EWA Stock Market and Portfolio Review Q2 2023

Welcome to our quarterly recap. In this video, we’re going to be recapping quarter one of 2023 and then also looking forward at our thoughts of quarter two of 2023. As always, you can find your quarterly reports in your e -money vault.

These will show year to date since inception returns and also the current breakdown of your asset allocation, diversification, etc. Please reach out if you have questions and we thank you for watching today’s video.

you James and I are excited to announce a couple initiatives and exciting changes at EWA. First, we are extremely excited to announce that EWA has launched its own podcast. This is called FinLit for financial literacy, but also Lit is spelled L -Y -T, which is driven from the word catalyst.

I think one of the biggest descriptions or compliments we’ve got from clients is that EWA and advisors and the whole team really serve as a catalyst into making complex financial decisions simple, helping quarterback different professionals, whether it’s a CPA, an estate plan, etc.

Just making sure I love the analogy that it’s really hard to get a bolder moving. It takes a lot of inertia on a force, but once it’s moving, it’s easy to keep it moving. The way we describe a catalyst is the initial force to get the plan into motion.

We really hope that the FinLit podcast is a catalyst for all listeners. We’re going to be really doing two things on this podcast. One is really just talking about nerdy topics. The second one, we’re going to be interviewing current clients and really encouraging them to share their story.

I think the best way to learn, people learn from people. Our clients have some of the most amazing stories. Most of our clients are very well on track for financial independence, so we also expect that the tips and wisdom that they have in their plans will help you.

with your plan as well. So look forward for you listening and would love your feedback. If you found helpful, obviously, I’d love a five -star rating. I’d love if you share it with your friends and family as well.

But with that being said, our second initiative is some ways we’re utilizing technology. Jameson has been all over this and just recently with the somewhat polarizing topic of artificial intelligence, we’ve started to slowly adopt it in some ways that can really help us become more efficient.

And then really help make sure that all the details that we are keeping track of in the financial plan, we have an extra layer of protection to make sure that nothing ever falls through the cracks. So Jameson, tell us about how we’re utilizing technology.

Yeah, so we’re looking at multiple artificial intelligence technologies to help implement into our systems and processes to ultimately give you a better client experience. The one that we have implemented that many of you have seen, it’s called Fireflies.

It’s a technology that plugs into our Zoom calls and will… take notes and recap the meeting for us to make sure that we’re not missing any details within your financial plan. So we’re behind the scenes continuing to test these new technologies as they come out to see what we’re able to implement to save our time and ultimately best serve you as our clients and give you the best client experience possible.

The other cool thing about that technology, Jameson, is from a leadership perspective at EWA. It actually breaks down how much the advisor is talking, how much the client’s talking, and also catches on the tone of voice.

So it’s a good feedback system because we obviously want you, our clients to talk the most. So we’re understanding and listening to your goals and making sure we’re followed through. So it’s an immediate accountability system report at then in the meeting, as well as making sure no details are missed.

So Jameson, thank you for being all over that. And it’s definitely going to take our level of service to the next level. So thank you again. Last initiative, well, not initiative, but announcement we have is we have our newest hire, Jordan, and Jordan is joining Nick in the Investment Operations Department.

She will be helping clients from anything to do with their investments, whether it’s trading, getting new money out, distributing money for those that are spending it, tax loss, harvesting, the list goes on.

But Jordan has several years of experience as an extremely hard worker, is also local Pittsburgh and has not missed a beat. She’s fit in culturally and work ethic wise right into EWA from the get -go.

And later on in this video, you will hear personally from her as she introduces herself. Well, next up, we have the quarter one look back, and that’s going to be Chris Pavzik joining Jameson Smith to provide what happened in quarter one.

I’m joined right now by Chris Pavzik, who’s a lead advisor on the EWA team here. And we’re going to take a look back at what happened in the markets in quarter one and then followed. I’ll be joined by Ben Rottenberg, also another lead advisor.

And we’ll take a look at our projections into quarter two. in the market. So, Chris, tell us, give us a quick background of what we saw, both in the US and international markets in quarter one. Yes, so in Q1, markets saw mixed reactions here in the US and in Europe.

There was a lot of stress in the banking system. So, in January, market was off to a good start, and then due to the banking came down a little bit in February. Seeing falling energy prices as well, and then internationally, China is further along in their business cycle.

So, they’re kind of coming out of their recession a little bit quicker than a lot of the international markets. Awesome. Let’s take a deep dive on the banking sector, I guess, both in the US and in Europe with Silicon Valley Bank and a couple of the bank runs.

We’re really the main reason that we saw the market drop in February is what a lot of experts think. But taking a deep dive into that, basically, we’re seeing what’s called a credit crunch. And so, what that means is due to the recent bank runs rising interest rates, Banks are required to keep a large portion of their assets liquid in case, you know, everybody comes to the bank and wants all their money.

That’s what causes a bank run. So basically what we’re seeing is banks are lending less money out. So there’s less money stimulating in the economy because they are trying to make sure they have that liquidity in case any, you know, depositors want their money back.

So this is the largest decrease in lending since 1973 that we’ve seen. And basically what that just means is there’s less money circulating into the economy. And this chart explains that money market assets right now are at a historic high.

So this chart explains January 2023 money market assets are at $4 .8 trillion. And this is a high since May of 2020 coming out of the pandemic or I guess in the middle of the pandemic when they were also at about that same level.

So high level people are a little bit worried about the banking sector, which has impacted the markets a little bit. But Chris, tell us what we saw with inflation and interest rates. Yeah, in terms of inflation, it did come down.

It’s dropped to 5% from in June of 2022 is at 9 .1%. Drop was expected, but inflation has not dropped as quickly as people would have hoped. So we still have seen a 25 basis point hike in quarter one as the Fed still trying to get their hands around inflation and cooling things off.

Yeah, so a lot of experts think that inflation was another contributor to the February pullback from the positive returns we saw in January. Basically, the Fed is targeting a 2% inflation rate, which we’ll talk about here in a little bit when Ben joins us.

But it’s continuing to drop, but not quite as quickly as people had expected or the Fed had predicted. So that basically is just why we saw that pullback and we are expecting you. We may see another rate hike here in the future.

But what, Chris, specifically, you talked a little about asset classes and then what percentage wise, where are we at year to date with the S &P 500 and bond aggregates? Yeah, so when it comes to the US markets, the S &P rose 6 .18% in January.

Again, like we were saying with the banking dropped 2 .61% in February and then this past month in March, up another 3 .51%. So overall for the year, we’re positive in the US. Again, February was largely in part due to the banking turmoil and the fact that inflation hasn’t dropped and the fact that the Fed did raise the rates a little bit more, 25 basis points.

But on the screen, we have a chart of all of the major asset classes, chose quarter one performance and what happened in the past year. So on the right side, you can see the one year performance almost every single one of these were in the negatives.

If we look at back at what happened over the last 12 months. And then so far this quarter, US growth stocks are the top performer at plus 13 .9% rate of return. Awesome. Thanks, Chris. Yeah, I think this really reiterates what we preach about long -term investing.

I love the analogy that every storm eventually runs out of rain, meaning that things are going to get better. They’re going to eventually go up. And that is a good segue into something we’ve been tracking the last couple quarterly videos as to, you know, are we in a recession?

Are we not? Obviously, it’s a kind of a debatable topic. But we’ve talked a lot about corporate earnings, and there’s a lot of really good things still going on in the economy with unemployment rate is low.

Obviously, there’s high inflation and interest rates as well as low stock prices. But if we look at this chart shows corporate earnings, again, that we’ve been tracking generally in a recession. Stock prices drop over 20 percent, and then corporate earnings also drop below 20 percent.

And what we’re seeing here, corporate earnings have began to fall. They were positive at the end of 2022, but corporate earnings right now are down about 2 percent. So still negative, they’re trending downward, but still not at that 20 percent drop that we generally see during a recession.

So that was a look back on what we saw in quarter one. Thanks for giving us the insight, Chris. And next up, we’ll have Ben Rottenberg joining to project out what we’re looking at in quarter two. So now I’m joined by Ben Rottenberg, another advisor on the EWA team here.

Now that we got all the data of what happened last quarter and quarter one in the markets, we’re going to take a look at what experts are seeing as we head into quarter two of 2020 -2023. So the first big talking point, which we’ve already hit on is the issues in the banking sector and the credit crunch.

So like we said, banks are making it a lot harder to lend. They’re keeping more money in cash and there’s less money going out into the economy. So if we think about what this means from a macro economic level, companies that came into the down market beginning of 2022, basically the favored big quality stable companies that had a lot of cash on the balance sheet.

And if we think about think of like the tech sector, for example, which is what trick. the Silicon Valley bank run. Tech, the last year, they haven’t been able to, like I think of a tech startup, they haven’t been able to get funding from private equity, from VC funds.

So they’ve been spending cash that is in their bank account. And if that eventually runs out, Ben’s going to talk about what we’re going to see over the next six to 12 months. But as that cash begins to run out, if they’re not able to go to the bank and get a loan, this is really, like I said, going to favor companies that have a lot of cash on the balance sheet and that are very quality companies versus the smaller startup types could potentially see some issues if they are going to have a cash problem.

So Nick’s going to join us at the end here. We’re going to talk about specific portfolio recommendations and some of the moves we’re making. And like we mentioned, like we were talking about with Chris, money market assets right now are historic highs.

So what does that mean for stock returns? Yeah. So speaking broadly about money market asset funds and where we stand right now in 2023. It’s important to take a look back to see how far we’ve come. So looking at this graphic here, really in the last 20 years, we’ve seen $2 trillion worth of increase in money market asset funds from 2003 to 2023.

And the important factors to note here is, number one, have we hit a peak in money market asset funds, or are we due to see more in the next coming months? An important trend to analyze really over the last 20 -year period is when money market assets have hit a peak, equity returns have been very, very strong.

So looking at the right -hand side of this graphic, again, money market assets peaked in January of 2003. The following three years after that money market asset peak, we saw 16% equity returns. Moving forward again in 2009, again, money market assets peaked 19% equity returns in that three -year period.

And then as we’re seeing now from 2020 to current day 2023, again, double -digit equity returns. So the question becomes, have we hit a peak in money market asset funds, and if so, what can we expect from equity returns moving forward?

Interesting. That’s really, really insightful. But obviously, if we are at a high, the outlook would be we’re expecting a trend upward in equity returns, just like we’ve seen in history. So Ben, outside of the banking sector is a big discussion point.

And then outside of that, we have inflation rates and interest rates. In the quarter one, we saw a 25 basis point hike from the Federal Reserve. What is that leading to the rest of the year? What’s the outlook on the rest of 2023?

Yeah, so judging by recent comments from Jerome Powell, who’s the chairman of the Federal Reserve Board, we do expect to see another interest rate hike shortly. This is mainly due in large part to reduce inflation.

We saw inflation hit a high of just a shade over 9% in June of 2022. And the question then becomes, was that the peak of inflation? And are we able to reduce it from there? So the Federal Reserve has set a target inflation rate of 2%.

And so the question becomes, James, is we were at 9% inflation, we want to get to 2%. How quickly can we get that 7% drop? Generally speaking, getting from peak inflation to a target inflation, that could take anywhere between 18 months.

So if we think that the inflation peaked in June of 2022, we could expect to get to our target inflation rate of 2%. Some are around the end of 2023 or the beginning of 2024. Yeah, so let’s take a look at this chart.

This shows just historically from that peak inflation, which again would be June of 2022, how long does it take to get under 3% and the historic average is almost 18 months. So just like you said, Ben, that would lead us to believe that.

Okay, that’ll take us into the end of 2023, but if the Federal Reserve is targeting 2% inflation rate, That’s going to take longer than 18 months, which leads us to believe that this may take into early 2024 to get these rates to continue to come down.

Knowing that historically it’s taken about 18 months to go from peak to under 3% inflation, what’s our outlook on how that will impact? Let’s start specifically with US equity markets. What are we seeing with historic trends in the S &P 500 that we could outlook going forward?

Generally speaking, once inflation hits its peak, the next 12 months of equity performance, specifically in the United States market, has been very strong. So taking a look at this graphic here, what are returns following peak inflation rates?

You can see on the right side here, once inflation does hit its peak, what equity performance has done in the next 12 months, drawing your attention specifically to March of 1980, where we saw very, very high inflation, the next 12 months saw a 40% return in the United States equities.

Looking specifically at June of 2022, we’ve seen just above a 6% return in the United States markets, again, just from that peak inflation. So all in all, things are trending in the right direction. Just looking at historic data, we should see an equity recovery in the next 12 months, especially as Fed, like we said, by early 2024, if the Fed begins to drop interest rates, that should just ideally spur economic growth within the next 6 to 12 months.

We’ve done some content. I’m thinking of a video specifically looking at the correlation between US stocks and international stocks. So generally speaking, they tend to work almost inversely. So when US equities are at a high and then they drop, we see international equities then outperform historically.

What’s the outlook on international stocks over the next 6 to 12 months? Yeah, just extrapolating on the point you just made, because it is so interesting. this graphic, again, comparing the rolling 10 -year performance returns from international equities and United States equities, I think it’s really fascinating to see this is from the years of 1973 to 2023, when United States equity returns were under 4%, 100% of the time, so 45 out of 45 times, international returns outpaced United States returns.

Like you said, generally speaking, when international equities are up, United States equities could potentially be down and then vice versa. What does that mean for 2023 and quarter two moving forward?

There’s still a lot of political strife going on in Europe, particularly with the Russia -Ukraine conflict. While we’re not necessarily predicting what’s going to happen in European and international markets specifically moving forward, not recommending any huge changes mostly.

holding current positions, not looking to transition too much inside or outside of international equities. So basically looking at these trends would be reasonable to think that generally we would make a big shift into international stocks right now, which we’re not going to do.

We’re comfortable where we’re at in portfolios. But the reason being is it’s kind of a unique time with there’s a war with Russia and Ukraine. A lot of the European countries are energy dependent on Russia, which is influencing the market.

But also then the banking sector, what we’ve seen in the US has also been happening in Europe as well. So it’s a lot of the same problems along with the Russia, Ukraine, war is leading us to believe that we’re not making a big shift into international long term over beyond the next six to 12 months.

Maybe we see some sort of correlation just like the chart we looked at, but our outlook is in the short term, no major, major moves. Well, thanks to Ben Ruttenberg and Jameson Smith for providing the thoughts on quarter two looking forward.

Next up, we’re going to talk about some frequently asked questions we’re getting from clients and just in general, the consensus out there of some widely debated topics. So Jameson, tell us about the just US currency.

What happens if something changes here? Is it good or bad? There’s been a lot of questions been receiving specifically on this. Yeah, we’ve gotten a number of questions from clients asking what would happen to the US economy, their financial plan, their investments, if the US dollar is no longer the dominant currency in the world, which could happen.

Did a ton of research. We’re actually going to do a standalone blog on this topic because it’s a pretty extensive, widely debated topic, but the exorbitant privilege is an economic theory that’s basically debated on if there is a benefit to the US economy or not being the dominant currency, widely debated topic among economists.

And one argument is that that privilege actually does not even exist and it’s slowed down the US economy for a number of reasons. reasons that a lot of developed countries, some people think have actually grown faster than the US because they’re slowed down by being the dominant currency.

So there is risk with this, but that is one outlook is that it actually may help the US economy because one reason would be exports. It would be much cheaper to do business in the United States if other currencies are worth more than the dollar.

So countries would come to the US for US exports, which would help spur the economy. Another thing to think about is globalization that has occurred with companies in the last few years actually helps this as well.

So we think about globalization, that is the spread of technology, goods, jobs around the world, meaning that a company can be, let’s just hypothetically based in the United States, but also have employees around the world.

They’re able to do business all over the world now with technology. So why that matters is if we think about companies, these big companies that are doing business in the US, but also around the world, they will see a benefit if this.

US dollar is not the the dominant currency because they’ll it’ll be cheaper for them to Do business in the United States, but then on the flip side companies that are primarily only based in the United States They wouldn’t really have a benefit, but they could benefit from exports of other countries buying from buying United States products so from a from an investment standpoint many companies have adopted and They are very globalized anyway, so that could be not really a huge factor with a lot of companies but another thing to be just thinking through this the a lot of people have compared this to the UK the pound in the 1950s went was a dominant currency and then there is a the Suez canal crisis that led to that pound Not being the dominant currency anymore and after doing some research To the UK at the time And if we think about the UK economy from then until now that actually really didn’t even hurt them They still continue to grow you the UK stocks continued to grow So all in all it’s a this is a debated topic We’ll publish a blog in more detail But there are a lot of theories and economists that think that this will not hurt the US and actually could help them in the long term Definitely a wildly debated topic James.

Thank you for sharing your thoughts look forward to the blog one of the thing I’m going to add to the US and the currency of the economy is a lot of Clients are worried rightfully so about the debt levels that are approaching about 31 and a half trillion dollars of assets, so This in itself is its own topic, but just to address this one one thing I heard from a very wise mentor of mine is that there’s also very little talked about that if you add up the individual assets of people in the United States that these assets are Four times the amount of the the US debt so when you look about the the power of the United States and the economy and the individual wealth of the US citizens, that is a comforting fact.

The debt is still a crisis, figure it out, but this fact was definitely mind -blowing for me. So, Jameson, that brings us to another hot topic right now, which with the collapse of Silicon Valley Bank and some other banks under pressure in the US, tell us about just safe assets.

We just did a podcast on this that we’ll reference as well. That’s going to be our second episode of the Finlet by EWA podcast, but give us a high level of safe assets right now in the US. Yeah, so as you just heard us talk about in the previous section, a lot about what’s going on in the US economy and with banks in general, a lot of people are asking.

So, we fundamentally believe long -term, Long term time horizon money should be invested in equities in the stock market. But anything short term within the next five years, a lot of people, number one, are a little bit scared of keeping money in banks, especially over the $250 ,000 FDIC insurance limit.

And so one planning consideration that we’ve done with some clients is taking that money and putting it into a brokerage account with Fidelity and then investing in US Treasuries, which right now up to five years are paying pretty high interest rates, looking at just historic interest rates.

So anything in the next, any money that’s needed in the next one to five years, we could ladder it into different types of treasuries with different durations to help get a higher interest rate than what would be in the bank account.

And on the flip side, would also be safer in a sense that Fidelity will ensure up to $1 .9 million of cash versus the $250 ,000 in a bank account. So from a security standpoint, it could be a little bit safer as well.

Absolutely. And then on top of that, they have excess insurance of up to $1 billion per client in securities as well. So any other questions on that, please reach out and please reference the episode number two on the podcast.

Next up is Nick Stonecipher and Stephanie Bogdan that are going to address the EWA portfolio and some strategic shifts that are happening in the asset allocation overall. I’m Stephanie Bogdan, COO of EWA.

I’m here with Nick Stonecipher, our portfolio manager, here to talk a little bit about our portfolio, upcoming changes to our portfolio allocations and just a little bit about the market conditions in general.

So again, been a little bit of a volatile quarter as everybody’s been seeing with the market as well as changing rate environment. So I’m going to turn this over to Nick and he’s going to give us a little bit of a snippet about the difference between momentum in the large cap space versus quality in a large cap space because that is a hot topic for this quarter.

in terms of what’s been going on with inflation and the Fed trying to bring things down. So go ahead, take that away, Nick, and give us your insights. Absolutely, happy to be here once again and provide some market commentary and updates on how it relates to our portfolio moving into quarter to 2023.

So yeah, as Stephanie mentioned, we’ll take a look at some of the moves we’re making in our portfolio, quality factor as well as momentum factor and what that means moving forward. But to, I guess, kick this off, we’ll take a look at what did we see in quarter one?

Actually, with all the volatility that we’ve seen over the past few quarters, quarter one across most asset classes was showcasing fairly solid returns. Now granted, inside of the wrapper of rolling one year, most asset classes are still down, but we did finally see some positive growth in the market.

across most asset classes in quarter one, which was certainly positive. For long -term investors, we’re still recommending stay the course with equity exposure. We’re not moving out of the markets. We’re not taking flight to fixed income and sacrificing your equity sleeve.

But so yeah, we’re still long -term bullish and we’re gonna remain optimistic even in the face of, you know, a lot of people wanna talk about potential recession looming. We’re still long -term optimistic on equity exposure.

Absolutely, and I think the biggest factor is that our driving the market right now is sentiment around inflation. We’re still targeting an inflation rate, the Fed is that is, right around 2%. So we still have a ways to go there.

It takes some time for that to happen. So we’re really looking at potentially that coming down within that range, probably somewhere in the earlier part of like 2024. So not really sometime anytime soon.

Can you talk a little bit as to how that affects the stock market? So if we see rates continue to rise, inflation’s coming down, but not extremely rapidly. What does that do to the large cap equity market?

To kind of kick into what we’re looking at and some of the changes we’ll make in the portfolios moving forward in Q2, but also something we anticipate we’ll keep in the portfolio for the next few quarters at least as we monitor and see what’s happening in the market moving forward for 2023.

But typically when we talk portfolio discussions and some of the moves we’re looking to make, I know a lot of times we discuss the business cycle and where we’re currently at. So you have expansion, which is early cycle, mid cycle, and then you have contraction, which is more late cycle into recession.

Right now in the United States, we’re firmly in the late cycle. I wouldn’t necessarily say we’re in a full on recession just yet, but so how does that relate to the portfolio? Late cycle, business cycle, more so a contractionary.

phase. So a natural kind of slowing down. Absolutely. Absolutely. So for us, we’re well positioned right now in the defensive sector and we have been. So minimum volatility holdings, both US and abroad internationally.

So typically defensive sector performs pretty well in contraction periods. So in late cycle as well as in our session. But one of the big plays we’re looking to make this year or this quarter is moving some into some of our exposure into quality stocks and quality stocks in general hold up really well in late cycle and into a recession.

So we’re looking to get out ahead of that and incorporate some additional quality investing into our portfolio. But we’ve already been pretty well positioned for this and we continue to maintain our allocation as is as it relates to the defensive sector.

Right. So our clients can anticipate, you know, everything basically staying the same within the portfolio in terms of the allocation to large cap, mid cap, small cap, international and so forth. However, within the large cap sleeve, we’re specifically going to make a small shift.

So about 50% of what is in momentum, tickers are MTUM will be shifted into quality, as you mentioned, QUL. So that’s actually what clients will see happening when we process our quarterly rebalance, which is coming up here in the next week or so.

So our clients can anticipate seeing that shift happening on their next account statement. To kind of break down what the shift is looking like, as Stephanie mentioned, we will be across the map for all of our qualified portfolios making one big switch, one big change for quarter to.

And again, this is a move that we’re making and we intend upon keeping for the near term. So it will be cutting 50% of our current momentum exposure and moving into quality stocks, more so a quality exposure.

So to briefly break down, you know, what these buzzwords are, momentum versus quality. So the momentum factor, we still believe in it, and it’s still something we intend to maintain in our portfolio, but we are looking to cut some of the exposure there.

So what momentum investing is, is it’s money managers taking a look at short term windows, typically three to 12 months, and they’re really trying to go all in on stocks and on companies that are riding a hot wave that are performing well in those short term segments.

So by its nature, momentum is, if these companies, if these stocks are performing well, let’s overweight into those and try to minimize some of the exposure to the poorer performing companies and stocks in large cap.

So we still believe in momentum investing, but typically momentum investing in that factor in general is best served and suited in more of an expansionary rate. or some mid -cycle dynamics instead of late cycle.

So that’s where we’re gonna pull some of the quality stock investment from, from that momentum factor. So you will see a decrease across the board in the overall weighting and momentum, but we’re still absolutely bullish on equity exposure and we’re still going to maintain momentum investing in your portfolios.

And I think it’s also important to note that the shift keeps the risk or standard deviation of the portfolio in line as well. So we’re always looking to get the best risk adjusted return for our clients as it, as it’s fitting to them within their risk tolerance and according to their goals, of course.

So definitely look for, you know, those changes to be implemented as of late, late, excuse me, the next statement cycle. And then also you will be getting your quarterly performance reports shortly after that, which will reflect these changes.

So if, again, if any questions always give your advisor a call, feel free to reach out to us here at EWA and we’ll be happy to answer your questions. Hi, my name is Jordan Fadasco. I am the Director of Investments here at EWA.

I graduated from Duquesne University in May of 2022. My primary major is finance, secondary major is mathematics, and I have certificates in quantitative finance and actuarial science. I started in the industry in 2021.

I was working alongside Stephanie. My role here at EWA involves client service requests and investment operations. So ranging from new account openings, asset consolidation, portfolio management, and trading.

I’ve now been at EWA for a little over two months now. It has been such a great experience learning and working alongside Nick. He’s so intelligent and I’ve enjoyed absorbing his knowledge and expertise.

I’m so glad to be a part of this team and to be here at EWA.