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Q1 2023 Quarterly Market Update

Market Update Q1 2023

Hi, this is Zach Harrington, Chief Investment Officer and partner here at Rise Advisors.  On behalf of my partners Stephanie Kelm, Scott Klatt, Mark Jones, our staff, Danielle Emmons, Jenna Reiber, and Angelica Sudore. I want to thank you for taking the time to listen to our Rise Advisors update and market outlook for May 2023.

When we look at what we're going cover today, we're going to spend a lot of time focusing on the financial sector, looking at some banking data that I think indicates the direction the economy is headed, as well as some of the path and expectations of where the Federal Reserve is going to take things over the next six to 12 months. We'll talk about the impending recessionary pressures that we see the market having to deal with, and then we're going to talk through the portfolio composition of our framework models, some of the positions within there, things we're keeping an eye on, and some upcoming changes.

For those of you who had a chance to review our March blog post that went out shortly after the collapse of Silicon Valley Bank1, this chart right here should look quite familiar. A little update to this chart from March: this bank right here, First Republic just got taken over by JP Morgan over the last weekend and it was the third bank to collapse during what has been this pretty unsettling six-to-eight-week period for investors. One of the things we noted in that March meeting that has really started to ring true is that everybody in this realm of SVB or smaller is going to have to immediately start reorganizing their balance sheets. And what does that mean? What it means is, they're trying to free up cash and get liabilities off of their balance sheet in an effort to be in a better financial position as things begin to become more difficult economically.

So, when we look at some of the data around this, what we're seeing here is data where we're just focusing on rolling two-week numbers. What we've seen in the six weeks post Silicon Valley Bank’s collapse is the largest rolling two week decline in deposits just about ever. So over that time period, we've seen deposits at these commercial banks and regional banks, once again, the ones to the right here of Silicon Valley Bank, we've seen these deposits decline by approximately 380 billion. About 300 billion of those dollars went to the big banks. And that has really changed how those big banks have had to basically lend and make money available. When we look at the decline in mortgage holdings, just as we noted, these banks need to shore up their balance sheet.

They do it a couple of different ways. They raise cash via making incentives to banks, to depositors, or they get liabilities off the balance sheet. And that's what we've started to see. About 140 billion of mortgages have come off of these commercial banks’ balance sheets and been sold off to larger banks or servicers, institutional fund managers. The other thing we're seeing is the decline in treasury holdings. So, banks basically shoring up their short-term deposits by selling treasury bonds to the tune of about 40 billion2. This is the most important one though, the decline in bank lending. When we look at what is driving some of the economic activity, even as interest rates have been higher, it is banks’ lending money to consumers and to companies and that's come to a screeching halt post Silicon Valley Bank collapse and as a lot of these banks try and shore up that balance sheet.

One of the things that we think is important to look at is some of the behavior of these banks. So, as we noted, when you're trying to shore up your balance sheet, you do it in a multitude of ways. One is selling bonds and getting liabilities off the debt or off the balance sheet. The other piece is incentivizing new depositors. And so when we look at the small banks, they've increased the yield on their three month CDs since the end of February, as have mid-size banks, but the largest of the banks have actually dramatically declined to the tune of 0.36%, the average three month CD they're willing to offer3. And that's a testament to how strong a financial position they're in and how little dependency they have on new depositors. When you look at the opposite end of the spectrum, there's a massive incentive to get new money into those banks.

So, when we look at the banking sector as a whole, we think it's important to remind ourselves that bank lending provides key money supply into the market and into the economy. And the combination of restrictive Fed monetary policy, restrictive bank lending, is going to drive down inflation and it's likely going to slow the economy down quite dramatically. It's our opinion that the May meeting that's going take place here within the next couple of days is going to be the end of the Fed rate hiking cycle. And we do look for the economy to come to a halt here during the second quarter of 2023. 

But with that it's important to keep in mind that there is opportunity even in recessions. One of the ways you combat getting out of a recession is to make money less restrictive. And when you look at the expected Fed Fund Future Rate, basically the expectations of where the Federal Reserve is going to take interest rates, it's pretty clear and evident that the market thinks that over the next 24 months, these rates are going to be cut quite dramatically4.

So as those rates come down, you as an investor benefit within your existing bond portfolio because as rates come down, bond prices come up, and on top of that you benefit as an equity investor because as those rates come down, the equity markets become more attractive. It's just something to keep an eye on that yes, there's going to be some short-term speed bumps here, but over the next 24-to-36 months, we should expect the market to break out of this sideways pattern it's been in for the better part of two and a half years.

When we look at the business cycle update, one of the important things to keep in mind is the economies and the business cycle move in a sine wave, right? So, you have early cycle, mid cycle, late cycle and recession. At this point, China is making its way out of a recession and entering the early stage of the business cycle. Every other major economy is in a recession or approaching a recession5. Once again, this doesn't have to be a 2008 recession, recessions are things that happen normally during economic cycles. On average they happen around every five years. And this is something we should expect to see more frequently moving forward as basically the Federal Reserve and the government can't control the economy with such easy and low interest rates.

So, when we look at things from a portfolio construction standpoint, right now just about every framework is at its target allocation. You have your core equity pieces, you have your large-cap US exposure, you have your small and mid-cap US exposure, your international and emerging markets. You have your satellite equity exposure where you have financials, industrials, Apple, Home Depot, Target, PayPal, and DraftKings. We think those are all companies or sectors of the economy that coming out of a recession should benefit mightily. Industrials and capital expenditure increasing in the early business cycle are very common; banks benefiting from higher interest rates and more economic certainty and lending activity. It's a great way to own the big banks and then things like Home Depot and Target and PayPal. As consumers become more and more comfortable and things come out of the recession, these are great places where we want to have money.

We then look at the things on the fixed income side. And it's an important thing to keep in mind that most of you are exposed to these longer duration and shorter duration bonds. And we think those are great places to be during times of economic uncertainty. The shorter duration bonds are there and designed in a way in which they can provide a buffer to your cash flow need and your longer duration bonds are going to have some really awesome total return potential as rates come back down and those bond prices increase. So, we really like where those things are coming together.

 When we look at things, we're keeping an eye on, we think there's some main drivers here of some instability in markets over the next 12 months or so. One of the things we're keeping an eye on is basically China is a power broker globally, specifically within what's known as the bricks, which is Brazil, Russia, India, China, and South Africa. We think that China's been able to do a lot of things geopolitically that the US has struggled to be able to do and it is giving us reason to pause and just focus on that, power dynamic. We're focusing on the US Treasury default and possible debt ceiling limits here over the next 30 to 90 days. And what happens with that. We're keeping an eye on oil contracts and they're pegged to the US dollar and the impacts they may have on our ability to lend money via treasuries at such a low interest rate. There's obviously the war in Ukraine and the potential of an escalation of what's taking place in Taiwan. These are all things that are out of our control, but they're things we're cognizant of in keeping an eye on as we continue to navigate 2023 and beyond.

When we look at upcoming portfolio changes, we are going to be looking to produce Apple here in the coming weeks. When you look at your overall portfolio, most of you own Apple outright. Most of you own Apple within Vanguard growth and one of the largest holdings within XLF, which is the financials ETF, Berkshire Hathaway. And Berkshire Hathaway's largest company that they own is Apple. So, we think there's an over concentration in Apple, which has been a great place to be over concentrated. Apple has had a really great start to 2023, but we do think that limiting that exposure is something we're going to want to do.

The other thing you're going to see is FLOT finally eliminated from the portfolio for most of you that's been in your portfolio since November of 2021. And it's done an awesome job of providing price stability and consistent cash flow and with where we expect rates to head. We are looking at some alternatives and there's going to be more to come on that.

And then we're looking at potential equity hedges. Are there ways that we can kind of have our cake and eat it too when it comes to upside with inequity markets and limiting downsides? So, lowering the volatility and providing some opportunity if markets go one way or another.

 Those are the things we're working on. I want to thank you for taking the time to listen to this. As always, if you have any questions or concerns when it comes to your portfolio or any of the decisions being made within our Rise Advisors frameworks, don't hesitate to contact your advisor and I'd be happy to get on a call with you and talk more about it. Thank you again on behalf of everybody at Rise Advisors and I hope you have a great summer.

 Disclosure: This presentation is for Informational purposes only. All investment strategies including rebalancing and diversified asset allocation have risk. Past performance of our investment approach, component holdings and methods does not guarantee future results. Advisory services offered through Rise Advisors, LLC ("Rise") Registered Investment Advisor. While all data is believed to be from reliable sources, accuracy and completeness are not guaranteed.


1. Torsten Slok “From No Landing to Hard Landing” Apollo Academy, March 15, 2023, accessed on March 17, 2023, https://apolloacademy.com/from-no-landing-to-hard-landing/

2. Apollo Academy – Outlook for Regional banks

Charts used from pages 4,5,6,7

3. Torsten Slock – Daily Buzz 5/2/2023

4. St Louis Fed – Summary of projections https://fred.stlouisfed.org/series/FEDTARMD

5. Fidelity Business Cycle update April 2023