Insights

…grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference. – Reinhold Niebuhr In a year that had already witnessed a noticeable uptick in volatility compared to the prior two years, the ongoing back and forth regarding looming tariffs, culminated in what has been described by many pundits as some of the most aggressive levies introduced since the 1890s. While the policy announcements themselves have been well telegraphed, the scope and scale are considerably higher than what was expected, as evidenced by the market’s harsh response. Rather than imposing tariffs based on pre-existing trade protections with our counterparties (i.e., existing tariffs, subsidies, or other barriers to entry) the formula to arrive at the tariffs focused more on the trade imbalance between the two nations. As the largest economy in the world, trading with nearly everyone, many of which are much smaller countries/economies, this was ripe for distortion. For those who have been long time followers of President Trump’s beliefs this should come as little surprise, a recent piece in the WSJ captures quotes dating back to the 1980s which share his perspective that the US was drawing the short straw and other nations should have to pay to access our robust and dynamic economy.  Going back to the days of the earliest trade when men roamed the earth hunting for food there has always been some degree of mercantilism whereby one group looks to accumulate power and wealth and protect their own interests, but in the Post World War II era, it’s inarguable that the US has benefited enormously from their embrace of “free trade” and capitalism. Our economy has grown a hundredfold since 1950 when it was approximately $270BB. The naysayers will point out that back then the US accounted for about 50% of global GDP, peak wealth, or about twice what it is today, but that fails to account for the fact that much of the world having fought the theatres of war in both Europe and the Pacific was in ruin and needing to be rebuilt. There is a misconception that both NAFTA (1994) and China’s entry into the World Trade Organization (2001) were the watershed moments leading to the hollowing out of the US’s manufacturing base, but in reality manufacturing employment had been in decline going back to 1950. At its peak US manufacturing workers accounted for about 30-35% of the nonfarm workforce, whereas today that level sits at around 8% where it has hovered for the last 15 years. In 2000 it was just 15% so still very much the minority. This long-term shift in the mix of the US economy where services now account for a disproportionate percentage of GDP and the workforce overall is the result of a far more skilled workforce driving both innovation and productivity. Surely some manufacturing jobs have left based on the focus on corporate profits, but some of the change relates to comparative advantage and inexpensive labor. It’s not to say, that we should look to push all manufacturing to the most “efficient” destination, surely it’s important to maintain control of manufacturing of critical components to defense, information technology or medicine, but it seems unrealistic at best to expect that we can produce enough and at reasonable costs to satisfy our insatiable demand. We are after all only about 5% of the world’s population, though we account for 25% of global GDP. Talk about punching above our weight. Aside from the logistical challenges that reshoring/onshoring pose, not to mention the timeline associated with the payback for such efforts, the willingness or lack thereof on the part of the business and consumers alike beg the question of whether or not it is worth pursuing. Considering our societal tendencies for policy to reverse course every 4-8 years with Washington’s constant changing of the guard which has grown even more partisan in recent years, it’s hard to envision the private sector making these investments where there may be little or no long-term benefit to the majority of stakeholders, mainly consumers and shareholders alike. If we are being intellectually honest, as we have seen with the likes of Amazon, if automation or robotics can do the work better than human beings, who need benefits and breaks, the case for this policy bolstering manufacturing employment seems weak at best. That’s one of the key pillars of the artificial bull case after all. In addition, there is clear evidence that economies which produce a disproportionate amount of goods versus services are much more susceptible to the boom bust cycle as demand for goods themselves is far more cyclical, look no further than Japan and Germany whose export driven economies have largely languished for the last 20 years in the slow growth/no growth period in the aftermath of the Great Financial Crisis. Let’s put all this into context, according to the World Trade Organization as of 2023 the US had a trade weighted tariff rate of 2.2% lower than nearly all countries around the world. For a country that is such a massive importer one might argue the low levels fostered healthy trade relations with some of our key allies and admittedly some frenemies or altogether poor bedfellows. With these sweeping tariffs, some as high as 49%, this marked a significant shift in policy where the aforementioned tariff rates will approach 30%, having a significant and lasting impact on consumers and businesses alike. Whether you want to describe a tariff as something different than a tax seems to be semantics, the added expense is rarely fully eaten by the producer. In the aftermath of the pandemic and the correspondingly high inflation due to excessive fiscal and monetary policy along with supply side disruptions, its doesn’t require too much detective work to know the average American is exhausted or outraged by higher prices. The tariffs will only add to the price at the register unless we all of a sudden find the private sector extraordinarily benevolent, willing for much if not all of the added costs to result in shrinking margins. By now you have surely figured out why there was such a market kerfuffle, but let’s make sure to fully examine why the result was to shave $3 trillion of market value off of US stocks in one day, which supposedly is the equivalent of 5 years’ worth of tariff receipts. First and foremost, despite opening the year with an economy bumping along with real GDP around 2.50% we have seen a sharp decline in the soft data, where surveys from the confidence board and University of Michigan plumb levels we have not seen going back to the pandemic when fears of a severe respiratory infection and 10% unemployment were front of mind. The hard data has been only a little better as labor has held up thus far, but as we have seen in Retails Sales there are signs that the consumer may be tapped out or growing wearier. With GDP likely to be between negative .5% to positive .50% for Q’1 that it’s like slamming on the brakes while driving in the passing lane. No surprise that there may be a real sense of whiplash. As the odds of a recession have risen, something the President himself acknowledges, it’s safe to assume expectations for earnings growth this year and next seem to be slipping away. With valuations stretched, there has been little margin for error and it’s those stocks, some of the most expensive that have felt the impact that much more acutely. This is why we have heard the “Mag 7” referred to as the “Lag 7” here in early 2025. Now you might be thinking this is likely transitory, a word that is making its rounds again after an ill-feted debut to Wall Street vernacular in 2022. If we are in fact, we are likely to see a shift to a more capital-intensive economy, is it reasonable to justify such high multiples which made more sense in an asset light, intangible heavy ecosystem? It seems hard to justify, from this vantage point. Hopefully, we will avert a recession, but that’s not to say it is an all-clear sign for the stock market. Earnings recessions, like that of 2022, may not lead to large scale job losses and disinflation, but increase the prospects for a bear market. There is a risk here that those fat margins whither because of trade frictions and lead to something more pernicious like a repeat of the stagflation episode of the 1970s and early 1980s where higher inflation sucks the oxygen out of the room leaving little room for real growth. So, what is an investor to do… Well for one thing, maintaining discipline in the form of diversification has helped and likely will continue to, with investors who have roughly half of their portfolio in overseas stocks and fixed income, the positive returns in these two areas have been able to offset some of the decline in US stocks. Incorporating other assets like Treasury Inflation Protected Securities (TIPs), gold or real estate may help mitigate the risk somewhat but as we have seen in the past times of market angst correlations often increase, giving the appearance there is no place to hide. Eventually markets will calm down, as the last of the sellers capitulate, though that process can take weeks or even months to play out. I’ll leave you with some quotes from some of the smartest minds on Wall Street to ponder as we head into the weekend. “Sometimes the share price of a firm tells the CEO of that firm nothing about their company they didn’t already know. Other times, the stock market takes on the role of “active informant.” Stock prices predict investment because they provide business managers with useful information about the future. I think now is probably one of those times. -Neil Dutta, Head of Economics, Renaissance Macro “We all know the math: the stock market has historically grown by 10-11% over the long run but only gone up 60-70% of the time. That means it has corrected 30-40% of the time. Surviving those drawdowns is the price of admission.” -Jurrien Timmer, Director of Global Macro at Fidelity Investments “We are a great nation, the leader of the free world. Yet we squander our political power to appease the textile industry in the Carolinas! We should instead be setting a standard or the world by practicing freedom of competition, of trade, and of enterprise that we preach. -Milton Freidman This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice. Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, www.adviserinfo.sec.gov. Past performance is not a guarantee of future results.

We have all heard the adage… “Don’t fight the Fed.” That was sage advice back in 2022 as the Fed embarked on the most aggressive tightening cycle dating back 40 years. That year both stocks and bonds withered, ending the year down by double digits, you would have to go back to 1941 the last time both asset classes showed losses for the year when you use the 10-year Treasury as a proxy for the bond market. Now with the pendulum shifting from tightening monetary policy to “easier money” everyone is trying to understand what that means for the economy and their portfolio in the months and years ahead. Lately the narrative has shifted a bit, there is a growing chorus that believes that monetary policy and by that we are really referring to the Fed’s setting of overnight interest rates in an economy dominated by bits and bites versus the more tangible attributes of yesteryear has less impact today. Or perhaps, it’s those long and variable lags Milton Friedman was referring to as higher rates are still making their way through the economy. If that is the case it stands to reason that even if liftoff is September it may take time for lower rates to exert their influence. In this piece we are going to explore rates from a few different perspectives. One thing to make clear, we are not market timers and market rates are a byproduct of not just Fed policy, but numerous other factors, like growth and inflation expectations, fiscal policy, the state of geopolitics etc… We can use the past as a prologue have been taking and will continue to take some steps on behalf of our clients whose assets we are managing for important life goals.  Equity Investing U.S. Stocks When the Federal Reserve cuts interest rates, it typically has a positive impact on US stock markets. If that is to play out again now, making sure that your portfolio is allocated properly when the Fed is inclined to cut rates is critically important. Here are some key points on how and why this occurs: Lower Borrowing Costs : Reduced interest rates make borrowing cheaper for companies and consumers. Newly lowered rates can lead to increased spending and investment, which often boosts corporate profits and, consequently, stock prices. Increased Consumer Spending : With lower interest rates, consumers may be more prone to take out loans for big-ticket items like houses and cars. Increased consumer spending can drive higher sales and earnings for companies, positively affecting their stock prices. Improved Corporate Earnings : Companies with existing debt benefit from lower interest payments, which can improve their profitability. This can lead to higher stock valuations. Shift from Bonds to Stocks : Lower interest rates typically lead to lower yields on bonds. Investors seeking higher returns might move their investments from bonds to stocks, positively impacting stock prices. Economic Confidence : A rate cut is often seen as a proactive move by the Fed in support of the economy. This can boost investor confidence, leading to increased buying activity in the stock market. Sector-Specific Impacts : Certain sectors, such as technology and consumer discretionary, often benefit more from lower interest rates due to their reliance on borrowing for growth and consumer spending patterns. Sectors that are highly capital intensive or with significant fixed costs stand to benefit more than asset light business historically. Financials tend to see their net interest margins or “NIM” shrink as rates come down, though a protracted period with an inverted yield curve may be less make lower rates less of a headwind if the curve returns to its normal sloping relationship where longer rates are higher than shorter rates. Manufacturers could see a benefit if lower rates mean a lower dollar making their goods more competitive when it comes to global trade. Small Cap Stocks With the incredible rise of the Magnificent 7 stocks, small cap stocks have been overlooked. A change in outlook by the Fed may create an environment for small cap stocks to continue to climb. Lower Borrowing Costs : Small-cap companies, which often have higher debt ratios than larger companies, benefit considerably from reduced interest expenses when rates are cut. Lower borrowing costs can improve their profitability and support expansion efforts whether it be adding to their workforce or expanding research & development. Growth Potential : Small-cap stocks are typically seen as growth-oriented investments. Afterall, companies that are now among the largest companies in the world like Amazon, Apple, Nvidia and Microsoft all started as small caps! Lower interest rates can spur economic activity, benefiting smaller companies that may be more agile and able to capitalize on new opportunities. Increased Risk Appetite : Rate cuts can increase investor confidence and risk appetite. Investors may be more willing to invest in higher-risk, higher-reward small-cap stocks during periods of lower interest rates. Access to Capital : Lower interest rates can make it easier and cheaper for small companies to raise capital, whether through loans or equity offerings. This can help them invest in growth initiatives, leading to higher stock prices. Overseas Equities Yield differentials may narrow : Foreign capital has been lured into US assets for many years dating back to the European Debt Crisis in the early 2010s. If US interest rates look less attractive by comparison than foreign capital may be onshored and find its way into local stock markets. A weaker dollar may ease inflation and lower borrowing costs : A more common phenomenon in the emerging markets where consumption of commodities represent larger percentages of overall spending may allow for capital to be directed more productively and as foreign companies and countries often offer dollar bonds to institutional investors to hedge the currency risk the cost of that interest could drop if the local currency strengthens vs. the dollar. Foreign assets may offer a store of value : Should the dollar weaken, it stands to reason that it’s losing ground to some other currency; that relationship can serve as a hedge to offset the diminishing purchasing power of local assets. After a long run with a stronger dollar, if there is a secular shift underway that will unfold over the years ahead, having some additional exposure aboard would be valuable from both a risk and return perspective. The combination of more attractive valuations should provide a little extra incentive to increase the ex-US holdings in the portfolio, even if it is just at the margins. One thing to keep in mind, in the past monetary policy has generally been pretty well coordinated, but if that is to change in the years ahead it will be that much more important to have some professional oversight to help navigate what could result in a little more short-term volatility. Stocks historically have fared well when the easing cycle begins, though it’s not always the case, especially if the easing is in response to a shock to the economy or deteriorating fundamentals. The latter does not appear to be the case today though there are signs of continued cooling in the labor markets where with the former, a shock, well, that’s tough to predict, after all it wouldn’t be considered a shock. It’s those known unknowns or unknown unknowns, that get you in trouble to quote the late Donald Rumsfeld.

As has been the case for 3 years running, August has been a difficult month for the markets and as we type, we are in the midst of a sharp increase in volatility and the selling pressure that often accompanies it. The proximate cause changes from year to year, in 2022 it was Fed Chairman Jay Powell’s “pain” comments about what lay ahead for both Wall Street and Main Street, while 2023 was a concern that the economy may in fact be overheating and the next move for the Fed was perhaps another hike. In 2024, it’s been about rising unemployment and the Sahm rule, along with some other data points that show the economy is slowing.  While all real concerns, then or now, generally the market follows a familiar script where emotion meets some disappointing data results in a narrative shift and the worst possible scenario comes to the fore. A weekly unemployment claims report on Thursday morning that showed higher than expected new filings, was followed by a disappointing Manufacturing ISM survey which showed that part of the economy was contracting, though interestingly enough the NonFarm Payroll report for July, released on Friday, saw employment increases in construction, transportation, and warehousing. The “Jobs Report” as it’s often referred to, is an important data point, one of many, and the combination of a lackluster headline number (114K new jobs versus 175K predicted) along with 29K of downward revisions for May and June left people worrying that the labor markets were rolling over. Aside from the tepid job growth (growth being the operative word here) itself, a decrease in hours worked and an increase in the unemployment rate from 4.10% to 4.3% seemed to be enough to get the market convinced that it was time for the exits. We have had a couple questions related to the report, as you might imagine, one of the more common inquiries is how are we adding jobs yet seeing a jump in the unemployment rate. That phenomenon relates to an increase in the participation rate where more people actively seeking employment versus prior months means a larger pool of workers came into the survey vs. the total number of new hires. There are other wonky features to these reports, the other reports from the Bureau of Labor Statistics where they try to smooth out the data. The summer and winter months tend to be rather noisy related to weather patterns along seasonal employment trends (i.e. new college grads entering the workforce or students working summer jobs.) There has been much hand wringing about the Fed behind the curve, but they have no record of ever being accurate ex ante, we could be talking about Bernanke whistling past the graveyard when referring to the subprime risks being contained back in 2007 or the March 2022 liftoff of the most recent tightening cycle where inflation was already well on its way to peaking at 9.2% later that same year. The Fed, like all of us are human beings and prone to the same failings and we are somewhat misguided to put them on a pedestal as some clairvoyant policy mechanism. James Mackintosh’s piece in today’s Wall Street Journal does a nice job in summarizing several instances where market structure contributed to the big market moves in 1987 and 1998 where an otherwise lousy headline may have just meant a day’s decline morphed into something a bit bigger. It is safe to assume the economy has slowed down from the blistering pace we saw in 2021 and 2022 and saw some hints at in the back half of 2023, but we should expect the economy to go through periods of acceleration and deceleration from time to time. You’ll hear the word recession even more and more, partially because it seems intellectual to seem bearish, but the fact is there is always the possibility of a recession on the horizon whether due to an exogenous shock or the ebbing of the business cycle as animal spirits are exhausted and the credit cycle shifts. We sympathize with those of you spooked by the chatter about a more uncomfortable period ahead though there is no guarantee that is what transpires. In the last 48 hours, you may have heard multiple references to the aforementioned Sahm Rule which suggests that by the time the unemployment rate has jumped by .50% in the span of 6 months we are already 3 months into a recession or Goldman Sachs ratcheting up the prospects for a recession in the next 12 months from 15% to 25%. Ms. Sahm, an economist, acknowledged the limitations in her model and the obvious fact that we are at a time where there has been a good deal of distortion related to the pandemic and its aftermath, especially related to the unprecedented policy response. You may recall hearing about the inverted yield curve’s undefeated record when it comes to predicting recessions back in 2022, though 24 months later it seems that record may no longer be unblemished. To quote George Box, the famed British statistician, “all models are wrong, some are useful.” There are a number of important data points ahead, and while the next Fed meeting is not until September 18th, if the policy makers see a reason to act prior to then, they will. It likely will be in response to the “growth scare” versus proactively addressing pernicious events a few quarters out but we will have to wait and see. Further evidence of the market wanting to look for the negative news flow, it shrugged off the Service Sector ISM which accounts for 70%+ of the economy and was firmly in expansion mode. As long term investors, it’s best to take any and all data in stride and consider it in a broader context, the bright spot is for investors with diversified portfolios, the last month you have seen the benefits of holding bonds to offset the equity declines, something that we didn’t see in 2022 when both assets classes ended the year down sharply. Over that same timespan we have seen sharper declines in technology or technology adjacent industries (communication services, and consumer discretionary sectors) whose stocks had gone up an eye watering 48% since last October when looking at the Nasdaq composite. Despite the selling pressure many stocks still appear fully if not overvalued given the fundamentals, so it does not appear a massive snapback rally is in the cards as was the case in 2020 or early 2023 when various ratios came back to levels in line with historical averages. Your instincts may suggest to sit this one out and go to the sidelines for a little, but some of the markets’ better days are often in the midst of volatile periods like this and after having already realized some of the declines you may very well be making a poor decision to compound those losses. Citing a slide from our recent market update, courtesy of the folks at Schwab & Bloomberg, if you missed the ten best trading days over the last 2520 days (20 years) you would have captured only 60% of the market’s long run return. Actions like this have a meaningful long-term impact on your results. It’s not to say times like these are to be dismissed, and you should go about your summer plans. And in one of the few instances where I disagree with Warren Buffet who in 2015 said “if you are worried about corrections, you shouldn’t own stocks.” It’s okay to be worried, you have worked hard for your money and have goals associated with it. Perhaps better stated he might have said that if a correction makes you want to sell your stocks, you may need to revisit your allocation. Periods of episodic volatility can be extremely valuable in that they allow you to be better informed of your risk tolerance. If you feel like the last few weeks are untenable, be sure to schedule some time with your advisor to review the merits of your approach or any change that may be appropriate. Sources: Bloomberg, Charles Schwab & Co, Barron’s, WSJ, CNBC

The death of famed psychologist Danny Kahneman earlier this year meant countless tributes for a true intellectual giant. His work on prospect theory earned him the Noble Prize in Economic Sciences in 2002. The Princeton professor whose exacting attention to detail was borderline pathological, along with his lifelong academic partner Amos Tversky, Richard Thaler and Cass Sunstein made countless (enormous) contributions to the field of behavioral science for the last 60+ years. Their work has helped millions of individuals, organizations, and policymakers alike, many unwittingly, make better decisions when it comes to economic matters and their financial affairs. What is behavioral finance or behavioral economics as it is often referred to? It is a discipline that combines elements of psychology and economics and looks at how the two interplay and impact real world decision making. Going back to the days when man stopped dragging his knuckles when he walked, it was assumed that he acted rationally, especially when it came to important decisions, but time and again it was clear that people’s biases, referred to as heretics, are capable of influencing their choices resulting in suboptimal outcomes more often than we’d like to admit.  While there are many of these biases, in this piece we will stick to a handful so as to get a better sense of what may be getting in the way of you acting more like Mr. Spock, the Vulcan whose calm demeanor saved the Star Trek crew from peril time and again. As we have watched Nvidia’s ascent, which at times is both breathtaking and terrifying, there may be no better story that exemplifies some of these facts today. Don’t let the fear of missing out or FOMO cloud your judgment. Let’s dive in. Endowment Effect: We are all guilty of thinking something that we own is more valuable than the actual markets price, whether it’s a used car or those shares of IBM that have been accumulating dust in your portfolio for the last 20 years while the rest of the tech sector has gone up 3-4X in that time. Bottom line, don’t fall in love with your stocks, save that devotion for your spouse or hobbies. Sunk cost: Similar to the endowment effect resulting in holding on to less than stellar investments, and worse, adding to them on the basis of the fact you have already committed some capital and walking away now would mean locking in those losses. Good investors/traders cut their losses and move on when it is clear that they have made a mistake. That’s okay, it’s a learning experience, no one bats 1.000 in the world of investing. Risk Aversion: We feel pain twice as much as we enjoy our success, this natural wiring may be good for our survival instincts but wreaks havoc on our investing. The result may be in the form of significant opportunity costs or ill-timed decisions in the throes of market volatility. If you find yourself getting nauseous when markets get jumpy, do yourself a favor and skip logging on to look at your balances for a bit. Recency Bias and the Gambler’s fallacy: Perhaps one of the reasons that markets in China have not experienced the same long-term success that we have witnessed in the US despite a truly remarkable economic advance, investors look at the markets much like a casino versus a source of wealth creation. With this heuristic, the notion that a recent random event is likely to impact the future is foolish, the odds of a coin landing on heads or tails are 50% even if the last five flips have all landed on heads. What happened yesterday generally has little bearing on what will happen today and that’s okay. Availability: One of the reasons we have gotten ourselves into this political quagmire, rather than do the work and the research involved to mine the data, here people’s laziness is about simply recalling recent information not necessarily the facts. Interestingly enough, bad information sticks out, even if it is a rare occurrence and clouds our judgment. Stick to the facts, take your to unearth the truth. Cognitive Dissonance: While availability is perhaps a bit more benign, the bias here gets us into the same trouble. Conflicting data or beliefs may make us uncomfortable, let’s listen to this analyst talk up one of our holdings, while I’ll change the channel when another analyst makes the bear case against my position. Often associated with confirmation bias, they have similarities and differences with cognitive dissonance being more of a conscious decision whereas confirmation bias tends to be more reflexive or automatic. Bounded Rationality/Dunning Kruger Effect: Going with our gut or overestimating our ability may mean suboptimal decisions or worse, abject failure. In a world that encourages the Do It Yourself “DIY” mentality, we are constrained by time, information, and cognitive ability yet that doesn’t stop us. We assume we have the ability to be a quick study and effective in our execution when in fact our shortcomings may be harmful. Herding: The recent meme stock revival brought back memories of how a group of Redditers toppled some “brilliant” hedge fund managers, true there is often wisdom in crowds, but not always. This bias always makes me think of Kindelberger’s famous quote… “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.” Whether crypto or the rise of social media influencers, just because others are doing it doesn’t mean it’s wise or going to end well. Follow mom’s advice here. This is a good list though there are other “traps” that prevent us from being the next Peter Lynch, our awareness of these biases however may make us think twice, question assumptions, do more research, and avoid triggers so that we put ourselves in the best position to be successful. If in your experience it has been difficult to avoid falling victim to your biases, if you work at it, you can train yourself to avoid the pitfalls and sometimes simply acknowledging your limitations means outsourcing the decision making to your advisor(s) is the smartest move.v

Japan is back… Where were you in 1989? It is a welcome sight witnessing the Japanese stock market get back to levels it last touched when I was wearing tube socks and playing Nintendo. In the first quarter the TOPIX was up 10.05% matching the S&P 500 torrid start to the year. But it’s not just in the capital markets that are buzzing. You could stay up late watching Bloomberg Asia during market hours but since that should be time to wind down, you won’t be disappointed taking in two of the best series on television right now… Max’s Tokyo Vice and Shogun on FX. The world’s third largest economy as measured by GDP deserves some love. Between pop culture and higher stock prices it’s a new dawn in The Land of the Rising Sun.We are in the midst of March Madness, the pinnacle of excitement in “amateur sports” it’s hard to replicate something so immersive and exciting, but I worry the combination of the NIL and sports betting has irreparably damaged the purity of the tournament. We are all aware by now that the pandemic ushered in new era of gamification and gambling providing a much-needed distraction and some excitement in those dark days of lockdowns and masks. When it comes to wagering it’s common knowledge the house always wins. All you need to do is look at the gambling stocks which have been on a tear as they quietly pick your pockets. I have my thoughts about legalizing drugs and making gambling more accessible, but rather than pontificate, I have a more compelling suggestion. On any given day, the stock market chances for an increase is no greater than a coin toss. Alas if you buy a stock or fund you get to play that same wager over 240 times a year and rather than the “house” ending up ahead in the long run you likely have a lot more to show for it.The death of Nobel prizing winning psychologist Danny Kahneman last month had me reflecting on a true intellectual giant’s contributions to the world of behavioral finance and its value to the everyday investor. Even for someone who has spent more than two decades honing my craft, I am often surprised/amused at the tricks our minds play on us when it comes to investing. Dr. Kahneman’s seminal work Thinking, Fast & Slow is a true masterpiece, but many struggle to make their way through it. Michael Lewis’s 2016 Undoing Project is a wonderful tribute to Danny and his best friend Amos Tversky, and is a really approachable read for those unwilling to commit to the intellectual density of T, F & S. Any investor would be well served to learn about loss aversion recency bias or the endowment effect to name just a few of those blasted biases.  Just when you thought people were coming to their senses and the crypto bust of 2021-2022 rid us of the daily digital data dump, here we are again with the biggest grift in modern times. I have to give it to them, despite lacking a compelling use case the Bitcoin believers have talked their way into one of the most epic executions of the greater fool theory in the history of man. Happy to have Wall Street get in on the rouse, the SEC and the sponsors of the various Bitcoin ETFs should be ashamed of themselves. Making it easier for people to lose their hard earned money is not why we are in this business and anything to “legitimize” an endeavor that has funded terrorism, human trafficking and the drug trade all for some basis points is an embarrassment. While we are on the topic of dereliction of duty, has anyone spoken with a family trying to navigate the FAFSA process this year? It’s bad enough that it costs $90,000 for a year at a prestigious liberal arts college, but to think we are making it more difficult to apply for and receive aid. You wonder why the younger generations are fed up and both sentiment levels and the government’s approval rating is at historically low levels despite a stock market at all-time highs and an unemployment rate under 4%. Applications for aid are down 57%, you read that right while the costs of college skyrocket. And those that applied were working with incomplete data. I can’t make this stuff up. We are supposed to be taking care of those in need, but we are more likely to see students take on more debt. If there was ever a better reason to start plowing money into the 529 plans now then let me know. It’s not to say we shouldn’t take the aid available to us, but perhaps it’s best to be in a position where we don’t need to count on it. George Carlin may have been thinking about another dirty word when he heard someone mutter the word inflation. It’s surely making the current administration cringe with the election less than 7 months away. While the rate of price changes have dropped markedly from their peaks in the summer of 2022, recent data suggests the victory lap for Fed which kicked off in October coinciding with this strong rally, may have been a bit premature. Coming into the year the market was pricing in 6 or even 7 rate cuts but a combination of better labor data and price stickiness has reduced the probability of aggressive easing getting under way. Just this week, on Monday, the ISM Manufacturing Survey showed we entered expansion territory in March for the first time since the Fall of 2022 and now the odds suggest just two cuts may be in the cards for 2024. It’s becoming increasingly more evident that we are in a period of fiscal dominance, I am not sure that monetary policy is having as much of an effect outside of residential and commercial real estate. The former is holding up fine in the face of limited inventories while the latter is holding on for dear life; they stare down the barrel of a gun in the form of refinancing. Always good to zoom out a little. I am not sure we will see those prices come down without a deep recession, but before we do too much hand wringing it’s important to put things into the proper perspective. For the last 30 years, dating back to 1994, CPI has average just below 2.50% including the recent the elevated inflation, that’s less than half the inflation for the 30 years from 1966 through 1995 where prices grew at a clip of over 5.4%. Magnificent 7, 6, 5 4, 3 , 2, 1… Aside from Meta and Nvidia the latter of which has somehow managed to add an 80% return on top of a truly breathtaking 2023 performance, we have seen quite the dispersion in the returns and what appears to be a case of returning from orbit for high flying Apple and Tesla. With the group trading at a forward P/E ratio of 31 times there is no room for error as they trade at 50% premium to the S&P itself over which they have a great influence given their size. What is even more amazing is that they trade at a 100% premium to the equal weight index. Something has to give, is it that Amazon, Microsoft, Meta and Alphabet starts to resent buying GPUs from Nvidia with 80% gross margins and they start in house fabrication much like Apple did with ditching Intel in 2020. Rent seeking behavior is usually short lived as competitors look to take share as well. Or perhaps it’s all that enterprise spending that doesn’t yield the earnings growth forcing multiples to contract. Much like the upcoming NFL draft there rarely is a can’t miss story out there. Much like “retired” Bill Belichick did at the helm of the New England Patriots for 20+ years, perhaps trading down and having more picks allows you to build a better roster versus needing everything to go right with your one great idea. Diversification and identifying mispricing is a consistent path to wealth even if it takes you a little longer to get there. Common prosperity or conciliatory China? Polishing off the old playbook and rebranding communism by using some more gentle words like common and prosperity doesn’t mean your people have to like it. History suggests that there is nothing common about prosperity when the state dictates distribution of resources as was the case for the 30 years under Chairman Mao until Deng Xiaoping ushered in market based reforms in the late 1970s and early 1980s. Clearly Xi Jinping’s admiration of Mao Zedong’s emphasizes his cult of personability and despotic tendencies while minimizing the fact his policies resulted in the deaths of millions of Chinese whether by famine or the Cultural Revolution. But the Chinese have had their taste of capitalism it appears they like what they experienced. While the property problem persists, efforts to cool tensions between the US and Chinese relations along with more aggressive and targeted stimulus may break the years’ long malaise. The last pre-pandemic slowdown in China required about 2 years to run its course and then set up a period of synchronized global growth from 2016-2019 a similar recovery would be welcome as trade may provide further disinflationary pressures as they compete with Mexico and India for labor and any increase in consumption is bound to help US multinationals grow earnings after the US consumer eventually slows down. We are not ready to pivot away from our view China is practically un- investible but this is modestly constructive and worth monitoring. Virtuous cycles of asset allocation based investing. Whether the calendar dictates adjusting your investment mix or there is more discipline based on drift and data, the fact we have spent 30 of the last 40 years in one heck of a bull market has meant that there has been an unquenchable demand for fixed income. At one point the bond market in the US dwarfed the stock market but stocks have caught up where both pools of capital valued at about $51TT. Globally the bond market is a bit bigger than the equity markets, $133TT to $110TT. Rates have been coming down since the early 1980s only to have increased a bit in the middle of the 2000s and again most recently. Higher rates should attract more buyers, yet $6TT is parked in money market funds. The average bond buyer has become much more price (yield) insensitive, buying bonds in something resembling rote behavior. If the market continues to go up and likely at a rate of change that exceeds the bond market, and it should given the uncertainty associated with owning stocks and the natural inflationary forces that drive asset prices higher, then we should more often than not have a bid putting something of a lid on yields and not needing to implement a Japan style yield curve control. Mark Twain’s famous quip about his death being an exaggeration seems fitting for all those folks. Please join us April 18th for our Quarterly Market Review and Outlook. Register Now Sources: Baron’s WSJ, BLS, ISMForbes, JP Morgan Asset Management Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, www.adviserinfo.sec.gov. Past performance is not a guarantee of future results.

Getting pretty technical here aren’t we…  How using charts can improve your investing and worsen your eyesight. At one time or another we have all found ourselves on a quest for the next great investment idea or to identify the next bubble before it bursts. For some of us it’s a lifetime endeavor while for others it’s a fleeting moment of excitement fueled by someone else’s success or failure. It’s safe to say that much of Wall Street is focused on the less glamorous field of fundamental analysis where valuing companies, industries or sectors is based on using traditional metrics like free cash flow or price to book ratios among countless others. This is a rigorous and helpful process but requires the use of assumptions sometimes on a single variable, but more often than not assumptions with multiple variables. This makes trying to estimate the earnings of a company 2 quarters out difficult, let alone 2 years or 10 which seems next to impossible, frankly. That is supposed to be one of the preferred methods to arrive at a price to pay for a security. This isn’t to suggest this effort is futile, but to acknowledge its limitations therefore incorporating additional information into one’s investment process would seem to make sense. Schumpeter described the concept of creative destruction, which posits that the state of constant change is filled with innovation and destruction. We have all borne witness to this over the course of our lifetimes whether we are talking about iPhones or Uber. Companies disrupting the incumbents or creating an entirely new market from scratch makes capitalism so dynamic and exciting, but it also makes using past economic models challenging at best or worse, outright obsolete. I don’t foresee that changing any time soon so if we are trying to identify something constant in all this it may be as easy as looking in the mirror. After 300,000 years on the planet, humans have more or less wired themselves through the evolutionary process and that “hard coding” can be really valuable to understand. Everyone is familiar with the “fight or flight” concept, which is about survival in its simplest form. Safe to assume flight is the better bet most of the time when it comes to physical confrontation but that same reaction function can wreak havoc on our portfolios triggering ourselves to sell out when the market is troughing. The same can be said about herd mentality, where behavior becomes something akin to a mania and totally dispels the idea of the wisdom of crowds. I am essentially talking about behavioral finance, something we have been writing about on occasion for the last couple years and following for the last couple of decades. Assuming we can (or can’t) control our inner impulses, that will provide us with an edge, especially since it’s apparent that most people are incapable of that level of discipline. How best to exploit those human inefficiencies you ask? Sometimes it’s as simple as picking up anecdotal evidence like the stock tips from the shoeshine boys of yesteryear, but not everything is as obvious an outlier as Bored Apes NFTs and Meme stocks or subprime housing bubbles. Incorporating technical analysis is a tool that may be able to help. So what is technical analysis really? It is the use of price and volume data to inform one’s investment decision making process. Perhaps better said, fundamentals tell you the what, while technical tell you when and how far. With the troves of data out there, patterns and trends often emerge that are a reflection of investor’s sentiment and expectations and identifying them early on may allow you to augment your returns or cut your risk exposure. Here are a few indicators that traders and investors look for when employing technical strategies: Price Trends confirmed by trading volume: Price movements may be random or noise, unless they are accompanied by surges in activity at which time they like represent a signal Momentum: Much like Newton’s famous first law of motion which states an object in motion, stays in motion the same has often applied to stocks. The momentum effect or factor is a bit controversial in that it seems to suggest chasing returns but academic research has found it to be a helpful tool when paired with other factors (size, value, quality etc…) Moving Averages: Looking at price over varying time series reveal inflection points for markets, common measurements are the 50, 90 and 200 day moving averages. When prices move above or below the moving averages it suggests the stock may have broken through a resistance point and are headed higher or lower as a result. There are countless techniques dedicated to this field of investing, many of which are more detailed or complex and outside the scope of this piece. We’ll admit there are surely some short term elements to this approach but incorporating this information into your thought process means you are adding an extra layer to what is hopefully a sound long term strategy. We surely think it’s valuable at Breakwater even if it makes our eyes blurry by the end of the day.

The future’s so bright, I gotta wear shades……. “If you look good, you feel good, If you feel good, you play good, If you play good, they pay good”- Deion Sanders  With college essays and applications already on the minds of the class of 2024, and the deadline for early decision only about a month away, I find myself amused by the business of higher education in America. Here locally it has been all about the University of Colorado whose quick start and charismatic coach have been all the buzz. Much like Doug Flutie’s “Hail Mary” put Boston College into the national conversation nearly 40 years ago, I wonder how many applications will pour into Boulder in the weeks ahead given the enthusiasm that has reinvigorated the Buffalo community. It’s been a long time since Kordell Stewart or Rashan Salaam wore the black and gold. A recent 60 minutes commentator described Boulder as a “hippy college campus with a store dedicated strictly to selling kites”, to one where “Prime” college apparel flies off bookstore shelves about as quickly as it can be stocked. It’s truly amazing to see how a little success and commensurate college spirit can create such camaraderie and excitement for students and alumni alike. Although I am a University of Denver alumni (Go Pioneers), and a football novice, I find myself planning Autumn Saturdays around the college football schedule this year because #IBelieve. This is all too ironic, considering my husband, a die-hard Jets fan (I know, it’s as depressing as it sounds), allows me to bring my iPad to Metlife stadium for game day when visiting family back East. All that aside, the process of selecting a college and in turn a college selecting a student, are some of the most formative moments in their lives. The experience is the start of a profound journey propelling them into their future careers and lifelong relationships, not to mention one of the most substantial financial commitments that they (and often their families) may make. Whether you are a college athlete dealing with possible NIL endorsement deals, seeking any available academic scholarship opportunities or evaluating your financial aid package, Deion’s words should resonate with all students; if you “play good” then the proverbial “they” do actually “pay good”. Putting on my financial advisor pants suit for a moment, let’s talk about how to make the right college choice from a financial perspective so you can have the career fulfillment (and compensation) that you want. College is often said to be a time to learn more about yourself and cultivate interest . While that is true, and classes ranging from “Shamanism, Healings and Rituals” to “Global Economies and Markets” offer the opportunity to do just that, it should also be a time to be realistic with yourself. If you go into undergrad having declared a major or will need to take a little time to decide, it’s totally appropriate if not imperative to consider your income potential or upward mobility that a career track may afford you. Ideally, you find a calling that you are passionate about and could see yourself mastering your craft over the span of a 30-40 year career. You may end up having 10 employers or just 1, but aspiring for the chance to “tap dance to work” to quote Carol Loomis’s biography on Warren Buffett does seems like a nice objective. Unfortunately, as Paul Tough, writer for the New York Times Magazine explains in a recent podcast on The Daily, many high-school students are soured on the idea of attending higher education as they see the cost outweighing the benefits. This is in stark comparison to opinion polls done a decade ago where 98% of parents said they expected their kids to attend college, to now only 50% of American parents expect their kids to go to college. This is a sobering statistic an The real college wage premium is irrefutable proof of the value of post-secondary education, I emphasize real, which we’ll get to in a moment. After graduation, those with a bachelor’s degree on average earn 60% more than their peers who have completed only high school. But this statistic only tells half of the story as it only takes income into consideration, not how much more debt a college student may have assumed to earn that wage. Over the last 20 years that debt load has mushroomed making what was a few year pay off proposition akin to a 30 year mortgage obligation. I often have a parallel conversation with clients about budgeting and savings and the adage still applies here… “It’s not about what you make, it’s about what you keep”. If we apply this same thinking to the cost of college and wage-earning potential, economists are now measuring what they call the “college wage premium” in how much wealth you are able to accumulate (assets – debts) over the course of your lifetime. Examining college graduates from this perspective reveals a significantly altered narrative. The true impact of the steep rise in tuition costs over the last decade becomes evident, greatly influencing the ability of students to accumulate wealth or, in many cases, rendering the college wage premium virtually nonexistent. As many younger people are buying their first homes or at least trying to, they are provided simple formulas to measure affordability. We often hear about 28% of your gross income can go to housing related expenses and 36% to total debt service which would include things like car payments or student loans. Ideally the amount of money one borrows for education would require less than 5% of their gross income to be paid off in a span of less than 10 years. Of course, everyone’s situation is unique. If your family has saved enough money to cover your cost of attendance, you won’t have the burden of paying off loans and pursuing a degree in English literature at an Ivy League school may be just fine. This choice may offer valuable networking opportunities that could potentially elevate your income potential versus that of someone who opts for a more cost-effective state school for the same degree or pursues another field altogether. Given the average price of tuition, fees, and room and board for an undergraduate degree has increased 169% between 1980 and 2020 , even if parents are footing the bill, those are funds that earlier generations have been able to plow into second homes or investment portfolios. As a result, the amount you spend for college really should be congruent with your earning potential when you graduate, not simply based on parental affordability or availability of credit. There is no easier underwriting process than for student loans where basically a pulse is sufficient enough. The most recent data shows about 50% of students are graduating with approximately $29,000 of debt, which when taken into account changes the wealth premium arithmetic materially, from 96% to 50%. Further analysis shows that science, technology, engineering and math (STEM) majors see an increase in students’ earning potential significantly with graduates making an average of $90,000 upon completion of their degree whereas arts and humanities majors earning less than half that amount with an average graduating wage of $35,500 . Students need to take advantage of networking and outside the box thinking in making sure their earnings are outpacing how much they may owe. Fortunately, there are important state and Federal programs that encourage careers in these fields and can help offset some of the earnings shortfall, but many fail to utilize these offers hiding in plain sight. As we look at the job market landscape today Georgetown University predicts that 70% of all applicants will require some level of college education by 2027 so what may have been optional before is becoming more of a necessity. As the economy becomes more technologically native with artificial intelligence playing a greater role, that level is likely to increase over time. In the aftermath of the pandemic, the job marketplace is extremely competitive and will continue to be that way for the years ahead. Seeking out the best jobs and opportunities is a global pursuit where the top students from around the world come to the US to experience their version of the American Dream. A recent WSJ article suggests we should expect labor tightness for the next 20+ years as the baby boomers age out/retire from the work force. While this may create opportunity, it’s important that students who are financing education do so with “Clear eyes, Full Hearts.” Certainly not everyone’s situation is created equally, so this is very often a group effort, involving family, friends, counselors and advisors. Let’s be sure to pick a place where success isn’t measured by the bowl game appearances but by the financial outcomes that fulfill both their wallets and their career aspirations. For those just getting started on the savings plan to those narrowing down which schools to apply to or whose financial package to accept, an advisor can help you navigate that process. And for the many who have already gone down that path with student loans on their balance sheet we can surely help with how to best tackle them head on. Breakwater Capital Group is extremely passionate about putting our clients in a position of power and planning for these important and expensive life events is critical. We engage these topics head on, and you should too so that every time you show up to life’s Folsom Field, you feel good, you play good, and you get paid good. We won’t win them all but if we are well prepared we will surely win a lot more than we lose. The views expressed represent the opinions of FIRM as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed. Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. https://adviserinfo.sec.gov/ Past performance is not a guarantee of future results.

Will the Bull Market Rally Give Up the Ghost or Will We Have a Feel Good Fall? As we wind down the summer, with kids back to school and work returning to something resembling a five day a week proposition, it has become an annual ritual to discuss the traditionally volatile months that usher in the Fall. Below are the YTD returns for major averages as of close 9/12/2023: S&P 500 Index: 17.57% Nasdaq Composite: 32.64% Dow Jones Industrial Average: 4.31% MSCI EAFE: 9.78% MSCI Emerging Markets: 4.24% BBg US Aggregate Bond Index: .63% Interesting fact: Even after a bumper 2023 for the S&P 500 thus far since the start of 2022, it’s simply 1.2% higher than the Dow over the same 20+ months. While we have seen market declines for each of the last three Septembers, October, on the other hand, has been far kinder, with gains of nearly 7% in 2021 and 8% in 2022. By now we should all know that trading the calendar is hardly a recipe for sustained success, after all that would be far too easy. After a torrid start to 2023 through the first seven months of the year, a disappointing August and slow start to September has restored the universe to a more balanced level of investor sentiment. There seemed to be a building level of ebullience and with valuations full, if not stretched, the possibility of detachment from reality seemed altogether likely if not inevitable by late July. While I hate the phrase “market correction” as it implies the market is not reflecting the proper price of assets, an oxymoron if there was such a thing, periodic selling pressure can do some good. It’s difficult to put a finger on any one cause and we perfectly understand if you are somewhat spun around by all the seemingly contradictory data these last couple months. Just be happy you are not a central banker, posh room in Jackson Hole aside … With the hope of providing some clarity we thought it would be worthwhile unpacking a number of key areas of focus for the months ahead. Perhaps it will be a good sleep aid as well. Earnings: Time and again you’ll hear the phrase that earnings drive stock prices and with discounted cash flows, still the preferred method for valuing assets better, or at least, less bad earnings should see prices increase. So, with 2’Q earnings coming in better than expected, why did stocks not respond more favorably to the numbers? According to FactSet, 79% of companies beat their earnings estimates (above 5-year average) with 64% beating on revenue (below 5-year average). Earnings are down about 4.1% year over year and witnessed a decline of 7.00% for the second quarter in what is likely to be the trough in this cycle. A weaker top line suggests some softening in demand, so that’s worth watching as there is only so much you can do with cost cutting and financial engineering. Guidance for 3’Q has improved somewhat off a low base and suggests year-over-year earnings growth of anywhere from 1-3%. As we wrap up 2023, earnings improve more sharply in the 4th quarter and into 2024 where low double digits have been penciled in. Given that markets are forward looking some of that is already reflected in prices. If earnings do in fact grow at those levels, stocks can support further gains, though they are likely to be modest given higher interest rates and full valuations with the S&P 500 trading around 18.5 on a forward basis. Inflation: There has been encouraging news when it comes to the rate of price change, thus resurfacing the transitory argument, as supply chains continue to improve should demand remain at the current level there may well be some disinflation if not deflation on the horizon. The Fed’s preferred measure of inflation, core personal-consumption expenditures (PCE) came in at 4.2% in July when measured year to year, but on a month-on-month basis, prices increased at .20%, the lowest going back to March 2021. Headline inflation is likely to jump back up for August and possibly in September based on higher gasoline prices and some weather-related factors impacting food prices. Industrial metals have been marching higher based on an uptick in demand. The trend however is for inflation to continue to decline and as Fed Chair Jerome Powell stated unequivocally in Jackson Hole, that the target remains 2% even if it takes until 2025 to get there. Housing, which is measured as owner’s equivalent rent in the PCE measures, is likely to be a drag on inflation based on higher rates sapping demand for existing home sales and actual rent growth falling sharply after some catch up in 2021 and 2022 based on concessions made during the pandemic. For the August CPI release much was made of the core level being elevated yet the market shrugged off the “hotter number” mainly because it has done little to change the narrative around disinflation, looking at this data over a rolling 3 months is a better way to see whether or not there are real trends emerging versus one month’s report which is surely impacted by noise. Federal Reserve: June’s meeting brought the “pause/skip debate” but that was put to rest after the July meeting offered a 25-basis point hike, the 11th of this cycle taking Fed funds to the highest level since 2000. While the drumbeat from the various Fed governors is that they intend to take a wait and see approach, at this point my sense is that they are done hiking rates this cycle. Having adequately tightened monetary supply by hiking rates over 5.00% while shrinking their balance sheet by nearly $1TT the Fed has cooled down housing, increased the overall cost of borrowing and indirectly drained the animal spirits from the capital markets as evidenced by the decline in asset prices over the last couple of years. Hardly time to say, “mission accomplished,” a good deal of progress has been made. For the better part of the last 2 years, risk of not doing enough clearly outweighed doing too much, but several data points suggest that further tightening here could result in something else breaking (aside from a few banks) and with little appetite for a policy response from the Fed itself and nothing coming from the fiscal side, that seems imprudent. While we still wait for the lagged effect of tighter monetary policy, one place where the impact is felt more acutely and quickly is within the currency market, something I opined about last Fall when highlighting why a strong dollar was a source of concern. As the dollar has strengthened again quite a bit recently, it was on an 8-week winning streak the longest in nearly a decade and up 5% since early July the greenback has put pressure on various currencies around the world from China to Japan as well as UK and the EuroZone. While a weaker local currency can help export driven economies, it essentially means you are importing inflation at home, something the Europeans would greatly like to avoid having dodged an energy crisis last year with the invasion of Ukraine. Germany, the manufacturing powerhouse of the EU, would have benefited from similar dynamics in the past, but the weakness in China, a key trading partner, has made stagflation a real concern for the 4th largest economy in the world. More on this in a moment Labor: Another Goldilocks nonfarm payroll report for August. The combination of job gains (187K), along with an increase in the unemployment and participation rates all while seeing hours worked increase and hourly wages increase more slowly (.2% month on month) suggest a cooling labor market. This was the equivalent of walking on water and just what the Fed has been hoping for if a soft landing/no landing is possible. With inflation being front and center the last couple of years, you’d be forgiven if you forgot that the Federal Reserve has a dual mandate to control inflation and target full employment. To temper the overly optimistic tone somewhat, we witnessed a decline in available jobs and a decline in quits in the Job Openings and Labor Turnover Survey (JOLTs) suggesting employers are getting a little more cautious as are employees. While labor is historically one of the key drivers of inflation, wage growth is only modestly higher than the projected 5-year inflation rate suggesting the vicious wage price spiral of the 70s is not likely to repeat. All eyes on the UAW strike, but keep in mind their 150,000 members represent about 1/10th of 1% of the working population in the US. Larger employers like Walmart, which employs over 1.6MM Americans have actually been cutting wages for new hires as the competition for jobs has abated in the last couple months. Retail Spending: The endless debate on when and if consumers will run out of their pandemic savings has been going on for about a year and I still see the estimates ranging from $500BB to $1TT with estimates that it will be exhausted in about a year’s time. That may well be the case, and some indicators like increased credit card borrowing suggest we may be closer than we think, but healthy labor markets are able to cushion the impact here. After a .7% increase for July, only a .2% increase is forecast for August but that’s still healthy by most standards, especially for what is typically a less active month. As has been the case for much of the last decade there is a certain consumer whose demand is less susceptible to economic conditions as solid earnings from the likes of Lululemon suggest. Sentiment levels: At one point with the market within 5% of it’s all time high, achieved on January 3, 2022, the S&P has given back about 3.5% of the profits and investor’s moods have shifted. Back in July, the relative strength index (RSI) was consistently logging figures in the mid to high 70s suggesting the market had become overbought, we have drifted back to around 50, which while not quite oversold levels seem to indicate there is less froth out there. CNN’s Fear & Greed index has returned to a neutral reading from Greed a month or so ago and while the market volatility has dropped sharply there is a bias to negative skew meaning the cost of hedging has increased somewhat as stocks have given back some gains. There are some technical factors that are flashing yellow signals whether they be leading economic indicators that have rolled over and have been at recession levels for the last 12 months, granted those measures are focused more on durable goods and stocks are very close to their 50-day moving average suggesting if support is broken the next move may be lower. China: One of the biggest questions on everyone’s mind is what is going on with the world’s second largest economy where growth and trade have disappointed all year despite emerging from Covid lockdowns. With stimulus targeted more at business versus everyday consumers they did not see the inflationary effects witnessed in the West, but their economy remains far too reliant on the commercial real estate market and manufacturing, the former having been a problem since 2015 and the latter coming more into focus with supply disruptions related to the pandemic. With China accounting for nearly 20% of global GDP yet only 12% consumption according to Michael Pettis, the argument is that it’s necessary for China to focus on consumption growth over the next 10 years at the expense of inefficient GDP growth. This would entail a rather large philosophical shift where the state would essentially look to transfer more wealth to the consumer through assets sales and social safety nets, something that they have been loathe to do at this point. It’s worth experimenting with as the current path seems likely to ignite pushback against Xi’s policies and suggest this may be his last 5-year term as leader of the Middle Kingdom. This may be too logical or optimistic, it would be a boon for US companies and perhaps even the Chinese stock market, but I am skeptical they will be willing to undergo such a drastic policy pivot and undertake the needed reforms. Both China and the US need each other as the rest of the world seems hardly up to the task. A healthy level of competition can be productive, see the Space Race or DARPA versus a more hostile policy of containment which increasing the odds of further frictions adding costs but for now China looks to be worth passing on until they embrace a model that hasn’t been working for the last 8 years or so and stop scapegoating the West.  In summary, the next couple of months may remain a bit choppy; on balance the economic backdrop at home has improved and the fact monetary policy should be more consistent should mean stocks can better discount the future. Should we see any improvement abroad that should power markets back to the levels from late July if not higher. There is reason to be optimistic out there and as my 5-year-old gets excited about Halloween, I get the sense that the 4th quarter may be more treat than trick this year, but time will tell. The bigger question is how many times the costume may change between now and then. For those who endured, thanks for reading, feel free to share this and our other timely content with anyone who would benefit from our perspective. Get In Touch SOURCES: Barron’s, FactSet, WSJ, Bloomberg, FT, Charles Schwab & Co LLC The views expressed represent the opinions of Breakwater Capital Group as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed. Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. https://adviserinfo.sec.gov/ Past performance is not a guarantee of future results. The Dow:The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chipstocks. The market index is unmanaged. Investors cannot directly invest in the above index. NASDAQ: The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers AutomatedQuotation System. You cannot directly invest in this index. S&P 500: The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to berepresentative of the stock market in general. You cannot directly invest in this index. MSCI EAFE: The MSCI EAFE Index (Europe, Australasia, Far East) is designed to measure the equitymarket performance of developed markets outside of the U.S. and Canada. You cannot directly invest in this index. MSCI Emerging Markets: The MSCI Emerging Markets Index captures large and mid cap representation across 24 Emerging Markets (EM) countries*. With 1,421 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Bloomberg US Aggregate Bond Index: is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices.