-energy-markets
[6] ibid

Outlook
In our last few commentaries, we have discussed the conundrum facing the Federal Reserve. The challenge of monetary normalization after years of easy money and the significant distortions it created is quite daunting. Unfortunately, the Fed has moved at a turtle’s pace while inflation (NOT transitory), has raced ahead like a hare. The past quarter had investors sitting on edge as persistent high inflation reports suggested faster and higher rate hikes that the market quickly and painfully factored into prices. The result- the worst start to a year since 1950.
At the beginning of July, Chairman Powell indicated that the market had “gotten it right” with the current rate hike expectations. This assuaged the markets on the rate hike front leaving open the earnings season to provide signs on the health of corporate American. While we noted that the current price/earnings ratio of the S&P 500 has fallen to a level near the 25-year average, it could have further to fall if the expected earnings do not materialize as forecasted.
Below we have shared a view on earnings from Oxford Economics that is in line with many we have reviewed and makes sense to us as we feel that analysts have been slow to update their forecasts. They recently wrote that “the upcoming earnings season could prove challenging for US equities.
Expectations for the second quarter itself have been revised lower in recent months and look achievable (at -2% ex-Energy), but the focus will be on company guidance for Q2 and beyond. We think the current consensus forecast for near 10% earnings growth over the next 12 months is too optimistic and is likely to be revised lower.
Although we agree with the consensus view that revenue growth will remain relatively healthy in the context of our soft-landing view, we are less sanguine on the outlook for profit margins. The bottom-up consensus forecast would suggest that we have already seen the entirety of the margin squeeze, but this seems unrealistic in the context of slowing economic activity and fading corporate pricing power.
Indeed, our profit margin leading indicators have continued to deteriorate and now point to a much more marked decline in margins than bottom-up analysts expect. Falling profitability is likely to offset revenue growth and could drive a modest decline in US earnings over the next 12 months, even if a recession is avoided.”
Rising interest rates, shrinking money supply, persistent inflation, and a potentially challenged earnings season implies more volatility as we move through the summer. On top of these concerns, we face policy uncertainty with the mid-term elections, the continued effects from the pandemic and the war in Ukraine, and the growing chorus of economist predicting an oncoming recession. We expect we will see many fits and starts throughout driven in part by some of the worst consumer sentiment and investor confidence readings we’ve seen in years- on a positive note, a contrarian indicator. Managing through this volatility has been and will continue to be difficult. So what are doing to adjust to this environment?
We continue to introduce structured credit and hedged investments into our portfolios and have added additional exposure to real assets in both public and private real estate. During the first half of the year, we were more conservative in our fixed income positioning and held higher levels of cash but have recently begun to add to fixed income, particularly municipal bonds where the valuations have become more compelling. We are neutral on growth vs value at this point as a compelling case can be made for either depending on one’s view of the world over the coming months. As an example, the recent change in expectations suggesting that the Fed could be less aggressive and even accommodative later next year boosted growth stocks for a few day run while signs of a stronger economy (via the latest labor report) could mean faster tightening, a potential blow to growth stocks. The strong dollar has been a headwind for international stocks whose returns have been better than US returns when viewed in local currency. We continue to favor the US where we see better opportunities but will watch the dollar while we assess international investments. From a tax standpoint, the gyrations in the market continue to provide loss-harvesting opportunities that we are taking advantage of where possible.
Fund flows have not been supportive for markets as conviction remains elusive. The “buy the dip” mentality of years past is not in vogue. The good news is that according to Hartford Financial, the average length of a bear market is 289 days, or about 9.6$months. That’s significantly shorter than the average length of a bull market, which is 991 days or 2.7 years. They also point out that “A bear market doesn’t necessarily indicate an economic recession. There have been 26 bear markets since 1929, but only 15 recessions during that time” Bear markets often go hand in hand with a slowing economy, but a declining market doesn’t necessarily mean a recession is looming. This topic will continue to be debated but the odds are growing that recession will hit within the next 18 months. The key will be the severity of the recession.
If history holds, we may be stuck in this morass for the remainder of the year owing to many of the factors cited above. As we look for bright lights, we remind ourselves that the markets have already discounted a good deal of economic and earnings slowdown (how much is still unclear of course), that markets have often done quite well following times when consumer confidence was extremely low (see below), and that markets have also, often, gotten a boost from mid-term elections. Private equity, flush with cash, may also be poised to step in and purchase companies whose valuations have come down and may be quite attractive.

Our headwinds/tailwinds summary is below.

Headwinds
• Federal Reserve tightening aggressively
• Inflation (commodity prices) staying high in a decelerating economy
• Supply chain issues and declining labor participation hampering economic growth
• Equity and fixed income valuations remain high on an historical basis despite the recent pullback
• Elevated corporate and government debt levels offset in part by healthier consumer balance sheets.
• Geopolitical risks are escalated with the war in Ukraine showing no signes of abating
• Covid still impacting the world with China potentially instituting more economically hurtful lockdowns.

Tailwinds
• Strong labor market
• Corporate buybacks are likely to be supportive
• Significant cash on the sidelines- hedge funds are holding a ton of cash!
• Healthy consumer and corporate balance sheets and continued consumer spending
• Earnings expectations are still positive in 2022

PRW News
PRW’s Chief Investment Officer, Elliot Herman was quoted in the fortune.com article The Fed just raised rates by half a point. Here’s what financial advisers think you should do with your moneyi by Megan Leonhardt and also in the cnbc.com article Here’s who should consider filing a tax extension and how to do itii by Kate Dore.

We look forward to connecting with you over the coming months. Enjoy the summer.

William A. Payne Richard A. Renwick Elliot B. Herman

1 Pine Hill Drive #502, Quincy, MA 02169 ♦ 617-745-0900 (ph) / 617-745-0910 (fx) ♦
prwwealthmanagement.com
PRW Wealth Management, LLC is a registered investment advisor (“RIA”) with the U.S. Securities and Exchange Commission. Investment Advisor Representatives offer financial advice through PRW Wealth Management, LLC. Registered Representatives offer securities through Lion Street Financial, LLC; member FINRA/SIPC. PRW Wealth Management, LLC and Lion Street Financial, LLC are not affiliated. PRW Wealth Management, LLC and Lion Street Financial, LLC do not provide legal or tax advice and are not Certified Public Accounting (CPA) firms

i The Fed just raised rates by a half point. Here’s what financial advisers think you should do with your money – Fortune iiHere’s who should consider filing a tax extension and how to do it (cnbc.com)

Asset classes are represented by the following indexes:

US Equities S&P 500 – is an unmanaged index that is generally considered representative of the US equity market, consisting of 500 leading companies in leading industries of the US economy (typically large cap companies)
representing approximately 75% of the investable US equity market.
International Equities MSCI EAFE – is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of countries considered to represent developed markets, excluding the U.S. and
Canada.
Emerging Markets
Equities MSCI Emerging Markets – is a free float-adjusted, market capitalization index that is designed to measure the equity market performance of countries considered to represent emerging markets.
China MSCI China – measures the performance of small-cap equities in developed market countries around the world,
excluding the U.S. and Canada. The index covers approximately 14% of the market cap in each country.
US Small Cap
Growth S&P 600 Growth – measures the performance of the small cap growth segment of the US equity market.
US Small Cap
Value S&P 600 Value – measures the performance of the small cap value segment of the US equity market.
US Mid Cap
Value S&P 400 Value – measures the performance of the mid cap value segment of the US equity market.
US Mid Cap
Growth S&P 400 Growth – measures the performance of the mid cap growth segment of the US equity market
US Large Cap
Value S&P 500 Value – measures the performance of the large cap value segment of the US equity market
US Large Cap
Growth S&P 500 Growth – measures the performance of the large cap growth segment of the US equity market
US Bonds Bloomberg US Aggregate — measures the market of USD-denominated, investment grade, fixed-rate taxable bond market of SEC-registered securities, including bonds from the Treasury, government-related, corporate, mortgage-backed securities (agency fixed-rate and hybrid ARM passthroughs), ABS and CMBS sectors. US Agency Hybrid Adjustable Rate Mortgage (ARM) securities were added to the US Aggregate Index on April 1,
2007.
International Bonds Bloomberg Global Aggregate ex USD – is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed
annually using World Bank income group and International Monetary Fund (IMF) country classification.
Emerging Markets Bonds Bloomberg Emerging Markets USD Aggregate – is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi- sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country
classification.
TIPS Bloomberg US TIPS – measures the performance of inflation-protected securities issued by the US Treasury.
US Long Treasuries Bloomberg Long Treasuries – measures the performance of long-term US Treasury bonds, including all publicly issued securities that have a remaining maturity of ten or more years, are: non-convertible, denominated
in US dollars, rated investment-grade, fixed-rate and have $250 or more of outstanding face value.
High-Yield Bonds Bloomberg US Corporate High Yield – measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch,
and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.
Utilities S&P 500 Sector Utilities – measures the performance of companies that product, generate, transmit or
distribute electricity, water or natural gas, and also includes power producers & energy traders and companies that engage in generation and distribution of electricity using renewable sources.
Consumer Staples S&P 500 Sector Consumer Staples – measures the performance of companies involved in the development
and production of consumer products including: food and drug retailing, beverages, food products, tobacco, household products and personal products.
Communication
Services S&P 500 Sector Communication Services – measures the performance of companies from the media,
retailing, and software & services industries in the U.S.

Consumer Discretionary S&P 500 Consumer Discretionary Sector – measures the performance of companies involved in industries such as: automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media and retailing.
Real Estate S&P 500 Sector Real Estate – measures the performance of companies from the following industries: real
estate management & development and REITS, excluding mortgage REITS.
Energy S&P 500 Sector Energy – measures the performance of companies involved in the development and production
of crude oil, natural gas and provide drilling and other energy-related services.
US REITs FTSE NAREIT All Equity REIT – measures the price of physical commodities futures contracts traded on US exchanges, except aluminum, nickel and zinc, which trade on the London Metal Exchange. Weightings are
determined by rules designed to insure diversified commodity exposure.
Gold Bloomberg Sub Gold – measures the price of gold futures contracts, reflecting the return of underlying commodity futures price movements quoted in USD.
Commodities Bloomberg Commodity – dynamically rebalances exposure to maintain a 10% volatility target and represents portfolios consisting of the S&P 500 index and a cash component accruing interest. Uses S&P 500
methodology and overlays algorithms to control the index risk at specific volatility targets.
US Dollar US Dollar Index – measures the value of the US dollar relative to the value of a ‘basket’ of currencies of the majority of the U.S.’s most significant trading partners. Factors the exchange rates of six major world
currencies: euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc.

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Investment Commentary – Q1 2022

Dear Valued Client:

 

In this letter, we are going to talk about bonds. While we will get to the investment variety, we’ll start by focusing on the bonds that tie the spirit and solidarity of most of the world with the people of Ukraine. Watching the horrors beset upon the people of Ukraine, we cannot help but wonder how this could have happened and how this will end. Our hearts go out to the men and women who are trying to survive the unprovoked attack and pray that this conflict will end soon and without further bloodshed.

The war that started in February has united many in the developed world and even both political parties in this country, at least on this issue. However, while US/NATO countries and many other nations have joined together in sympathy and action, other countries have yet to condemn the attacks. Over the past 15 years, we have seen a marked shift in the world between authoritarian and democratically governed countries. The impacts of this are many highlighted by the need for energy disentanglement and independence in Europe. As the war continues, some bonds will be strengthened, and others frayed. So how might this impact investors?
Economically, companies tend to do what is in the best interests of their shareholders and customers. Jeff Kleintop, CIO at Charles Schwab, notes in a recent piece(1), that despite the political decoupling between the
U.S. and China and the recent move by the U.K. to exit the EU, the countries of the world remain tightly intertwined economically. He goes on to say that “the idea of economic globalization defined as sourcing production in one country with the lowest labor cost and exporting the final product to be sold everywhere else is now outdated. He noted that the rapidly growing digital economy is the next iteration in globalization that once focused primarily on manufacturing and that political deglobalization has not resulted in a stall in the sales of multinational companies nor a decline in the international portion of those sales. Finally, he notes, that “Political deglobalization could lead to some reshoring of industries deemed essential and some companies linked to national security issues may be impacted.” We expect that globalization will continue and evolve despite the war but that the past two-plus years have invited a new set of challenges.
The wars’ impact on inflation, goods shortages, and supply chain delays has been well documented. Russia’s war is threatening to thrust Europe into recession, is inducing painful food and energy shortages in Africa and the Middle East and is sowing the seeds of social unrest in the many countries feeling the impact of the war from afar. The climate of uncertainty this quarter caused a spike in volatility and a big haircut in the prices of many heretofore high-flying stocks. Stocks whipsawed and we expect this will continue. With little clarity on the war and the efficacy of the Fed’s plans (more later), it feels as if we are in for a bumpy ride. The wall of worry is high, but markets have historically found a way to climb it.

First Quarter Market Review

Source: FactSet financial data and analytics

• The war in Ukraine, surging inflation, and rising interest rates led markets lower in the first quarter. After a strong 2021, US equities saw their first quarterly loss in two years. During the quarter at its worst, US equities fell 13% and thus into official correction territory (defined as a drop of 10%). While this may be shocking, it remains in line with historical intra-year declines. Since 1980, despite average intra-year drops of 14.0%, annual returns were positive in 32 of 42 years[i]. Despite ongoing uncertainty, US equities staged a strong late rebound of nearly 9% to end the quarter at -4.6%.

• Within US equities, nine out of 11 sectors suffered losses in Q1 22. Two sectors with positive returns included Energy and Utilities. The Energy sector gained 39% on surging oil prices. Utilities, often considered a defensive sector, also gained 4.8%. Technology-related sectors like Communication Services (-11.9%) and Consumer Discretionary (-9.0%) were the worst performers amid fears of rising rates and a slowing economy. Interestingly, according to Morningstar, Inc., the FAANG stocks contribution to the market’s returns declined from 37% in 2020 to just 2.7% in 2021 (as of 11/19/2021).
• Elevated valuations and rising interest rates hurt long-duration growth stocks. The gap between value and growth stocks across size and style was stark and was significantly in favor of larger and value-oriented segments. Large-cap value stocks outperformed large-cap growth by 8.3%.
• Within international equity markets, both developed and emerging markets fell 5.8% and 6.9% respectively in Q1 22. The conflict in Ukraine weighed heavily on European markets, given its reliance on Russian energy. Additionally, emerging markets, particularly China, struggled as continued COVID-19 lockdowns remained highly disruptive to its economy.
• Bonds had their worst quarter in 20 years[ii]. US bonds fell 5.9% in 2022 as interest rates rose after the Federal Reserve set out on a more aggressive path to tame inflation. Despite higher inflation, TIPS also fell 3% due to rising rates. Longer-term Treasuries, which have the greatest sensitivity to interest-rate changes, were the hardest hit and fell by 10.6%. US high yield bonds fell 4.8% due to the flight to quality stemming from the Russia-Ukraine conflict. Lastly, a stronger dollar and inflation woes also led international bonds lower for the quarter.
• Commodities were the biggest winners as the war in Ukraine fueled further inflationary pressures leading to a surge in oil and grain prices. Gold gained 6.6%, living up to its reputation as a safe haven during the market selloff. Expectations for higher interest rates in the US led the dollar to rally by 2.6%. After a record 2021, US REITs lost 5.3% over concerns of rising costs due to higher interest rates. However, gains were recorded within subsectors such as hotels and offices, as they continue to benefit from easing economic restrictions.

[i] JPMorgan Guide to the Markets. Q1’2022

[ii] https://www.morningstar.com/articles/1087132/13-charts-on-the-markets-first-quarter-performance

Outlook
As noted, the past quarter saw significant volatility & turbulence in geopolitics and global capital markets. The outbreak of conflict in Ukraine, resulting in soaring commodity prices, as well as a host of existing cross currents (record inflation, slowing economic growth, central bank policy maneuvers) made this one of the most unpredictable times for investors in living memory.

We are likely (nobody knows for sure) in the middle to later parts of the economic cycle with signs that we achieved peak growth sometime last year. Mid-cycle investing has historically been the most volatile. Add the ongoing concerns of war, supply chain bottlenecks, and an aggressive Fed support that volatility. The good news, perhaps, is that the markets have historically behaved well during periods of rising rates andafter times of severe conflict in the world.

Uncertainty has created a market that is very reactionary. The Federal Reserve has turned quite hawkish with minutes from the last meeting showing a determination to aggressively hike rates while shrinking the balance sheet in a concerted effort to curb inflation. Unfortunately, many of the inflationary issues are a product of supply chain issues, fiscal stimulus, and higher energy and other commodity prices driven upwards by the war in Ukraine. Most market strategists agree that the Fed should be raising rates but question whether the hikes should/will occur at the pace and amounts currently laid out. If the path plays out as constituted, it will be the largest and fastest increase since 1994. Taking on inflation through rate hikes brings bad side effects and that is the conundrum facing the Fed. Act too quickly and push the economy into recession, act too slowly (not the current plan), and risk inflation moving higher.

Interestingly, it was June 10, 2020, when Chairman Powell said, “we’re not even thinking about thinking about raising rates.”

We believe that some of the pressure on supply chains will abate later in the year and that we may be close to peak inflation, which could influence the Fed’s data-dependent moves. Peak inflation would be good here but still a challenge given the elevated levels and near-term expectations for a slow fall. Inflation will be a major factor influencing our economic trajectory for now. At some point, consumers and businesses will refuse to pay higher prices. We are seeing anecdotal evidence that businesses with higher input costs, be it fuel or materials, will cease or reduce their operations if they cannot recoup the costs. Consumers ready to travel again may think twice about paying the exorbitant prices greeting them at hotels around the world. So far, demand post-pandemic has not abated but is showing signs of weakness.

This is a multi-pronged problem. Lack of investment in energy structure is coming home to roost. In a recent update, Northern Trust energy specialists note that global capital expenditures on oil mining peaked in 2014 and have been flat since 2018. At the same time, renewable energy sources have not proven to be a reliable substitute to meet the energy demand. Their opinion was that energy inflation will stay constant or move higher over the year as we simply do not have the power to meet the demand at this time.

And what about the yield curve? The yield curve is an oft watched measure of the likelihood of a recession. An inversion of the curve occurs when rates on shorter date bonds exceed those of longer-dated bonds.

This phenomenon has been a good predictor of recession, but it is not foolproof, nor does it clearly define the timeframe that a recession might occur. We saw a brief inversion of the curve last year and for a day or two this year. The growing consensus is that we could see a recession in 2023 if the Fed is unable to balance its moves and inflation proves to be too heavy a burden for the economy. We shall see.

So how are we adapting portfolios to the shifting market environment? What are we doing to navigate the surge in bond market volatility? What can be done to deal with the impact of higher inflation on the markets? These are the questions we have been wrestling with during the quarter. The sands under our feet keep shifting and we have been adapting.

Fixed income markets, as defined by the Barclays Aggregate Bond Index, fell over 6.5%. The 10-year Treasury rate moved from a rate of 1.63% at the beginning of the year to 2.32% at the end of the quarter a very substantial move in a short time period (2). Understanding the headwinds for bonds but not fully expecting the magnitude and speed of the upward move in rates, we had positioned our portfolios in shorter-duration (less interest-rate sensitive bonds), floating-rate bonds (whose rates will adjust upward and provide some protection against rising rates despite having credit risk), and a multi-sector bond fund with a go-anywhere mandate. Municipal bonds were not immune to the rate hikes, and we did see these bonds fall in line with taxable bonds.

We have been steadily introducing structured credit and hedged investments into our portfolios over the past year to dampen volatility and take advantage of it. We’ve added positions with more exposure to energy and metals and are close to adding a dedicated inflation hedge position. The gyrations in the market have also provided loss-harvesting opportunities that we are taking advantage of where possible.

For the near future, we see markets trading sideways as we continue to transition away from a disinflationary, low-rate, low-risk premium environment. While the road ahead looks challenging, the importance of diversification is very clear.

Our headwinds/tailwinds summary is below.
Headwinds
• Federal Reserve tightening aggressively
• Inflation (commodity prices) staying high in a decelerating economy
• Supply chain issues and declining labor participation hampering economic growth
• Equity and fixed income valuations are high on an historical basis despite recent pullback
• Elevated corporate and government debt levels offset in part by healthier consumer balance sheets.
• Covid shut down parts of China and has not disappeared from the rest of the world.
• Volatility quite challenging near term

Tailwinds
• Strong labor market
• Corporate buybacks are likely to be supportive
• Significant cash on the sidelines
• Healthy consumer and corporate balance sheets
• Earnings expectations are still positive in 2022

Tax updates
The House of Representatives passed HR # 2954 on 3/29/2022 (“Securing a Strong Retirement Act”), now sending the bill to the Senate. The legislation, designed to overhaul the current pre-tax retirement system in the US, includes an expansion of auto-enrollment in retirement plans, an increase in the age at which individuals must begin “required minimum distributions” from age 72 to age 75, and improving the access to employer-sponsored plans to part-time workers.
There has been little movement on bills to increase income tax rates as was very much in focus last year. We will be watching for any updates. President Biden has spoken about a tax on billionaires that is yet to get support. The Tax Policy Center estimates that 57% of US households will ultimately pay no federal income tax in tax year 2021 as pandemic-driven legislation eliminated the tax bill.

PRW News
PRW’s Chief Investment Officer, Elliot Herman, spoke on two panels this quarter. On February 23rd he served as the Moderator on a panel discussing Alternative Investments for Advisors at the MA RIA Summit. On March 24, 2022, he spoke at the 7th Annual Private Wealth New England Forum, which is the leading forum for family offices, wealth managers, private banks, and asset managers in the region. Elliot was on a panel entitled Best Practices in Wealth Management and Preservation and the panelists discussed changes they have made and the strategies they have stuck with to better protect their client’s money.

We look forward to connecting with you over the coming months. Enjoy the better weather on the way.

William A. Payne Richard A. Renwick Elliot B. Herman

1 Pine Hill Drive #502, Quincy, MA 02169 ♦ 617-745-0900 (ph) / 617-745-0910 (fx) ♦
prwwealthmanagement.com
PRW Wealth Management, LLC is a registered investment advisor (“RIA”) with the U.S. Securities and Exchange Commission. Investment Advisor Representatives offer financial advice through PRW Wealth Management, LLC. Registered Representatives offer securities through Lion Street Financial, LLC; member FINRA/SIPC. PRW Wealth Management, LLC and Lion Street Financial, LLC are not affiliated. PRW Wealth Management, LLC and Lion Street Financial, LLC do not provide legal or tax advice and are not Certified Public Accounting (CPA) firms

(1) Deglobalization is Political, not Economic, Market commentary by Jeffrey Kleintop, CIO at Charles Schwab & Co., April 11, 2022
(2) U.S Treasury

Asset classes are represented by the following indexes:

US Equities S&P 500 – is an unmanaged index that is generally considered representative of the US equity market, consisting of 500 leading companies in leading industries of the US economy (typically large cap companies) representing approximately 75% of the investable US equity market.
International Equities MSCI EAFE – is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of countries considered to represent developed markets, excluding the U.S. and Canada.
Emerging Markets Equities MSCI Emerging Markets – is a free float-adjusted, market capitalization index that is designed to measure the equity market performance of countries considered to represent emerging markets.
China MSCI China – measures the performance of small-cap equities in developed market countries around the world, excluding the
U.S. and Canada. The index covers approximately 14% of the market cap in each country.
US Small Cap Value S&P 600 Value – measures the performance of the small cap value segment of the US equity market.
US Small Cap Growth S&P 600 Growth – measures the performance of the small cap growth segment of the US equity market.
US Mid Cap Value S&P 400 Value – measures the performance of the mid cap value segment of the US equity market.
US Mid Cap Growth S&P 400 Growth – measures the performance of the mid cap growth segment of the US equity market
US Large Cap Value S&P 500 Value – measures the performance of the large cap value segment of the US equity market
US Large Cap Growth S&P 500 Growth – measures the performance of the large cap growth segment of the US equity market
US Bonds Bloomberg US Aggregate — measures the market of USD-denominated, investment grade, fixed-rate taxable bond market of SEC-registered securities, including bonds from the Treasury, government-related, corporate, mortgage-backed securities (agency fixed-rate and hybrid ARM passthroughs), ABS and CMBS sectors. US Agency Hybrid Adjustable Rate Mortgage (ARM) securities were added to the US Aggregate Index on April 1, 2007.
International Bonds Bloomberg Global Aggregate ex USD – is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country classification.
Emerging Markets Bonds Bloomberg Emerging Markets USD Aggregate – is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country classification.
TIPS Barclays US TIPS – measures the performance of inflation-protected securities issued by the US Treasury.
High-Yield Bonds Bloomberg US Corporate High Yield – measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.
Utilities S&P 500 Sector Utilities – measures the performance of companies that product, generate, transmit or distribute electricity, water or natural gas, and also includes power producers & energy traders and companies that engage in generation and distribution of electricity using renewable sources.
Consumer Staples S&P 500 Sector Consumer Staples – measures the performance of companies involved in the development and production of consumer products including: food and drug retailing, beverages, food products, tobacco, household products and personal products.

Technology S&P 500 Technology Sector – measures the performance of companies that product, generate, transmit or distribute electricity, water or natural gas, and also includes power producers & energy traders and companies that engage in generation and distribution of electricity using renewable sources.
Real Estate S&P 500 Sector Real Estate – measures the performance of companies from the following industries: real estate management & development and REITS, excluding mortgage REITS.
Financials S&P 500 Sector Financials – measures the performance of companies in an array of diversified financial service firms, insurance, banks, capital markets, consumer finance and thrift companies.
Energy S&P 500 Sector Energy – measures the performance of companies involved in the development and production of crude oil, natural gas and provide drilling and other energy-related services.
US REITs FTSE NAREIT All Equity REIT – measures the price of physical commodities futures contracts traded on US exchanges, except aluminum, nickel and zinc, which trade on the London Metal Exchange. Weightings are determined by rules designed to insure diversified commodity exposure.
Gold Bloomberg Sub Gold – measures the price of gold futures contracts, reflecting the return of underlying commodity futures price movements quoted in USD.
Commodities Bloomberg Commodity. – dynamically rebalances exposure to maintain a 10% volatility target and represents portfolios consisting of the S&P 500 index and a cash component accruing interest. Uses S&P 500 methodology and overlays algorithms to control the index risk at specific volatility targets.
US Dollar US Dollar Index – measures the value of the US dollar relative to the value of a ‘basket’ of currencies of the majority of the U.S.’s most significant trading partners. Factors the exchange rates of six major world currencies: euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc.

IMPORTANT INFORMATION

This material is for informational purposes only and not meant as Tax or Legal advice. Please consult with your tax or legal advisor regarding your personal situation. PRW Wealth Management LLC does not provide legal or tax advice. Some of this material is written by Assetmark Inc. and is provided with permission. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by PRW Wealth Management LLC for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should not be construed as advice meeting the particular investment needs of any investor.
Neither the information presented, nor any opinion expressed, constitutes a solicitation for the purchase or sale of any security. The indices mentioned are unmanaged and can’t be directly invested into.

Past performance doesn’t guarantee future results; one can’t directly invest in an index; diversification doesn’t protect against loss of principal.

All investing involves risk, including the potential loss of principal; there is no guarantee that any investing strategy will be successful. Structured products are complex products that involve investment and other substantial risks compared to traditional investments and may not be appropriate for all investors. Investors should consider the investment objectives, risks, charges and expenses of the structured product carefully before investing.

INTERNATIONAL INVESTING carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

EMERGING MARKETS INVESTING may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

Neither the information nor any opinion expressed herein constitutes a solicitation for purchase or sale of any securities and should not be relied on as financial advice.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
The information contained above is for illustrative purposes only.

PRW Wealth Management, LLC (“PRW”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PRW and its representatives are properly licensed or exempt from licensure.
Advisory services are offered through PRW Wealth Management, LLC (“PRW”). Advisory services are only offered to clients or prospective clients where PRW and its representatives are properly licensed or exempt from licensure.
For additional information, please visit our website at www.prwwealthmanagement.com.

For current PRW Wealth Management, LLC information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with PRW’s CRD #284669.