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Market Commentary <br />As of 12/31/2023 <br />Economic Activity <br />GDP in the third quarter of 2023 increased by <br />4.9%, which was the largest increase since 2014 <br />excluding the pandemic and was now the fifth <br />consecutive quarter of growth despite economists <br />relentlessly calling for a 2023 recession during the <br />latter part of 2022. Personal consumption in the <br />second quarter increased by a notable 3.1% over <br />the previous quarter—though a disappointing result <br />relative to the initial forecast of 4%. GDP was <br />surprisingly led higher from gross private domestic <br />investment, an increase in nonfarm inventories, and <br />government consumption. <br />Labor markets have continued to show changes <br />throughout the fourth quarter that would favor the <br />Fed moving to an official approach of nearer-term <br />rate cuts. The most recent reading of job openings <br />fell to their lowest level since March 2021 though <br />they still exceed the number of unemployed people <br />in the U.S. by 2.3 million but well down from the <br />peak of 6 million in August 2022. The labor force <br />participation rate increased to 62.8% in November, <br />which moved back to its highest-level since February <br />2020, as 532K re-entered the labor force looking for <br />employment. Despite labor markets loosening a <br />little, wage growth continues to be strong at a <br />3.4% 3-month average annualized rate. <br />The Fed's favorite inflation gauge, the Core Personal <br />Consumption Expenditure ("PCE Core") increased by <br />3.2% year-over-year at its last reading and was <br />reached its lowest level since March 2021. The <br />even more encouraging sign was the 0.06% MoM <br />increase and PCE Core has now averaged a 1.86% <br />6-month annualized result. <br />Interest Rates <br />The Federal Open Market Committee (the "FOMC") <br />has not raised the Federal Funds Target Rate (the <br />"Rate") since July 26 and it continues to be <br />5.25-5.50%. The FOMC continues to focus on <br />reducing inflation, which has significantly subsided <br />and to a lesser extent they continue to address <br />their concerns with the tight labor markets. There <br />was a notable reverse course in interest rate <br />forecasts/expectations during the fourth quarter as <br />the FOMC now believes their target rate will end <br />2024 at 4.5-4.625%% but was forecasted to end <br />2024 at a 5-5.25% range at their third quarter <br />meeting. The yield on the ten-year U.S. Treasury <br />note hit a long-term high in the fourth quarter of <br />5.02% and since the moment has retreated to <br />being well under of 4%. <br />Credit continues to be the outperforming asset class <br />for the year within traditional fixed income even has <br />interest rates have swiftly declined in the fourth <br />quarter. Through the end of December, the <br />Bloomberg Corporate Investment Grade Index was <br />up over 5%, but the Bloomberg Treasury index was <br />up less than 4%. The best performer within <br />traditional fixed income for the year has been high <br />yield corporate bonds as the Bloomberg High Yield <br />Index has returned around 13% in 2023. <br />Stock Market <br />Equity markets finished the year strong with the <br />NASDAQ (technology) up 43.4% and the S&P 500 <br />up 24.2% not far from its intraday high of 4,818 <br />reached in January 2022. Bloomberg data shows <br />roughly 71% of stocks have underperformed the <br />S&P 500 this year with most of the gains coming <br />from a few large cap growth companies. These <br />stocks known as the "Magnificent Seven;" Amazon, <br />Microsoft, Apple, Tesla, Nvidia, Alphabet, and Meta <br />(Facebook) have collectively risen 73% in 2023 and <br />represent roughly 30% of the S&P 500 market <br />value. Small cap companies measured by the Russell <br />2000 underperformed their large cap counterparts <br />for the year but did outperform in the fourth <br />quarter by 4.8%. International equities trailed U.S. <br />equities by 9.4% for the year as Germany, the <br />largest economy in Europe, officially entered a <br />recession. <br />S&P 500 earnings are expected to grow 1% in <br />2023 after 4% earnings growth in 2022. For 2024 <br />S&P 500 analysts are forecasting earnings growth to <br />rebound strongly to 12%. We view this earnings <br />growth as optimistic in an environment where <br />current GDP forecasts are for the economy to grow <br />in the range of 1.0-2.0%. Operating margins are <br />below record highs seen in 2022 but have remained <br />stable at a lower level as companies remain <br />aggressive on trimming expenses. We believe <br />revenue growth will be more problematic in 2024 <br />and the moderating inflation which limits the ability <br />of companies to pass along higher costs. <br />Recent market performance in December has been <br />supported by Federal Reserve chairman Powell and <br />his pivot to a dovish stance. A decline in yields led <br />to outperformance in interest rate sensitive areas of <br />the market: small cap, real estate, and financials. <br />Other members of the Federal Reserve pushed back <br />on the notion of a policy shift and reiterated its <br />premature to think about interest rate cuts. <br />Markets are currently forecasting an 85% chance of <br />an interest rate cut in March and five additional rate <br />cuts for the remainder of the year. <br />We believe a more favorable risk reward ratio is <br />available outside the largest technology companies <br />and in mid cap and smaller cap companies. For <br />equity markets to continue their strong <br />performance in 2024 we will need to see recent <br />improvements in mid cap and small cap stocks <br />extend into next year. <br />January 16, 2024 <br />Page 2 of 12