Quarter 3 2022 Market Letter Dodging raindrops and looking for sun

We hope you are doing well as you read this quarter’s Market Update Letter. We will review the past quarter and share our current and forward-looking perspective.

We hope you enjoyed your July 4^th holiday. We spent ours at the beach, as we do every year. We found ourselves dodging rain and thunderstorms all weekend when Tropical Storm Colin made an unexpected appearance. Each day we tried to assess the situation, trying to determine whether it was safe to pull beach chairs out, go to the pool or kayak for a bit. We got caught in the rain several times, but thankfully were never far from safety when lightning struck. It was frustrating, but we watched the hour-by-hour forecast, kept an eye out for the sun and enjoyed good whether when we could. Thankfully the skies cleared just in time for Monday, July 4^th and we enjoyed a nice beach day with family, friends and neighbors.

The investing environment has been similarly challenging all year. There has been a lot of stormy weather and it has been virtually impossible to avoid getting caught in some rain. We have assessed the situation each day as the economic forecast continually evolved. The days markets are positive feel like sun coming out from behind the storm clouds. We are hopeful that skies will clear as the year progresses.

Second quarter performance

The first half of 2022 is in the record books. The S&P 500 declined -20.58%. According to Chief Portfolio and Technical Strategist at Raymond James, Mike Gibbs, this has been the fourth worst start to a year since 1932, which was the worst first half on record, dropping a whopping -45.44%. 2022 also represents the worst first half since 1970, when the S&P 500 lost -21.01%.

Raymond James’ Chief Investment Officer Larry Adam noted during the first six months of 2022 bonds had their worst start to a year ever. As for stocks in the Russell 3000:

95% of stocks declined 10% or more
85% of stocks dropped 20% or more
32% of stocks dropped 50% or more

Each of the prior three years with worse first half declines experienced gains in the second half of the year. With so much bad news priced into markets, outside of a severe recession, which seems unlikely at this time, and which is not Raymond James’ expectation, it certainly seems possible the second half of 2022 could be better than the first. Additionally, it is typical for mid-term election years to be volatile and the pattern the S&P 500 usually follows is for quarters two and three to be volatile with a rally beginning near the election extending to year-end.

As we have discussed all year, the decline has been a reaction to concern about high inflation levels and whether the Federal Reserve (The Fed) can be successful raising interest rates to tamp it down without sending the U.S. economy into recession.

This past May we attended our first Raymond James National Conference since 2019. It was wonderful reconnecting with our many friends and professional colleagues. The time together to collaborate, discuss the highest inflation since the 1970s, the aggressive response from The Federal Reserve, how we as financial professions should react and help our clients through this was needed by all. Everyone we spoke with agreed these are indeed very challenging times for investors.

Below are the quarter-to-date, year-to-date and past 12 month returns. There are two points we would like to make before going further. First, an unusual challenge this year has been that diversification benefits have been very limited this year because not only have stocks declined, fixed income investments have as well. Unlike most times when stocks experience corrections and fixed income cushions the downside, that has not been that case this year. Second, this is very rare, as it has only occurred two other times: 1984 and 1994, so this certainly is not a reason to abandon diversification. We expect that once yields stabilize, fixed income assets will become attractive again.

Like every other market decline in history, this too shall pass and at some point in the future, markets will likely make new highs it has following declines in the past. As Warren Buffet has always said:

“It’s never paid to bet against America.”

______________________________________________________________ _ _

Dow Jones Target Risk Indexes QTD YTD Past 12 months

Dow Jones Aggressive Index (15.43%) (19.72%) (16.56)%

Dow Jones Moderate Aggressive Index (13.23%) (17.51%) (15.03%)

Dow Jones Moderate Index (11.23%) (15.76%) (14.07%)

Dow Jones Moderately Conservative Index (9.32%) (14.12%) (13.31%)

Dow Jones Conservative Index (7.32%) (12.34%) (12.53%)

U.S. Equity Indexes

S&P 500 (Total Return) (16.10%) (19.96%) (10.62%)

RUSSELL 2000 (Total Return) (17.20%) (23.43%) (25.20%)

International Equity Indexes

MSCI EAFE DEVELOPED MARKETS (14.51%) (19.57%) (17.77%)

MSCI EMERGING MARKETS (11.45%) (17.63%) (25.28%)

Fixed Income Indexes

BLOOMBERG BARCLAYS US AGGREGATE BOND (4.69%) (10.35%) (10.29%)

BLOOMBERG BARCLAYS US CORPORATE HIGH YIELD BOND (9.84%) (14.20%) (12.79%)

Returns provided by Morningstar as of 6/30/2022

Where things might stand if a global pandemic had not occurred

Believe it or not, despite all the ups and downs the past two and a half years, the S&P 500 is currently higher than it was prior to the pandemic. Just before news of the pandemic hit markets the S&P 500 was trading at 3380. As of July 8^th it was trading at 3909. That is a 15.65% gain. Considering the average annual return over the history of the S&P 500 is around 10% this is only 4-5% less than we might have experienced if the pandemic never happened and each of those years were average years (which is not normally how the market moves. More typical are years with larger gains and ones with losses resulting in the average being around 10%). Additionally, drawing a general trendline from February, 2020 before the pandemic drop, and extrapolating that to the current period, assuming the pandemic never happened and the economy and market continued on the general path it was on early 2020 shows an S&P 500 somewhere in the range of 3900-4200. That is far below the high of 4766 the S&P 500 hit January 3, 2022. If in December 2019 someone told us all the crazy things that would occur the next two years and tell us that considering everything we were about to go through the S&P 500 would still gain 15.65% during that time we probably would have been surprised the market could hold up that well. It’s living through the ups and downs that has been so emotionally challenging.

Markets begin their recovery long before news is good, as the pandemic correction demonstrated

The last significant pullback we experienced was spring 2020, caused by the onset of the global pandemic. The S&P 500 declined by 30% in just 22 trading days, making it the fastest 30% sell-off ever, exceeding the pace of decline during the Great Depression, as noted by CNBC March 23, 2020. By the time this made news, the S&P 500 had already bottomed and was beginning to recover. The stock market is forward-looking, so the news is typically the worst after stocks have already reached their lowest point. When stocks began rallying in late March news was dire. There was no vaccine and many parts of the world were in lock-down. Rallies and recoveries off times like this begin long before the news turns positive and it feels good to invest. Hence the long and often quoted phrase that the best time to invest is when there is blood in the streets.

Loose monetary policy by the Federal Reserve + Government stimulus during the pandemic = the lighter fluid that sparked the flames of inflation

Yes, the war in Ukraine due to Russia’s invasion as well as supply chain disruptions have fanned the flames of inflation globally. However, excessive stimulus and long period of zero interest rates created the massive demand for goods that lit the flames of inflation, especially in the United States.

During the pandemic The Fed lowered the Federal Funds Rate to 0%. They did this to encourage borrowing, spending, and investing to support the economy. Very low interest rates encourage people and businesses to take out loans and use that money in ways that is supportive of the economy. Individuals buy things and make home Improvements. Businesses expand, hire and invest in ways that enhances productivity, and hopefully future growth. With little else to do, Individuals and businesses (that were able to) did just what the Fed wanted. They spent, supported the economy and the demand for all sorts of good skyrocketed.

At the same time, the Federal Government provided several rounds of stimulus to help individuals and businesses survive lockdowns. Individuals, largely stuck at home, bought a lot of things online. The additional cash also fueled speculation in risk assets like cryptocurrencies and stocks of companies with little earnings that were cheered on by social media outlets like Reddit. The unwind of some of that speculation is likely exacerbating the correction we would already be having due to high inflation and The Fed raising rates to combat it.

Supply-chain disruptions also significantly fanned the flames of inflation. Higher oil prices and the war in Ukraine added fuel to the fire. Both of these issues unfortunately still exist and the Fed can’t do anything to influence their impact on inflation.

What The Fed can do is raise interest rates and make taking out loans and buying large items, like houses, less affordable. That has a trickle-down effect of lessening demand for a variety of items. The expectation is that over time less demand results in lower prices and inflation will fall back nearer to the 2% level The Federal Reserve believes is healthy and sustainable for economic growth.

Definition of a recession

Many pundits on television define a recession as occurring when the economy experiences two negative quarters in a row, meaning the economy is contracting, rather than growing, the definition by the National Bureau of Economic Research (NBER) is a bit different. NBER defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”. Recessions are and can feel very different. Some are very mild with minimal impact to individuals’ ways of life. Others that are born out of structure problems in the economy, like the 2008-09 recession caused by the housing/financial crisis are more likely to be more pronounced, with pain felt by many Americans.

Although the odds of recession have risen due to the aggressive tightening by The Fed, still elevated prices of some commodities and continued impacts from Covid lock-downs on supply chains, Larry Adam and Raymond James Chief Economist Eugenio J. Alemán believe the U.S. is likely to either experience a slowdown in growth or a mild recession. They do not at this time foresee a severe recession in the next twelve months. There are several reasons for this:

There are not any apparent significant structural problems in the U.S. economy.
The job market is healthy and unemployment is low.
Americans have elevated cash positions as compared with pre-Covid levels.
Many service industries, such as travel and concerts are experiencing post-covid highs in demand.

The U.S. economy may avoid recession, but if a recession occurs, consumers have a cushion, which should lessen its depth and duration

Consumers overall entered 2022 in pretty strong shape financially with significant cash savings, partly due to government stimulus. Additionally, anyone who wants a job can get one. There have been more job openings than job seekers for many months now. Businesses are still reporting they are understaffed and are still trying, but struggling to hire qualified people their businesses need.

In raising interest rates, The Fed’s objective is to lower the money supply and thus reduce demand, which should help prices to come down slowly. Most consumers should be able to weather the inflation and rate increases fairly well. The lower-end consumer is where the strain shows itself first. There is beginning to be an Increase in credit card and auto loan delinquencies, indicating some stress. The good news is these delinquencies were coming off very low historic levels (due to stimulus handed out during the pandemic). Because of the strong employment environment, it is hoped weakness in credit will be limited.

Neutral rate policy is when interest rates are at a level deemed to not be accommodative (loose), but also not restrictive (tight), hindering the economy. It is thought that If The Fed is successful at moving rates back to more neutral levels, currently thought of as being in the 2%-3% range, and inflation starts declining, we may be able to avoid recession. If we can’t avoid a recession, Raymond James and many others expect it likely to be a mild one for the reasons mentioned previously. If though, inflation remains elevated and the Fed is forced to continue raising rates to the point of causing significant economic pain a recession could be a bit worse.

Seven signs to watch for to indicate inflation is easing:

Decrease in the money supply
Inventory growth, indicating demand for goods is less. Sales to get rid of inventory will follow.
Auto prices declining. They are starting to come down. Production of new cars is increasing.
Falling freight costs. Indicated lower demand for moving goods.
Semiconductor prices falling. Semiconductor companies are beginning to say there may be an excess compared with expected demand.
Fertilizer prices declining.
Economically sensitive commodities like copper declining in price. Copper, oil and lumber have all declined significantly in the past month

The market is likely to turn around before most expect it to

We suspect that as soon as the market sniffs out evidence of inflation abating and Fed President Jerome Powell begins commenting about inflation leveling off, indicating The Fed could slow the pace of rate increases markets could rally quickly and rally hard. Some believe the recent drop in volatility might be a sign the market is already sniffing this out. As mentioned previously, the stock market is forward-looking. It began declining before the Fed began raising rates. During past recessions the U.S. the stock market has bottomed on average four months before the recession has ended, according Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy at Raymond James:

It is important to stay focused on the long-term opportunity of investing

Timing the Market is impossible - You hopefully will recall us telling you in the past about the negative impact for long-term investors of missing out on the best days in the market.

According to “Timing the Market is Impossible” by Hartford Funds, the latest numbers show that missing out on the best 10 days in the market between 1992-2021, resulted in overall returns that are 54% lower versus remaining invested through the ups and downs.

The research also showed the best upside days tend to follow the worst downside days. 50% of the best days in the market happen during a bear market. Another 28% happen during the first two months of a bull market. With more computerized trading these days, significant market moves tend to happen very quickly.

The market is very oversold and sentiment is in the gutter - There have been numerous signs of a very oversold, washed-out market for a while now. This does not mean we have seen the bottom, but it is possible we have. Sentiment, which is a contrary indicator is extremely low. Adams noted in his conference call Deciphering the Markets Difficult Message that in the past when 95% of investors expected stocks to decline, as the latest surveys indicate, one year later the market has been positive 90% of the time by an average of 12%.

Stocks usually recover quickly and strongly off bear market lows as data from Mike Gibbs indicates:

Stocks are often up substantially within 60-days of bear market lows (+22% in recessionary bear markets and 17% in non-recessionary bear markets).
The news is often still very negative within 60-day of bear market lows. The most recent example, 60-days after March 2020 low the S&P 500 was up 33%. The news on the virus was still very negative and uncertainty was at an extreme.

As hard as it is – and we understand, we are investors, just like you, it is important during times like these to step back from the constant day-to-day negative news about the markets. Rather, let us take a longer, bigger-picture view and be prepared for the opportunity on the other side of this market decline. The U.S. and global economy have endured many challenging situations over the life of markets. In every circumstance the market has gone on to eventually make new highs. Thankfully so far, this is a cyclical bear market that is adjusting to a different part of the economic cycle with higher interest rates, rather than a structural bear market where significant stresses and problems exist in the backbone of the economy. We look forward to sunnier skies that will likely bring fresh optimism about the future. It may come sooner than many think.

We continue working hard to evaluate all pertinent information and guide you towards your long-term goals. We will also continue e-mailing you invitations to informative conference calls when they occur. Please also check our website and social media pages regularly for timely updates on all these topics.

Website: www.raymondjames.com/hilliard/

Facebook: https://www.facebook.com/hfgraymondjames

LinkedIn:

Eric Hilliard, CFP®, Branch Manager https://www.linkedin.com/in/ewhilliard/

Wade Stafford, CFP®, Associate Financial Advisor https://www.linkedin.com/in/ericwstafford/

Jenny Hilliard, Investment Executive: https://www.linkedin.com/in/jennyhilliardrj/

Please let us know of any significant changes in your life or situation that could impact your financial plan. In the meantime, we continue to follow the processes we have developed over the years that enable us to provide you our very best.

Thank you for your trust in me and in our practice.

Trusted advisors, helping our clients invest, preserve, and distribute wealth since 1973.

5720-201 Six Forks Road Raleigh, NC 27609 919-846-7268

____________________________________________________________________________________

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.

To opt out of receiving future emails from us, please reply to this email with the word “Unsubscribe” in the subject line. The information contained within this commercial email has been obtained from sources considered reliable, but we do not guarantee the foregoing material is accurate or complete. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

Investing involves risk, and investors may incur a profit or a loss regardless of strategy. All expressions of opinion are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts, statements, or opinions mentioned will occur.

DJ GLB Aggressive Index - The DJ GLB Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Aggressive index is 100% of All Stock Portfolio Risk.

DJ GLB Conservative Index - The DJ GLB Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Conservative index is 20% of All Stock Portfolio Risk.

DJ GLB Moderate Aggressive Index - The DJ GLB Moderate Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Aggressive index is 80% of All Stock Portfolio Risk.

DJ GLB Moderate Conservative Index - The DJ GLB Moderate Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Conservative index is 40% of All Stock Portfolio Risk.

DJ GLB Moderate Index - The DJ GLB Moderate is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate index is 60% of All Stock Portfolio Risk.

The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy and banks. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance which include both U.S. and non-U.S. corporations. An investment cannot be made in these indexes. Index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The performance noted does not include fees or charges, which would reduce an investor's returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Any Opinions are those of Eric and Jenny Hilliard and are not necessarily those of RJFS or Raymond James

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. © 2018 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.

Raymond James Financial Services does not accept orders and/or instructions regarding your account by email, voice mail, fax or any alternate method. Transactional details do not supersede normal trade confirmations or statements. Email sent through the Internet is not secure or confidential. Raymond James Financial Services reserves the right to monitor all email. Any information provided in this email has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James Financial Services and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. Raymond James Financial Services and its employees may own options, rights or warrants to purchase any of the securities mentioned in this email. This email is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this message in error, please contact the sender immediately and delete the material from your computer.