Stock lines representing the Centura Wealth Market Recap 2023
,

Q4 2023 Market Wrap: the US Avoided a Recession in 2023

With so much uncertainty surrounding the Fed’s monetary policy and the contagious effects their aggressive rate hiking cycle would inflict on the economy, we entered 2023 with great pessimism and uncertainty. Most economists and financial strategists predicted and braced for what they believed was an almost certain recession in the year’s second half.  Not only did the U.S. avoid a recession, the first three quarters grew at 2.2%, 2.1%, and 4.9%, respectively, with the Atlanta Fed GDPNow model estimating fourth quarter growth at 2.3%.  

Like 2022, the common themes wreaking market havoc in 2023 were linked to the Fed’s monetary policy, resulting market yields, and inflation. While the US economy is showing some signs of softening, the labor market has remained robust. The Fed’s war on inflation appears to have proven successful, as price pressures continue to grind lower towards their 2% target while avoiding a ’hard landing’. Yield volatility resulted in equity market gyrations over the last two years, and in 2023, the equity markets looked past the multiple regional banks collapses, growing geopolitical tensions globally, and several quarters of negative year-over-year earnings growth on their way to recording gains few predicted. Investors were rewarded in 2023 in many ways, including:

  1. The S&P 500 index surged $8 trillion and closed up 24.23% in 2023, finishing the year on a strong note. Notching nine straight weeks of gains – the longest such streak since 2004, the S&P 500 index closed the year ~0.56% shy of new all-time highs.
  2. The NASDAQ 100 benefitted from the Artificial Intelligence (AI) craze to gain 53.81% for year, the index’s best return since 1999.    
  3. The Magnificent Seven, comprised of the seven-largest technology stocks (Apple, Amazon, Alphabet, Microsoft, Meta Platforms, Nvidia, and Tesla), were responsible for approximately 64% of the S&P 500’s 2023 return.  Investors flocked to size and profitability and believe the Magnificent 7 companies’ scale and financial flexibility place them in the best position to capitalize on artificial intelligence.
  4. Global stocks, as measured by the MSCI All-Country World Index, struggled to keep pace with their U.S. counterparts, registering gains of 12.59%.  
  5. Bloomberg Barclays U.S. Aggregate Bond Index snapped its two-year losing streak. The index advanced 5.53% in 2023, and with yields plummeting over the final two months of the year, global bonds recorded their best two-month surge on record, according to Bloomberg.

Taking the Fed’s rhetoric from December’s meeting and the path of inflation, market participants went all-in, and are now anticipating the Fed is set to pivot in the first quarter of 2024 and cut interest rates significantly over the course of the year. This move would lift asset prices across all major markets, delivering most of the calendar year returns for several indices in November and December. Given the robust rally to close out the year, we keep asking the two primary questions: Have the markets gotten ahead of themselves? And is a recession still on the table for 2024?

Market Recap    

Equities – The combination of stronger economic data, U.S. Treasury debt issuance, foreign investor sales of U.S. debt, and Fed uncertainty that plagued equity markets in August and September rolled into the final quarter of 2023, pushing stock and bond returns to correction territory in October. While the index started the quarter declining more than 2% in October, the NASDAQ-100 bounced 16.77% in November and December to produce a fourth-quarter advance of 14.34%. The U.S. Treasury announced their debt issuance would focus on the front end of the yield curve. The labor market showed signs of softening, and the Fed started their dovish posturing. These shifting dynamics forced longer-term bond yields lower from nearly 5% on the 10-Year U.S. Treasury to 3.88%, subsequently igniting the ‘everything rally’ to close out 2023’s final two months.  The largest benefactors were those asset classes like small caps and technology, which tend to be the most sensitive to higher interest rates.

Unlike most of the year, the fourth quarter market surge was more broad-based, as evidenced by the average stock, represented by the S&P 500 Equal Weight ETF (RSP), besting the concentrated market-cap weighted S&P 500 with returns of 11.81% and 11.24%, respectively.  Lower rates and looser financial conditions boosted the outlook for smaller companies, as the small-cap Russell 2000 index rallied 13.55% amid the fourth quarter collapse in the 10-Year U.S. Treasury yield and nearly produced the entire year’s return for the index in the final two months. 

While talk of the most anticipated recession evaporated, and a ‘soft landing’ to ‘no landing’ is all but expected, the market appears to have received the clarity from the Fed they were looking for and have declared the Fed is done raising rates, with rate cuts on deck.  Participants continue to react counterintuitively to good news, treating it as bad news, while reacting to bad news as though it is good news. Should core inflation remain sticky and economic data like labor remain strong, we would not be surprised to see volatility ensue as investors start to unwind some of the optimism surrounding a Fed pivot they poured on in late 2023.  

Bonds – As yields continued to spike, bonds continued their downward trend, adding to losses accumulated since August 2020. With stronger-than-expected economic data, Fed uncertainty, and robust U.S. debt issuance, the demand for U.S. Treasury securities continued to wane, not absorbing supply and forcing higher yields. The yield on the 10-Year U.S. Treasury started the quarter yielding 4.59% and nearly closed above 5% (4.98%) before plummeting 1.10% to finish the fourth quarter yielding 3.88%. Falling bond yields resulted in strong returns, as the Bloomberg U.S. Aggregate Bond Index increased 6.82% in the quarter, dragging its performance out of negative territory for the year. 

Market Index Returns Y Charts

Source: YCharts. The Bloomberg US Aggregate Index was used as a proxy for Bonds; the Bloomberg US High Yield 2% Issuer Capped Index was used as a proxy for High Yield Bonds; the Russell 2000 Index was used as a proxy for Small Cap Equities; and the MSCI ACWI Ex USA Index was used as a proxy for Foreign Equities.

With stronger economic data, base case expectations are that the Fed will successfully achieve a ‘soft landing’, avoiding a recession altogether. However, as certain economic data has continued to surprise to the upside, growth metrics are moderating.

Economy: The Consumer is a Rabid Spending Engine 

Growing at more than double the pace of the first half of 2023, the final revision to third-quarter GDP growth accelerated to 4.9%, marking the fastest expansion rate since Q4 of 2021. The third quarter GDP reading was characterized by strong consumer spending, exports, and private inventory increases. Consumers are the engine driving us forward, making up roughly two-thirds of the nation’s economic output.  Showing signs of abating in Q2, spending only grew 0.8%, with the third quarter witnessing consumers accelerate spending by nearly 4X to 3.1%.  While consumer behavior is important to monitor, the acceleration does not appear troublesome to the Fed, as the Atlanta Fed’s GDPNow model for the fourth quarter has been lowered to 2.3%.

Given our nation’s reliance on consumption as a key component of GDP[1], consumer health is important to monitor. Fresh off a strong third quarter spending clip, the consumer has showed little signs of slowing, as indicated by holiday spending.  The five-day holiday shopping period encapsulating both Black Friday and Cyber Monday saw record sales of $38 billion, a 7.8% increase over last year. The two retail holidays produced a combined $22.2 billion in sales, representing year-over-year growth of 7.5% and 9.6%, respectively.  While strong spending in general is good, how consumers have been spending gives rise for concern. 

The post-pandemic, stimulus-infused savings are being exhausted and many consumers are adopting a buy now, pay later (BNPL) mentality and paying on credit. Most credit spending involves floating rates, so while consumers run up their balances, their cost of debt is also rising. Further deterioration in the labor market could spell trouble for the consumer, though for now, falling price pressures and sticky wage growth continue to support the consumers’ appetite for spending. 

Inflation & Interest Rates    

Inflation remains elevated, though the downward trends have been persistent. November’s headline Consumer Price Index (CPI) came in at 3.10%, while core CPI (excluding energy and food) remained stuck at the 4% year-over-year threshold for the second consecutive month. The once-persistent pricing pressure on core services, particularly, shelter, appears to have broken lower. 

Shelter represents about 1/3 of CPI, making the variable impactful on the overall inflation gauge, as shelter has accounted for nearly 70% of the total increase in core CPI over the past year, according to the Bureau of Labor Statistics.  Slightly declining to 6.5% in November from its 8% cycle peak, registered in March of this year, and rents declining nationally, shelter inflation should continue to move lower in 2024. 

Adding to the optimism over inflation is the downward pressure on the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE). Entering the year elevated, with the headline PCE and core PCE registering 5.44% and 4.87%, respectively, the Fed’s war on inflation has proven successful. Both metrics have broken through the 4% threshold, with headline breaking below 3%. Through October, headline PCE was 2.64%, while core PCE fell to 3.15%.  While the Fed’s actions appear to have been successful, it’s still too early for their victory lap, as wage growth remains above 4%.  Wage growth trending above inflation creates the concern that persistence of this trend could result in a wage price spiral, ultimately leading to a resurgence of inflation.  For the Fed to feel comfortable inflation will not reverse course, they will want to see both core CPI and wage growth trend below the 4% threshold for multiple readings. 

core CPI remains elevated

Unemployment    

November’s Labor Market Report registered the 35th consecutive month of job gains. Estimates called for 190,000 jobs in November, however the market barely beat to the upside when 199,000 jobs were added and unemployment fell 0.2% to 3.7%.  The labor market continues to post strong, albeit moderating, results. Providing comfort was the rebound in the participation rate to 62.8%, matching the post-pandemic high, along with job openings (JOLTs) falling sharply to 8.73 million and bringing the ratio of job openings to those unemployed to 1.34:1.  While the ratio of 1.34:1 is still elevated above levels we have historically witnessed, the ratio has fallen significantly from nearly two job openings for every job posting in 2022, indicating that some of the slack is working itself out of the system and the labor market is showing signs of tightening.  While unemployment claims are at extraordinarily low levels, the upward trend in Continuing Claims continues to point towards labor softening. The metric reached the highest level since late-2021, indicating out of work Americans are finding it more difficult to secure new employment, which could have a hand in slowing consumer spending.

While Unemployment has failed to cross

Time to Pivot?

The Fed has remained resolute in bringing inflation back to its long-term target of 2%. Since March 2022, the Fed has raised rates eleven times, bringing the target range for the Fed Funds rate to 5.25% to 5.50%. During this period, Fed Chairman Jerome Powell has also been reducing the Fed balance sheet by ~$95 billion per month, shedding nearly 14%, or approximately $1.25 trillion, since peaking in April 2022 at $8.965 trillion.    

As anticipated, the Federal Open Market Committee (FOMC) elected to keep rates unchanged in December for the third consecutive meeting.  While the Fed’s decision was largely expected, their dovish commentary surprised investors.  With moderating jobs data and promising inflation figures likely supporting their tone, the Fed indicated their efforts to dampen 40-year high inflation are proving successful, stating growth has slowed and “inflation has eased over the past year but remains elevated.”

December’s meeting also saw a reversal in the Fed’s future projections. Deviating from their September estimates, the Fed is now projecting 0.75% of rate cuts up from 0.50%, with another 1% of estimated cuts in 2025, which would bring the Fed Funds Target rate to 3.6% by the end of 2025. The FOMC further slashed their inflation estimates from 2.6% to 2.4%. In his post-announcement press conference, Chairman Powell all but declared the Fed is done hiking rates in this tightening cycle, 

“We believe that our policy rate is likely at or near its peak for this tightening cycle; the economy has surprised forecasters in many ways since the pandemic.” 

While recognizing the lagged effects of monetary policy on the economy, the Fed did leave the door open for additional rate hikes. However, the insertion of the word “any” in the following statement, “any additional policy firming that may be appropriate” to rein in inflation, sent equity markets higher and bond yields lower. In the weeks following the December FOMC meeting, the markets revised their expectations to aggressively price in 1.50% of rate cuts in 2024, beginning as early as March, double what the Fed is currently projecting.

Fed Projections Percent
fig 2 FOMC

Source: Federal Reserve

Barring any resurgence of inflation, we believe the Fed has finalized its rate-hiking program.  We stop short of saying “tightening cycle” because the Fed is still engaged in Quantitative Tightening (QT) through the reduction of their balance sheet by $95 billion per month, which Goldman Sachs believes has resulted in tightening financial conditions and higher yields.  Given the Fed’s steadfast commitment to bringing inflation down, we struggle accepting the market’s expectations that the Fed will cut rates as soon as March, rather believing that without some exogenous event or sharp economic contraction, the Fed will likely keep rates unchanged until at least mid-year.  Having extensively studied Volcker’s approach in the 1980s, it is unlikely that Powell wants to repeat those mistakes and cut rates too abruptly, which could cause inflation to reverse course as it did in the Volcker Era. Should our base case prove accurate, we would expect volatility to ensue as yields rise and equities sell off, giving back some of the gains realized to close out 2023.

Centura’s Outlook  

The Fed’s goal to slow the economy just enough to lower inflation back to its 2% mandate and avoid recession serves as the base outcome expected by the Fed and most market participants. Should this play out accordingly, we expect 2024 to produce solid returns in both equities and bonds. However, the market currently appears priced to perfection so investors should proceed with caution as monetary policy uncertainty, any reversal in yields, the presidential election, and, to a lesser extent, a looming U.S. Government shutdown could all lead to bouts of market angst and volatility. Nevertheless, there are opportunities across all asset classes moving into 2024 though, equities provide an example of how caution is warranted amidst attractive opportunities. 

Earnings for the third quarter snapped the three consecutive quarters of negative earnings growth as companies began to experience stronger than expected revenue growth. Revenues grew at 2.4% year-over-year and as earnings advanced 4.9%, according to FactSet. The surprising third quarter results indicated to investors that companies have weathered the Fed’s rate hiking storm better than anticipated. Surprisingly, even in the face of 15-to-20-year high interest rates, companies have been able to maintain solid profit margins through successful cost-cutting measures over the last two years.  However, FactSet has witnessed revisions for fourth quarter earnings, dropping from 8.1% on September 30 to 2.4% as of December 15.  

10 year S&P 500 profit margin

Forward 12-month P/E ratios are approximately 19.3x, above both their five-year and ten-year averages of 18.8x and 17.5x, respectively. This shows that equities are slightly overvalued and thus priced to perfection.  The fourth quarter saw multiple expansions in price appreciation and meager profits. To limit further multiple expansion, we need to see meaningful earnings growth to make valuations more attractive from their current levels. 

The Federal Reserve rhetoric from December’s meeting and waning inflation give us optimism, but we remain cautious.  The market remains too dependent on the Fed, which has become reliant on poor economic data, and with worsening conditions, the more likely the Fed is to pivot and cut rates sooner.   

Many variables in Q4 surprised to the upside yet continue to moderate. However, as we look forward, the consumer’s health gives us pause, as does the impact of prolonged elevated rates on corporate balance sheets of less than fundamentally sound businesses – both of which could result in increased consumer and business defaults. We continue to believe the two largest immediate risks hinge on a misstep or abrupt change to the expected Fed outcomes and a potential resurgence of inflation, both of which are related. 

We enter the year with portfolio allocations aligned with our long-term targets. While higher rates will continue to cause issues for some companies, we expect earnings to grow from 2023 levels in 2024. Additionally, equities generally produce a positive return during election years, so while volatility is likely to increase as we approach the election in the third and fourth quarters, we expect history to repeat itself and deliver gains.  According to First Trust, on average, the market was up 11.28% during 19 of the past 23 total elections, or 83% of the time, since the S&P 500 began producing positive results.

Yields should continue to grind lower over the course of the year, presenting attractive opportunities to produce asymmetric returns in bonds. While a strong bounce in the fourth quarter slightly dampened our 2024 return expectations for fixed income securities, we believe portfolios should extend duration. Extending duration should allow investors to clip an attractive yield, while also providing them with the opportunity to experience capital appreciation for a total return exceeding what they will clip sitting in money market funds or short-term Treasury bills.

Elevated interest rates continue to punish private real estate returns, with further slight downward valuation adjustments expected from their previous marks.  Real estate is an interest rate-sensitive asset class; as rates continue to move lower, we anticipate a pick-up in activity, and a subsequent reversal of valuations. While we believe we are nearing the light at the end of the tunnel for several real estate sectors like multifamily and industrial, unfortunately, we believe further paper losses are likely in the short term. 

Though yields have fallen sharply, private credit is predominantly floating and tied to a base rate such as the Secured Overnight Financing Rate (SOFR), which is closely linked to the Fed Funds overnight rate.  Yields on private credit should remain at their current levels until the Fed begins to cut rates. Even as the Fed cuts rates, the floating rate on private loans does not adjust immediately. Rather, there is a delay before the loan terms reset lower, with private loans typically resetting coupons quarterly. Barring a catastrophic event, the Fed is likely to lower rates more methodically than they hiked them, supporting higher yields in private credit. Combining traditional bonds with private credit should produce a balanced and diversified approach toward income production and total return in 2024. 

As the door closes on 2023 and we enter 2024, we do so cautiously optimistic, as we believe the market has gotten a little ahead of itself, and there is still a high-level of uncertainty. We will continue to move forward with our constant focus on quality. Thank you for your continued confidence and support. If you have questions or concerns, please contact your Centura Wealth advisor. 

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.  

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.   

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.  

Centura Wealth Advisory is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Centura Wealth Advisory and its representatives are properly licensed or exempt from licensure. 12255 El Camino Real, St. 125, San Diego, CA 92130.  

Stock lines representing the Centura Wealth Market Recap 2023
, ,

Market Wrap: Anyone For a Game of Tug-of-War?

For the past several quarters, the market has seemingly ignored communications from the Fed, particularly the point that interest rates will continue to rise and remain elevated for as long as it takes to restore inflation to their 2% target. This trend persisted up until August in the aftermath of Chairman Powell’s Jackson Hole speech and the subsequent September Federal Open Market Committee (FOMC) meeting. After over a year of repetition from Chair Powell, the market finally appears ready to listen to sentiment coming from the Fed. 

Successful childhood tug-of-war matches typically rewards the side with the best anchor. In a quest to predict the future, both the economy and the Fed have entered into a game of tug-a-war, with the market as the rope. Good news is no longer good news, rather, good news is bad news, and bad news is good news. The market hates uncertainty and must predict whether the Fed will raise rates again and, perhaps more importantly, when they will begin lowering. Good news signals that the Fed can continue increasing rates and likely prolongs the duration that rates must remain elevated. Conversely, bad news signals conditions are softening, and the Fed is likely done raising rates, with a pivot to rate cuts shortly to follow. The struggle is finding a better anchor than the side wielding the most power – the Fed. Hence why they said, ”Don’t fight the Fed.” With this constant push-and-pull between monetary policy deployed by the Fed and economic reality, it is hard to predict what will happen next. 

Market Recap

Equities – The combination of stronger economic data and revised projections from the Fed has finally gotten through to market participants. The Fed does not intend to repeat the mistakes made during the Volcker regime. The Fed will keep rates elevated longer to stifle inflation and ensure prices do not reverse course and reaccelerate. The market acceptance of the Fed’s thesis, coupled with higher Treasury yields, has finally chinked the armor of the interest rate ‘sensitive,’ tech-heavy NASDAQ-100.  

While the index was flat for the quarter, the NASDAQ-100 was down 6.61% since the yield on the 10-Year U.S. Treasury first began to surge on July 31st. This effectively erased the gains the index enjoyed during the quarter’s first month, bringing the index’s 2023 return to 34.51%.      

On the other hand, recent performance of the S&P 500 has been characterized by the ten largest stocks, which currently comprise more than 30% of the overall index. In fact, 90% of the benchmark’s return has been driven by those large constituents, which are mostly Big Tech. This is the highest level of concentration the index has seen with data going back to 1990. 

Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. The top 10 S&P 500 companies are based on the 10 largest index constituents at the beginning of each month. As of 9/30/2023, the top 10 companies in the index were AAPL (7.0%), MSFT (6.5%), AMZN (3.2%), NVDA (3.0%), GOOGL (2.2%), TSLA (1.9%), META (1.9%), GOOG (1.9%), BRK.B (1.8%), XOM (1.3%), and UNH (1.3%).  Guide to the Markets – U.S.

Through three quarters, the S&P 500 is up 11.68%, while the average stock, represented by the S&P 500 Equal Weight ETF (RSP), is up a mere 0.17% through September.  Elevated rates, tighter financial conditions, and more stringent lending standards continue to dampen the outlook for smaller companies, as the small-cap Russell 2000 index sold off 10.89% amid the late July 10-Year U.S. Treasury yield surge, bringing the small company gains to 1.35% for the year. 

Talk of the most anticipated recession has quickly evaporated, and a ‘soft landing’ is all but expected. The market appears to have accepted the ‘higher for longer’ mantra the Fed has been telegraphing all year. Participants are digesting the data and reacting counterintuitively to the good news is bad news and bad news is good news drum.  As we enter what is traditionally a strong quarter for equity markets, investors in the fourth quarter will look for clarity from the Fed as they start to shift focus and position portfolios for 2024.

Bonds – As yields spiked, bonds continued their downward trend, adding to losses accumulated since August 2020.  On the heels of a U.S. credit downgrade from Fitch and stronger-than-expected economic data, the demand for U.S. Treasury securities continues to wane, failing to absorb supply and forcing yields much higher. The U.S. Department of Treasury’s spending spree of nearly $1.7 trillion in U.S. debt since early June is also adding to the supply glut and forcing yields higher. The yield on the 10-Year U.S. Treasury surged 0.78% in the third quarter, seeing its highest yield since 2007. Bonds, as measured by the Bloomberg U.S. Aggregate Bond Index, fell 3.23% in the third quarter, dragging the performance for the year to -1.21%. 

Source: YCharts. The Bloomberg US Aggregate Index was used as a proxy for Bonds; the Bloomberg US High Yield 2% Issuer Capped Index was used as a proxy for High Yield Bonds; the Russell 2000 Index was used as a proxy for Small Cap Equities; and the MSCI ACWI Ex USA Index was used as a proxy for Foreign Equities.  

With stronger economic data, expectations have quickly gone from a certain recession to a high expectation that the Fed will successfully pursue a ‘soft landing’, avoiding a recession altogether. While the data has continued to surprise to the upside, many growth metrics continue to moderate.  

Economy: Still Waiting on that Recession? 

Defying expectations, the last week of September delivered the final, unchanged revision to second-quarter GDP growth of 2.1%.  The September GDP reading saw strong fixed business investment of 7.4%, and upward revisions to inventories and net exports to help offset an unexpected slowdown in consumer spending. Early projections for second-quarter growth saw personal consumption cut in half as consumer spending was revised from 1.7% to 0.8% — the weakest advance in our nation’s primary economic driver in over a year. While consumer behavior is important to monitor, the slowdown does not appear troublesome to the Fed.  After reaching 5.8% in mid-August, the Atlanta Fed’s GDPNow model for the third quarter was pushed lower to a robust 4.9%, signaling continued economic strength.

While real GDP may be growing moderately, several factors have the potential to push growth lower. Battling 40-year high inflation has applied pressure to consumers. According to Bloomberg, outside of the wealthiest 20% of Americans, the consumer has run out of extra savings. Consumers have less cash on hand than they did when the pandemic began. Adding to budgetary constraints, 40 million people collectively owe more than $1.6 trillion in student loans, and these individuals are starting to make payments on student debt for the first time since the onset of the pandemic. Given the lack of savings, the payments of $300 on average are causing concerns that discretionary spending will continue to trend lower. Not to mention, credit card debt has risen to record highs, exceeding $1 trillion and underscoring the severity of this consumer strain. With approximately 70% of our growth tied to the consumer, their financial health should be seen as a harbinger of what could unfold. 

Inflation & Interest Rates

Inflation remains elevated, though the downward trends are welcome. August’s headline Consumer Price Index (CPI) came in at 3.67%, while core CPI (excluding energy and food) remained above the 4% threshold, registering 4.39% year-over-year. The once persistent pricing pressure on core services, particularly, shelter, appears to have finally broken lower. Shelter represents about 1/3 of CPI, making the variable impactful on the overall basket of goods. Given the Fed’s focus on core inflation, the downward trend is seen as positive. However, dampening excitement is the sharp reversal of energy. Gasoline and energy rose 5.6% and 10.6%, respectively, in August, from the prior month, forcing headline inflation to reverse course and go higher.

While the downward trend in CPI is a reason for optimism, we are more concerned with the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE). After remaining mostly flat at 4.62% for the first half of the year, the gauge finally broke below the 4% level, to 3.88%. Breaking through the 4% milestone has many economists and market participants anticipating the possibility that the Fed is done raising rates for the year. 

Just like the debt ceiling negotiations consumed headlines through June, the government shutdown dominated chatter leading up to the close of the government’s fiscal year on September 30th. Like the debt ceiling, the proverbial can was kicked down the road, avoiding a shutdown at the eleventh hour. While negotiations were essentially a non-event, one of the most meaningful outcomes has been the U.S. government’s subsequent issuance of new debt, which has been ongoing since June 5th.   

Following the debt ceiling extension, markets anticipated the issuance of $1 trillion in new Treasury securities by the end of the third quarter, however, their estimates were off the mark. Surpassing expectations, the U.S. Treasury has issued approximately $1.7 trillion of new debt just since June 5th, pushing the nation’s deficit beyond $33.125 trillion. Issuance of new securities floods the market with new supply and, with few buyers, this massive issuance serves as additional quantitative tightening to support higher yields. 

‘Higher for Longer’  

The Fed is undoubtedly committed to doing whatever is necessary to bring inflation back to its long-term target of 2%. After embarking on their most aggressive tightening cycle in March 2022, the Fed has raised rates eleven times over eighteen months, bringing the target range for the Fed Funds rate to 5.25% to 5.50%. During this period, Federal Reserve Chairman Jerome Powell additionally led a $95 billion monthly balance sheet reduction. This reduction shed nearly 11%, equivalent to $960 billion, off the federal balance sheet, illustrating that the Fed is willing to deploy any and all tools in their war on inflation. 

After pausing rate hikes in July, the September Federal Open Market Committee (FOMC) meeting marked the second time since March last year that the FOMC voted not to hike rates further. The decision to pause was all but expected, but revisions to the Fed Dot Plot and forward-looking expectations for the Fed Funds rate sent markets reeling. Their September projections adjusted what was previously 1.0% of rate cuts expected in 2024 to only 0.50% and subsequently raised their projections for rate cuts in 2025 by 0.50%. These upward revisions indicate to the market that the Fed intends to keep rates elevated and will plan to slowly lower them over time to ensure their fight to pull inflation back to their long-term target of 2% is successful.   

September’s FOMC release and updated economic projections show a target peak Fed Funds rate unchanged at 5.6%, indicating another 0.25% of increases in 2023, though the market is anticipating the Fed is finished raising rates for now. Following the Fed’s September decision and updated Dot Plot, the market is finally accepting our base case and listening to what the Fed has been saying: rates will remain elevated for the foreseeable future, and barring a catastrophic event, cuts won’t likely come until mid-2024.   

Source: Federal Reserve  

Unemployment    

One of the Fed’s primary concerns continues to be wage growth. Although wage inflation has been trending lower, it remains elevated at 4.3%, which at the time of this writing is now higher than both PCE inflation readings, causing some anxiety for the Fed. Strong wage inflation increases the risk of a wage-price spiral, increasing the likelihood of a reacceleration of inflation or at the very least, persistent, elevated inflation.  

August’s Labor Market Report registered the 32nd consecutive month of job gains, showing signs of optimism for the Fed. Estimates called for 170,000 jobs added in August. Instead, markets were hit with the addition of 187,000 jobs. Unemployment jumped 0.3% to 3.8%, matching the large monthly bounce in May. Perhaps the most comforting data point in August’s job report was the significant increase in the participation rate, which notched a 62.8% reading. When coupled with job openings (JOLTs) falling sharply below nine million, this data point brought the ratio of job openings to those unemployed to 1.5:1, a welcome reading from previous months. The Labor Force Participation is driven by two primary factors, the labor force, which is defined as those employed or actively seeking employment, and the working age population. More people entering the labor force coupled with fewer job postings means wage growth may not turn out to be a source of inflation. As supply continues to increase and demand for labor wanes, wage growth should start to subside; a welcome development by the Fed.

Centura’s Outlook  

As the Fed remains committed to battling elevated inflation, interest rates have spiked to levels not seen since before the Great Financial Crisis and will likely continue to trend higher, or at least stay elevated for the foreseeable future. The Fed’s goal to tighten financial conditions and slow the economy just enough to lower inflation back to their 2% mandate and avoid recession is now the base outcome expected by the Fed and most market participants. However, if rates continue to march higher, we believe it could turn into a matter of not if, but when something in the economy will break. 

Earnings for the second quarter were once again stronger than expected, leading many to believe higher rates and inflation aren’t wreaking as much havoc as initially feared. However, with consumer spending trending lower and margins being pressured by both inflation and higher rates, revenues were effectively flat and the -4.6% year-over-year contraction marks the third consecutive quarter of negative year-over-year earnings.   

According to FactSet, the estimated earnings growth for the S&P 500 in the third quarter has been revised higher from the expected -0.4% in June to -0.1%. The negative forecast highlights companies’ challenges over the last year to produce profits. Given that higher rates are expected to persist, a company’s ability to service debt will remain negatively impacted, adding sustained pressure over the coming quarters.     

Forward 12-month P/E ratios are approximately 17.9x, slightly above their ten-year average of 17.5x, indicating that equities are slightly overvalued.  The inverse of the P/E ratio is known as the earnings yield, which can be compared to the 10-Year U.S. Treasury yield to gauge the relative valuation of equities. A higher earnings yield would indicate equities are undervalued, while a lower earnings ratio indicates that equities may be overvalued, as equities should demand a risk premium above prevailing Treasury rates. With the earnings yield currently at 4.26%, versus the 10-year U.S. Treasury yield of 4.59%, equities appear slightly overvalued at this juncture, and additional drawdowns may be in store before equities become attractive from a valuation standpoint.    

With recent Federal Reserve rhetoric and inflation still elevated, we remain cautious. The market is pinned to the Fed’s monetary policy tightening and has become dependent on poor economic data: the worse the economic conditions become, the greater the likelihood the Fed will pivot from their current posturing. Many variables in the third quarter surprised to the upside, and looking backwards, conditions appear somewhat stable. However, as all investors should know, past performance is not an indicator of future returns. As we look forward, the potential deterioration of consumer’s financial health gives us pause, as does the impact of prolonged elevated rates on corporate balance sheets. We believe the two largest risks to 2023’s economic and market rallies are a misstep or abrupt change to the expected Fed outcomes and a potential resurgence of inflation, both of which are closely intertwined. As communicated in , until inflation breaks lower, we remain cautious and anticipate that equities will continue to experience turbulence, particularly if inflation resurges.   

We remain steadfast in our belief that markets are discounting the impact of the Fed’s aggressive monetary tightening actions. Defaults and bankruptcies continue to rise, and as rates go higher, we expect further stress on companies and consumers. However, the artificial intelligence craze led to robust gains in technology-based and growth-oriented companies, causing many investors to jump in the market for Fear-of-Missing-Out (FOMO) and creating a large disconnect between economic fundamentals and market technicals. Given these disconnects and overall uncertainty, we returned our portfolio allocations to their long-term neutral targets. In addition to removing our underweight to equities, we have been actively replacing underlying investments to enhance the focus on quality. To navigate the forward-looking environment, we have added actively-managed investments in asset classes where active management has a proven track record of delivering superior risk-adjusted returns relative to respective benchmarks. 

Asset classes we believe warrant active management in this phase of the market cycle include international equities, large cap value, and fixed income.        

Surging interest rates have hurt private real estate, with further downward valuation adjustments expected. We prefer to focus on real estate industries possessing favorable supply/demand imbalances, like multifamily and various types of industrial real estate. These imbalances should help mitigate losses relative to other real estate sectors not possessing similar disparities, though further paper losses are expected. Ultimately, we believe a focus on quality and conservative underwriting, coupled with diversification across real estate asset types, geography, and sponsors will only benefit client portfolios.

While higher rates negatively impact several financial markets, we continue to find great opportunities in private credit. Given private credit is predominantly floating rate with short durations, and generally lower price sensitivity to spiking interest, private credit should continue to deliver strong returns and high levels of income production over similar public credit instruments. Defaults are climbing but remain below historical averages. Our focus in private credit aligns with our focus across all major asset classes, which is a focus on quality and relative value, anchored in our core investing principles.

We recognize the uncertain backdrop may provide cause for concern. We remain vigilant in our process, with an emphasis on protecting clients’ wealth, while delivering value over multiple market cycles.

Thank you for your continued confidence and support. If you have questions or concerns, please contact your Centura Wealth advisor.     

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.   
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.  
Centura Wealth Advisory is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Centura Wealth Advisory and its representatives are properly licensed or exempt from licensure. 12255 El Camino Real, St. 125, San Diego, CA 92130. 
graph and grid chart
, ,

Market Wrap: The Magnificent Seven Push Markets Higher

Move over, FAANG! The Magnificent Seven have taken over the markets. Representing the seven largest companies in the S&P 500, Alphabet, Apple, Meta, Microsoft, Amazon, Tesla, and Nvidia have been anointed by investors as leading the market and tech rally. 

The first half of 2023 was powered by mega-tech stocks, with the rest of the companies in the S&P 500 contributing an incremental amount to the indices’ return. The NASDAQ Composite registered its strongest first-half performance in 40 years, with Apple stock paving the way for an all-time high closing price on June 30, 2023 of $193.97, becoming the world’s first $3 trillion company. 

Like the dot-com euphoria, artificial intelligence (AI) has offered tailwinds for the tech industry. AI has sparked big investments by companies and investors wanting to capitalize on the Generative AI race. Meanwhile, the June 1st debt ceiling ‘deadline’ was practically a non-event. The final agreement passed by the House and Senate suspended the debt limit until after the next presidential election and restricted government spending through 2025. However, that hasn’t stopped them from increasing the deficit. As the markets look past signs of economic cooling, indices push higher in the year’s second quarter.

Market Recap  

Equities – The Fed has remained steadfast in its fight against inflation, and the prospects of higher interest rates for longer have been unable to derail the tech-heavy NASDAQ 100 momentum, on its way to a second quarter return of 15.16%, bringing the index’s 2023 return to 38.75%.  

Driven primarily by the returns of the index’s largest constituents, the S&P 500 has rebounded more than 20% since bottoming in late 2022, joining the bull market rally with the NASDAQ 100. Higher rates coupled with tighter financial conditions and more stringent lending standards have dampened the outlook for smaller companies. The small-cap Russell 2000 index has only gained 7.24% for the year, more than half of that occurring in the last week of the quarter. 

While market participants expect the Fed to continue lifting rates and no longer anticipate a pivot this year, recent economic data and stronger earnings have given bulls optimism that a recession might be avoided. For now, with an eye on the future, it appears the market is discounting the lagged impact of monetary policy; gravitating to AI-centric companies; pushing interest-rate-sensitive equities higher; and creating a larger gap between market technicals and economic fundamentals.

Bonds – Bonds, on the other hand, have been sending conflicting signals. Driven by fears of a US government default and potential Fed-induced recession, bond volatility continued in the year’s second quarter, posting a -0.84% return; bringing the overall return on bonds to 2.09% in 2023.  The current climate reminds us that while investing in ‘safe-haven’ Treasury securities removes credit risk, investors are still very much exposed to interest rate risk and ensuing volatility from changes in yields. Experiencing swings ranging from as high as 4.10% to as low as 3.37%, the yield on the 10-Year U.S. Treasury Note sits at 3.81%, or a mere 0.07% below where it started the year.  

 Source: YCharts. The Bloomberg US Aggregate Index was used as a proxy for Bonds; the Bloomberg US High Yield 2% Issuer Capped Index was used as a proxy for High Yield Bonds; the Russell 2000 Index was used as a proxy for Small Cap Equities; and the MSCI ACWI Ex USA Index was used as a proxy for Foreign Equities.

Despite declines in economic growth and activity, the economy has remained resilient as economists contend whether we are currently in or headed towards a recession.

Economy: What recession?

The economy continues to defy expectations and march higher in an environment with one of the most anticipated recessions in history. The last week of June delivered the final revisions to first-quarter GDP growth from 1.3% to 2%. Major gains came from robust consumer spending and surging exports, likely supported by the nearly 9% cost-of-living adjustment for Social Security participants. The 4.2% rise in consumer spending, as measured by personal consumption expenditures, was the fastest pace since the second quarter of 2021, and exports rebounded sharply, up 7.8%.  

While Real GDP may be growing at a decent pace, several indicators point towards further contraction or possible recession.   

May marks the 14th consecutive month that the Conference Board’s Leading Economic Index (LEI) contracted, an early indication that a recession is all but certain. Senior Manager of Business Cycle Indicators at The Conference Board Justyna Zabinska-La Monica said: 

“The US Leading Index has declined in each of the last fourteen months and continues to point to weaker economic activity ahead. Rising interest rates paired with persistent inflation will continue to further dampen economic activity. While we revised our Q2 GDP forecast from negative to slight growth, we project that the US economy will contract over the Q3 2023 to Q1 2024 period. The recession likely will be due to continued tightness in monetary policy and lower government spending.”    

While Treasury Secretary Janet Yellen, President Joe Biden, and the Fed all believe a recession will be avoided, the question is not whether we will enter a recession but, rather, when and how deep the recession will be.

Inflation & Interest Rates  

April and May’s headline Consumer Price Index (CPI) came in at 4.93% and 4.05%, respectively, while core CPI (excluding energy and food) registered 5.54% and 5.33% year-over-year readings over those same periods. The persistence of pricing pressure on core services, particularly shelter, has proven problematic. Shelter represents about 1/3 of CPI and has remained elevated, increasing 8% over the last year. Although the Fed’s restrictive monetary policy appears effective in bringing year-over-year inflation off its June 2022 peak of 9.06%, price pressures have proven painstakingly resilient and remain elevated more than the Fed prefers.  

On a positive note, rents are coming down and home prices are off their June 2022 peak, indicating lower inflation readings ahead. While the downward trend in CPI is reason for optimism, we are more concerned with the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE), which has remained relatively flat at 4.62%, the same level reported in December 2022.  

As highlighted in the previous quarterly market overview, uncertainty regarding the Fed’s inability to dampen inflation while avoiding an economic contraction has led to an almost certain harbinger of a recession: an inverted yield curve. Inverted yield curves occur when yields on longer-dated bonds are lower than yields on short-term notes and have proven to be solid predictors of recessions. 

Debt ceiling negotiations, or lack thereof, consumed headlines through June. While the negotiations were essentially a non-event, one of the most meaningful outcomes has been the US government’s subsequent issuance of new debt since June 5th, which received little recognition in the media.   

It was anticipated that a whopping $1 trillion of new Treasury securities would be issued by the end of the third quarter. Surprisingly, those estimates were off. The U.S. Treasury has already issued approximately $800 billion of new debt in less than a month, pushing the nation’s deficit beyond $32 trillion. Issuance of new securities serves as additional quantitative tightening to support higher yields and may lead to an equity pullback and widening of credit spreads according to both Citigroup and JPMorgan.

Don’t Expect a Pivot

True to their word, the Fed is committed to doing whatever is necessary to bring inflation back to its long-term target of 2%. In March 2022, the Fed embarked on its current Quantitative Tightening (QT) cycle, resulting in ten consecutive rate hikes over fifteen months and a federal funds rate of effectively 0% to 5%. During this period, Federal Reserve Chairman Jerome Powell additionally led the $95 billion per month balance sheet reduction, shedding approximately $625 billion since assets peaked in April 2022.

June’s Federal Open Market Committee (FOMC) meeting marked the first time since March last year that the FOMC voted not to hike rates further. The decision was telegraphed and highly anticipated. The Fed also conveyed that they are likely not finished raising rates, further tightening is likely required to lower inflation, and their June decision should be considered nothing more than a pause.  

June’s FOMC release and updated economic projections showed a target peak Fed Funds rate of 5.6%, indicating another 0.50% of increases in 2023. Following the Fed’s June decision and updated Dot Plot, the market finally accepted our base case and what the Fed has been saying all along: rates will remain elevated to ensure inflation is under control. Barring a catastrophic event, no Fed pivot is expected in 2023. The first rate cut is now expected in early 2024.  

Source: Federal Reserve

Unemployment  

One of the Fed’s primary concerns is wage growth. Although wage inflation has been trending lower, it remains elevated at 4.3%, which worries the Fed. Strong wage inflation increases the risk of a wage-price spiral that could prolong elevated inflation. While May’s CPI print showed headline CPI back below wage growth, core inflation measures remain higher, indicating that earnings are not keeping pace with cost-of-living increases.  

The labor market remains robust, despite some conflicting signals. May’s Labor Market Report registered the 29th consecutive month of job gains, though it showed signs of tightening. Estimates called for 195,000 jobs added in May and the market surprised to the upside with 339,000 jobs. Unemployment jumped 0.3% to 3.7%, marking the largest monthly bounce since April 2020. More than 440,000 people entered the unemployment market in May, also matching the largest monthly loss since the onset of the pandemic.  

Surprisingly, as measured by the JOLTS, job openings unexpectedly reversed course and surged back over 10 million. Due to the higher number of unemployed, the ratio of job openings to those unemployed remained relatively flat at 1.65:1.  

Centura’s Outlook

The Fed remains resolute in combatting 40-year high inflation, despite ‘pausing’ for a break, not letting concerns of a potential recession derail its tightening efforts. Interest rates remain at levels not seen since the Great Financial Crisis and will likely move higher over the next couple of months. The Fed’s goal to tighten financial conditions and slow the economy just enough to lower inflation back to their 2% mandate is a move that will likely force a recession.  

Earnings for the first quarter were stronger than expected, leading many to believe higher rates and inflation aren’t wreaking as much havoc as initially feared. However, higher rates for longer periods spells lingering bank liquidity concerns and potential economic recession have prompted analysts to revise earnings forecasts lower.  

According to FactSet, the estimated earnings growth for the S&P 500 in the second quarter has been revised lower from the expected -4.7% in March to -6.8%. If accurate, this would represent the largest decline the index delivered since the second quarter of 2020 of -31.60%.   These negative revisions highlight companies’ challenges in 2023 to produce profits. Given that higher rates are likely to persist, additional pressure may be applied over the coming quarters.    

A company’s ability to service debt is negatively impacted by elevated rates. The road ahead will likely remain a challenge given the increased cost of labor and companies’ struggle to pass increased cost of goods onto consumers.  

Forward 12-month P/E ratios have risen to approximately 18.9, slightly above their five-year average of 18.5. This indicates that equities are slightly overvalued and additional drawdowns may be in store before equities become attractive from a valuation standpoint. When banks kick off earnings season in mid-July, executive managements’ comments on the health of their companies’ and consumers’ balance sheets should prove insightful, particularly as it pertains to banks’ revisions to loan loss reserves. This should provide an indication of the direction and magnitude of companies’ future expected defaults, which we expect to increase.    

Until inflation breaks lower, we remain cautious and anticipate that equities could experience turbulence in the second half of the year, particularly if inflation remains elevated or resurges.  We also believe the market is discounting the impact of the Fed’s aggressive monetary tightening actions. Bankruptcies are quietly rising, and defaults are starting to tick up. As rates go higher, we expect further stress on companies and consumers. 

Conversely, we also recognize that the market is forward-looking, often pricing in future economic recoveries before they occur and that investors are irrationally exuberant. While we do not subscribe to, or make investment decisions based on FOMO (Fear of Missing Out), it exists and can often be the catalyst a market needs to continue to push higher. Through our experience, we have found when a large disconnect between economic fundamentals and market technicals exists, we should consider shifting allocations towards our neutral strategic allocations. 

Like many institutional investors, our cautious outlook has guided our allocations and we remain underweight to respective equity targets in client portfolios. [MT3] [CO4] Our quality bias, which served investors well in the angst of 2022, has served as a headwind in the first half of the year. Given the strength of the equity market recovery since late last year, we began bringing some of our equity positioning back toward our long-term target allocations. We intend to exercise caution while also monitoring opportunities to capitalize on any future market dislocations.    

Our fixed-income allocation has seen a reduction in non-traditional fixed-income investments that served portfolios well, as interest rates rose sharply. With end-of-rate increases in sight, over the last several months, we have been extending duration and increasing the quality of underlying bonds, emphasizing U.S. Treasury and investment grade fixed income securities. At this stage in the cycle, we believe this positioning should provide long-term benefits to portfolios and be benefactors of a ‘flight to quality’ that may ensue with any equity market volatility.   

We continue to succeed in improving returns and reducing risk by incorporating many private and liquid alternative investments into our allocations. Spiking interest rates have impacted private real estate, and we expect additional downward valuation adjustments across many sectors and markets. Our focus on real estate industries possessing a largely favorable supply/demand imbalance, like multifamily real estate, should help mitigate losses relative to other real estate sectors not possessing similar disparities. Despite the expected challenges in the real estate market, we maintain our dedication to exercising patience and selectivity in our decision-making process. For example, we are finding great opportunities in private credit. Most private credit is floating rate, possessing short durations and experiencing lower price sensitivity to spiking interest rates than similar public credit while also delivering a high-level of income production. We are beginning to observe defaults increase in the market, though they remain well below historical averages. With higher rates expected, additional pressure on borrowers’ ability to service debt will be applied. As such, our focus is on partnering with high-quality managers who have a proven track record of reducing loss. While we face significant uncertainties, we remain anchored by our core principles. Thank you for your continued confidence and support. If you have questions or concerns, please contact your Centura Wealth advisor.   

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. 
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Centura Wealth Advisory is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Centura Wealth Advisory and its representatives are properly licensed or exempt from licensure. 12255 El Camino Real, St. 125, San Diego, CA 92130.
The facade of the Federal Reserve Bank.
, ,

Market Update: Banking Sector Continues to Navigate Choppy Waters

It is not the strongest or the most intelligent who will survive but those who can best manage change.

-Charles Darwin

Recap

The investment landscape is constantly evolving. 

Over the last 6 weeks, we’ve experienced 3 of the 4 largest US Bank failures in history, with First Republic Bank the being most recent domino to fall. JPMorgan Chase quickly acquired the majority of First Republic’s assets, and assumed the deposits and certain other liabilities of First Republic Bank from the Federal Deposit Insurance Corporation (FDIC) for $10.6 Billion, with FDIC providing 80% loss coverage of First Republic’s single-family residential mortgages for 7 years. The fair value of the single-family residential loans is ~$22 Billion, with an average LTV of 87%.

In previous communications, we stated we did not anticipate further bank contagion following the demise of Silicon Valley Bank and Signature Bank. We have since adjusted our outlook and acknowledge the possibility of more regional banks failing in the near term. While we shift our outlook and advise clients to consider limiting regional bank deposits to FDIC-insured amounts of $250,000 (or your bank’s threshold as several banks possess multiple charters, allowing for more than the standard $250,000 limit), we believe larger national and international banks maintain much more resilient capital structures and controls in place which offer greater safety in deposits. 

Hike rates until it Breaks!

The Fed has an abysmal track record playing their part in several former crises. They generally tighten until something breaks.

The Savings & Loans (S&L) Crisis

In the early 1980s, the Federal Reserve increased interest rates to combat inflation, which made it more expensive for S&Ls to borrow money. Many S&Ls had funded their investments in real estate and other ventures with borrowed funds, so the interest rate hikes increased their borrowing costs and squeezed their profits. At the same time, the S&Ls were offering fixed-rate loans to homebuyers, which meant that they were locked into low interest rates and couldn’t adjust their rates to match the higher borrowing costs. When the real estate market declined in the late 1980s and early 1990s, many S&Ls were left with significant losses and were unable to repay their debts, leading to a wave of bank failures and government bailouts. The historic interest rate hikes contributed to the S&L crisis by increasing borrowing costs for the S&Ls and reducing their profits, which led to risky investments and fraudulent practices[1] to try to recoup losses. The crisis resulted in the closure of over 700 S&Ls and cost taxpayers over $100 billion in bailout funds.

The Dot Com Crash

From the late 90’s to early 00’s, investors engaged in speculative investing in internet-related companies which led to a market crash. At the time, many of these companies relied on debt financing to fund early expansion. Companies were able to sell ideas to investors through the novelty of the dot-com concept, most of which were unprofitable. 

The Fed’s rate hikes to combat growing inflation pressures made it more difficult for companies to obtain financing and led to a decline in investor confidence, which subsequently followed with a stock market sell-off. Although greed served as the main driver of the crash, the Fed’s hiking cycle served as a catalyst.

The Great Financial Crisis

The hiking cycle of interest rates played a significant role in causing the Global Financial Crisis (GFC) of 2008. In the years leading up to the crisis, the Federal Reserve had lowered interest rates to stimulate economic growth following the dot-com crash and the September 11 terrorist attacks. These low interest rates, combined with lax lending standards, led to a housing boom as many people took advantage of the easy credit to buy homes, invest in real estate, and even take second and third mortgages on their homes. However, in 2004, the Federal Reserve began to raise interest rates to combat inflation stemming from cheap money. This made borrowing more expensive and slowed down the housing market. At the same time, many of the homeowners who had taken out adjustable-rate mortgages (ARMs) found themselves unable to make their payments as the interest rates on their mortgages increased. This led to a wave of foreclosures This, in turn, led to a credit crunch, as banks became reluctant to lend money to each other or to other borrowers, exacerbating the economic downturn. The hiking cycle of interest rates played a key role in causing the GFC by slowing down the housing market, leading to a wave of foreclosures. This, in turn, created a chain reaction of losses and defaults throughout the financial system, ultimately leading to a credit crunch and a global economic downturn.

Current Day

The current hiking cycle of interest rates to combat 40-year high inflation is creating a regional bank crisis. Banking institutions, heeding the Fed’s guidance that inflation was transitory and rate hikes would not occur in the near future, searched for ways to increase yields on excess deposits invested in fixed-income securities. Many banks began increasing duration, reducing convexity[2], and taking greater interest rate risk to capture a positive return on investments. When the Fed began aggressively increasing interest rates, these investments lost value, and institutions holding these investments began to experience stress on their capital stack. Simultaneously, bank deposits continued to yield nearly zero. Regional banks with the most exposure to these investments have experienced significant outflows, and in some cases, failure. 

Fed tightening cycles tend to have a way of exposing weaknesses formerly masked by easy money environments; similar to the economic environment investors have enjoyed since the GFC.  When the Fed starts raising rates, the impact generally takes months before working through the system and affecting markets.  We’re now witnessing the impact of the Fed’s most aggressive tightening cycle in four decades, and stress is being felt throughout the financial system.

What is happening now, and why did we adjust our outlook?

On Wednesday, May 3rd, the Fed continued its war against inflation and raised the target Federal Funds Rate (FFR[3]) by 25 bps to a target range of 5.00% – 5.25%. In 14 months, the Federal Reserve has increased rates 10 times, for a total increase of 500 bps.  While the Fed will likely hit the pause button on rate increases in future meetings, they intend to keep rates elevated, adding additional pressure on banks and the debt service on corporate balances sheets.

Unlike their national and international counterparts, regional banks typically have less diversified business lines, less hedging (hedging is quite expensive and requires expertise), and more operational risk. Cracks within the foundation of Regional Banks subsequently began to appear during the current hiking cycle when depositors, unhappy with their meager deposit yield (most savings accounts were yielding <1%, while checking accounts were paying 0.01%) began withdrawing deposits and allocating funds to higher-yielding instruments like US Treasury Bills and money market funds. For example, from Q1 2022 to Q4 2022 (when the hiking cycle began), Money Market Funds total assets grew from 5.032T to 5.223T[4]. To free up liquid capital to maintain capital adequacy requirements from bank outflows, regional banks were forced to sell financial assets. Most fixed-rate bonds have lost value, forcing these banks to realize losses. Because banks are highly leveraged businesses, it doesn’t take much for a bank to get wiped out if it experiences an exorbitant amount of excess deposits invested in fixed-rate bonds during an extraordinary rising interest rate environment. We saw this with First Republic Bank (FRC).

By providing the concessions to JPMorgan Chase in the FRC deal discussed earlier, the Fed set the blueprint for larger banks to wait for FDIC to seize a failing bank and subsequently purchase the institution for pennies on the dollar. If regional bank failures persist, we anticipate this trend will continue and large banks will be successful in consolidating market share. 

PacWest, a Beverly Hills, California-based bank is working to solicit interest in the sale of its lender finance arm to strengthen its balance sheet. Through May 9th, PacWest subsequently has lost approximately 75% of its value in 2023. Hence why we believe PacWest, among other regional banks are suffering the wrath of the Fed and lack of consumer confidence.  

We continue to monitor the situation closely and assess possible contagion to other sectors of the economy.  We do not believe that regional banks are out of the woods quite yet as they are one of the primary lenders to commercial real estate operators, and we expect that they will remain under pressure as they look to navigate the billions of dollars in maturing commercial real estate loans this year and next.  At the current level of interest rates, we expect to see defaults across commercial real estate increase in the coming quarters, particularly for those operators using primarily floating-rate debt to finance their operations.

Further, we recommend clients review their banks’ FDIC limits and proceed with caution if choosing to hold cash above the insured amounts.  While many banks have started to increase the rate they pay on savings accounts, we would still caution against holding above-insured limits, and encourage clients to explore options such as holding excess funds in investments like Treasury Bills, government-backed money market funds, or even brokerage CDs to name a few.  We are happy to discuss which options would be optimal for you.  We encourage you to reach out to your advisor to make appropriate changes.  

If you have any questions, please do not hesitate to contact us. 

[1] One example of Securities fraud was the chairman of Lincoln Savings and Loan, Charles Keating. Keating used his position and influence to engage in fraudulent practices that ultimately led to the collapse of Lincoln Savings and Loan. He convinced depositors to invest their savings in high-risk junk bonds issued by his own company, American Continental Corporation (ACC), which was the parent company of Lincoln Savings and Loan. Keating misrepresented the quality and risks associated with these bonds, assuring investors that they were safe and would provide high returns. In reality, these bonds were high-risk and lacked sufficient collateral. Keating used the funds from these investments for personal gain, supporting an extravagant lifestyle and making political contributions.
[2] Convexity is a measure of the curvature in the relationship between bond prices and interest rates. It reflects the rate at which the duration of a bond changes as interest rates change. Duration is a measure of a bond’s sensitivity to changes in interest rates. It represents the expected percentage change in the price of a bond for a 1% change in interest rates.
[3] Federal Funds Rate. The target interest rate range set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
[4] Taken from Fred Economic Data
General Disclosures
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
 All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
 Centura Wealth Advisory is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Centura Wealth Advisory and its representatives are properly licensed or exempt from licensure. 12255 El Camino Real, St. 125, San Diego, CA 92130.
Financial problem, Bankrupt or fail in business concept. White piggy bank with plastic adhesive bandages on wooden desk with dark copy space wall background. Fail, Bankrupt or unsuccessful idea.
,

Market Wrap: The Fed Brings the ‘Pain’ to Banks

The combination of the Federal Reserve’s lenient monetary policy before and after the pandemic, and substantial economic stimulus measures, resulted in a considerable swelling of bank deposits. Last March, the Fed commenced the fastest tightening cycle in decades, increasing the overnight lending rate from essentially 0% to 5%. When the Fed increases bank borrowing rates and interest rates increase, banks generally raise the rates at which they lend money, while usually maintaining the interest paid on deposits. As a result, this boosts their net interest income. When 6-month Treasury Bills pay more than 5% and money market funds pay over 4% while bank deposits average less than 0.50%, depositors are incentivized to direct their money out of the bank and invest in Treasury Bills or money market funds. What happened with Silicon Valley Bank (SVB) was a collapse of confidence in unprecedented circumstances – an exodus of large investor deposits, more than the FDIC-insured limit of $250,000. This unexpected development caught SVB specifically, and other banks, off-guard, resulting in significant losses showing up on their balance sheets, as detailed next.

Take That to the Bank

According to the Wall Street Journal, in the days following SVB’s collapse, the 25 biggest US banks gained $120 billion in deposits. Small banks experienced $108 billion in outflows over the same period, resulting in the largest weekly deposit decline for small banks on record. Meanwhile, more than $220 billion has flowed into money-market funds.

A bank’s business model is to take in deposits, lending to individuals and businesses, and investing the balance (often a portion in long-term fixed-rate bonds), classifying investments they expect to hold for one year or longer as Held-To-Maturity. These Held-to-Maturity securities are held on bank balance sheets at amortized cost, and therefore do not reflect the traditional mark-to-market pricing as securities classified as available for sale; thus, bank balance sheets do not reflect the magnitude of losses resulting from the Fed increasing rates by 5% over the last year.   

Because the demand from SVB depositors was too great, SVB had to convert their long-dated Held-to-Maturity assets to available for sale, triggering a loss of $1.8 billion on the conversion from Held-to-Maturity to available for sale securities. Ultimately, financial regulators stepped in and took over operations of SVB. Days later, Signature Bank (SBNY) followed suit, and UBS acquired Credit Suisse (with the forced intervention of Swiss regulators) to prevent them from facing the same fate as SVB and SBNY. 

To prevent a bank-run contagion, the Fed stepped in on March 12th, providing liquidity to institutions through the Bank Term Funding Program (BTFP). Under this program, banks can, if needed, borrow reserves against their assets up to the par value; this is to provide liquidity to depositors without recognizing losses by preventing the sale of Held-to-Maturity assets. Through the BTFP, the Fed has injected approximately $400 Billion into the economy, working counter to their current $95 billion monthly balance sheet reduction.  

Banks rely on deposits to fund their lending and expansion, so as they experience declines in their deposit base, lending activity decreases, negatively impacting borrowers’ ability to access capital moving forward. Consequently, this situation could restrict consumer demand and accelerate the Federal Reserve’s fight against inflation, forcing them to pause rate hikes after May’s meeting.

Market Recap  

Equities – In what has shaped up to be primarily a low-quality rally despite mounting obstacles, the market demonstrated resilience for the second consecutive quarter. Many of 2022’s worst performers have been 2023’s darlings. The first quarter of 2023 saw the S&P 500 post a 7.03% return, marking the third time (1981 and 1938) in the last 15 bear markets the index posted back-to-back quarterly gains. Though the Fed continues to tighten monetary policy, the market anticipates the rate hiking cycle is nearing the end and expects the Fed will reverse course and lower rates later this year, especially on the heels of the unfolding banking challenges.

Interest rate-sensitive stocks led the charge, with the tech-heavy NASDAQ producing a first-quarter return of 16.77%. Among the biggest beneficiaries of investors shifting from financials to cash-rich companies were the largest growth-oriented equities, as evidenced by the NASDAQ 100’s Q1 return of 20.49%. With a gain greater than 20%, the NASDAQ 100 has technically entered a bull market, with the NASDAQ composite knocking on the bull’s door, returning 19.67% since bottoming in December 2022.

While market participants expect the Fed to pivot in the coming months, the Fed’s February meeting minutes suggested that further rate hikes are needed to dampen inflation. The Fed’s vow to keep rates elevated for longer signaled the peak for small-cap equities. From the start of the year through the Fed’s announcement on February 2, the small cap Russell 2000 index had gained 11.33%. Bank liquidity challenges are compounding the concerns for small cap equities as access to capital and lending standards tighten. The combination of these fears pushed the Russell 2000 nearly 10% lower from the Fed’s February meeting through the end of the quarter, with the Russell 2000 ending Q1 up only 2.34%.

Bonds – Traditionally considered ‘safe’ investments in a portfolio, bonds continue to take investors on a wild ride. Treasury Bond volatility (as measured by the MOVE index) outpaced equity volatility (as measured by the VIX) in the first quarter, leading many to question the validity of the Treasury security as the ‘safest asset.’ Periods like the first quarter serve as a reminder that investing in Treasury securities removes credit risk, but not volatility, from consideration.

Source: https://tradingcenter.org/index.php/trade/equities/stock-signals/354-move-index-bonds

At the beginning of the New Year, concerns about long-term growth prospects and anticipation the Fed would cut rates by year end caused yields on the 10-Year Treasury to decline by 0.51%, dropping from 3.88% to 3.37%. After January’s inflation report and the Fed’s February meeting, market expectations abruptly shifted, pushing the Fed Funds peak rate expectations from ~5% to close to 5.5%, and pushing the 10-year back above 4%. 

Queue the collapse of Silicon Valley Bank, forcing investors to flock to the safety of Treasury securities and pushing the 10-year back below 3.4%. In light of the Fed’s comments following their March meeting, along with the apparent stabilization of the country’s banking system, yields have risen, with the 10-Year Treasury now at 3.48%. As volatile as yields were in the year’s first quarter, bonds still produced a return of 2.96%.    

Source: YCharts   

Economy: Feel the ‘Pain’    

After two consecutive quarters of negative real GDP growth in 2022 of -1.6% and -0.6%, real GDP rebounded to 3.2% and 2.6% in the third and fourth quarters. 

Underpinned by a robust labor market and solid wage growth, consumers have proven resilient in the face of 40-year high inflation and higher interest rates. The fourth quarter’s final GDP reading showed that consumers may be starting to feel the pain with spending advancing only 1%. Reduced consumer spending leads to slower economic growth (and potential recession). Additionally, declines in exports, nonresidential fixed investment, and state and local government spending contributed to lower growth figures.

Inflation & Interest Rates  

Month-over-month readings continue to post positive marks. Year-over-year inflation trended lower from its June 2022 peak of 9.06%. Though inflation came in higher than expected in January causing equity markets to sell off and yields to rise, February’s reading was in line with expectations.      

January’s and February’s headline CPI came in at 6.41% and 6.0%, respectively, while core CPI (excluding energy and food) registered 5.55% and 5.53% year-over-year readings over those same periods, as both measures still increased month-over-month. The most problematic component of inflation is the resiliency of price pressure on core services, particularly shelter – a sticky and not-so-transitory variable representing about 1/3 of CPI. Shelter continued to trend upwards, increasing 8.1% over the last year – the highest growth rate since 1982. On a positive note, rents are coming down, and home prices are off their June 2022 peak, pointing to lower inflation readings ahead. 

Prior to the banking failures, we continued to see larger increases on the front-end of the yield curve, causing the inversions to worsen across several maturities, sending even stronger and more ominous recession signals to the market.

Recession has been a headline topic over the last few quarters. One of the most prominent and accurate yield curve inversion points is on the 2-Year US Treasury versus the yield on the 10-Year US Treasury (10/2). Its peak reached an inversion of -1.07% on March 7th and narrowed slightly to close the quarter inverted -0.58%, only 0.05% higher than the start of the year. The last statistically meaningful yield inversion was in the fourth quarter, with the 10-Year to 3-Month Treasury spread crossing into negative territory on October 26. Remaining inverted for the rest of 2022, it picked up momentum through the year’s opening quarter to -1.37%.

At their current levels, both inversion points mark the largest inversions since 1981. Inverted yield curves have proven solid predictors of a recession. Typically, a recession follows anywhere from 12 to 24 months after the initial inversion. For reference, the 10/2 yield curve remains inverted since July 2022.

According to LPL Research Fixed Income Strategist, Lawrence Gillum, one of the timelier signals derived from inversions is when the curve troughs and the yield curve finally begins to steepen, with the spread moving from negative, back to positive territory. Outside of the early 1980s, the steepening of the curve toward positive territory proved to be a timelier indicator, as the average time from an inverted yield curve trough to a recession shortened to roughly 12 months during these periods.

Finding Balance

After its balance sheet ballooned to nearly $9 trillion post-pandemic, the Fed commenced its initiative to reduce its holdings. In Mid-March, the Fed confirmed the pace of their balance sheet reduction of $95 billion per month for the foreseeable future. Since the start of the year, the Fed has reduced its balance sheet by $167 billion through March 1, bringing the total reduction to $598B from the April 2022 peak. Since the SVB collapse, the Fed has injected nearly $400B into the economy, reinflating its balance sheet and marking a pivotal moment for The Fed. For the first time in nearly a year, liquidity is being pumped into the system (Quantitative Easing). At the same time, the Fed is aggressively engaged in Quantitative Tightening (raising rates and reducing its balance sheet by $95 billion per month). 

Nonetheless, on Wednesday, March 22, the Fed decided to continue rate hikes by increasing the Federal Funds Target Rate by 0.25% to the range of 4.75% – 5.00%. Federal Reserve Chairman, Jerome Powell, pursued the narrative that inflation has run too high, and the labor market continues to remain too tight. The Federal Reserve, still committed to do whatever it takes to contain inflation, will likely raise rates another 0.25% during their May meeting. This would bring rates in line with the projected peak rate provided in the Fed’s March Dot Plot of 5.10%.    

Source: www.federalreserve.gov  

  

Unemployment  

The labor market remains robust, having now recouped all jobs lost during the pandemic-induced recession. Unemployment fell to pre-pandemic levels of 3.4% through January, matching the lowest reading since 1969. Although February saw an uptick to 3.6% as the increase in the participation rate outpaced the rate of hiring for the month, there are still more than one-and-a-half job openings for every unemployed person (1.67:1).   

Wage growth is one of the Fed’s primary concerns. Although wage inflation has been trending lower, it remains elevated, which worries the Fed. Strong wage inflation increases the risk of a wage-price spiral that could prolong elevated inflation. February’s CPI print marks the 26th consecutive month inflation has outpaced wage growth. Based on its updated March projections, the Fed forecasts the unemployment rate to increase to 4.5% in 2023. The strength in the labor market continues to serve as a beacon for the Fed. It provides a cushion and signals they can continue tightening monetary policy.

Centura’s Outlook

The Fed confirmed its commitment to do whatever it takes to control 40-year high inflation – not letting concerns about a potential banking crisis derail its tightening efforts. Interest rates remain at levels not seen since before the Great Financial Crisis (2008-09), so it’s no surprise to witness tighter financial conditions slowing the economy, with a likely recession on the horizon.  

We still believe the two most problematic and impactful risks today are inflation and the resulting Federal Reserve monetary policy response.  Concerns around bank liquidity and possible economic recession have prompted analysts to revise earnings lower. According to FactSet, the estimated earnings growth for the S&P 500 in the fourth quarter is –6.6%. If accurate, this would represent the largest decline the index delivered since the second quarter of 2020 (-31.8%). These negative revisions highlight the challenges companies must traverse to deliver profit in 2023. While the Fed’s March meeting was seen as a dovish rate increase, we believe it’s important to note that even when the Fed does stop raising rates, maintaining the current level of rates is still restrictive, and should not be viewed as the end of their tightening cycle.

A company’s ability to service debt is negatively impacted with rates expected to remain elevated. Factoring in the increased cost of labor and companies struggling to pass the increased cost of goods onto consumers, we believe the road ahead likely remains challenging to navigate. With earnings releases starting in mid-April, both top and bottom-line misses and negative management sentiment will likely dampen return expectations on equities. Forward 12-month P/E ratios are around 17.8, slightly below their five-year average of 18.5. This indicates additional drawdowns may be in store before equities become attractive from a valuation standpoint. 

In addition to the Fed’s tightening regime and banks losing approximately $400 billion of deposits in March, market volatility is likely to persist through 2023, with financial conditions tightening significantly. This puts further pressure on both business and personal balance sheets. Until inflation breaks to lower levels, the Fed provides more clarity on their forward-looking monetary policy, and banking conditions stabilize, we remain cautious and anticipate that equities will experience turbulence as the first half of 2023 continues to unfold.      

Our cautious outlook informs our allocations which remain underweight to respective equity targets. Our quality bias and slight value bias has served as a slight headwind in the year’s first quarter. Our underweight to foreign equities continues to provide support to client portfolios. Though the markets face a wall of worry, it’s important to remember they are forward-looking, often pricing in future economic recoveries before they happen. Given the strength of the equity market recovery since late last year, we began bringing some of our equity positioning back towards neutral or in line with our long-term target allocations. We intend to exercise caution going forward while also monitoring for opportunities to capitalize on further market dislocations.   

Our fixed-income allocation continues to utilize non-traditional fixed-income investments to mitigate further risks of rising rates. The short duration of our fixed-income allocation has protected client portfolios from spiking yields and loss of principal. We have incorporated larger-than-average cash allocations to provide additional support against interest rate volatility. Furthermore, yields on cash money market funds became attractive for the first time in several years. These cash allocations generate an attractive income stream and allow us to pivot as we identify opportunistic investments for superior risk-adjusted returns. 

We continue to succeed in improving returns and reducing risk by incorporating many private and liquid alternative investments to our allocations. The ramifications of spiking interest rates still impact private real estate and we anticipate additional downward valuation adjustments in many markets. We are particularly concerned with commercial office real estate, as several cities are experiencing office vacancies above the national average of 18.7% (the highest ever). With approximately $46 billion of variable rate office debt, we believe defaults on commercial real estate loans could increase over the balance of 2023, potentially adding to challenges in the banking sector.

Our focus on real estate industries possessing a large favorable supply/demand imbalance, like multifamily real estate, should help mitigate losses relative to other real estate sectors not possessing similar disparities. Despite the expected challenges in the real estate market, we maintain our dedication to exercising patience and selectivity in our decisions.

As Centura continues to enhance our alternative investment platform, we will remain focused on high-quality, conservative core exposure, with an eye toward opportunities to capitalize on the dislocations that often happen in private markets due to illiquidity and information disparities.  

Thank you for your continued confidence and support. While we face multiple challenges, we remain anchored to our core principles which we believe will allow us to navigate toward achievement of your wealth building objectives. If you have questions or concerns, please contact your Centura Wealth advisor.  

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. 
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Centura Wealth Advisory is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Centura Wealth Advisory and its representatives are properly licensed or exempt from licensure. 12255 El Camino Real, St. 125, San Diego, CA 92130.

CONNECT WITH US

HEADQUARTERS
12255 El Camino Real, Ste 125
San Diego, CA 92130
GET DIRECTIONS
858-771-9500

Our planning fee pricing for income tax planning services is determined using a standardized matrix based on Net Worth, Income, and Meeting Frequency. This base planning fee price may be adjusted to account for increased complexity or the occurrence of a future income event. To project tax savings, we analyze prior year tax returns to determine their past tax liability to project out the following year’s tax liability. Based on facts collected and confirmed by the client, we then identify and evaluate applicable tax strategies and the estimated annual tax savings they would produce if implemented. The estimated annual tax savings are then divided by the annual engagement price proposed to/agreed to by the client to determine the multiple on estimated annual tax savings generated as it relates to the planning fees paid. Please note, these initial projections are preliminary and based on our current understanding of the client’s situation. Outcomes may vary based on client’s decisions or chosen course of action regarding the implementation of recommended strategies, their specific goals, and risk tolerance.

Legal | Privacy Policy | Careers | Disclosures | Form CRS

© 2025 Centura Wealth Advisory. The Centura Wealth Advisory logo is a trademark.

CCG Wealth Management LLC (“Centura”) is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Centura and its representatives are properly licensed or exempt from licensure. For more information click here