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Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.

Short-Term Summary:

Equities continued their rally over the past week with the S&P 500 now up 16%, Nasdaq Composite up 22%, and Russell 2000 up 20% since the mid-June lows. Better-than-expected July inflation readings were the catalyst for continued upside, as headline CPI was flat m/m and headline PPI was -0.5% m/m. However, the majority of downside in these numbers was driven by lower energy prices, while items such as food and shelter remained more sticky. This is a positive start; and we believe that improved supply/demand imbalances, accompanied by broadly lower commodity prices since June, should support moderating inflation over the coming months. The net result is a Fed that remains in tightening mode (inflation still too high), but likely reduces its pace of hikes (assuming easing price pressure continues). At its September FOMC meeting, the Fed is likely to hike by 50bps, lower than the 75bps hike at the past two consecutive meetings.

Lower inflation expectations are supporting lower bond yields which, in turn, are resulting in higher equity market valuations in the rally. If inflation has peaked, the US 10-year Treasury yield likely has as well in our view. This is a positive as more stable bond yields (or further downside) will provide a much more supportive environment for equities. That said, earnings estimates are clearly weakening. The inverted yield curve (influencing tighter credit conditions) and soft economic demand surveys (i.e. contracting ISM new orders) indicate economic and fundamental challenges ahead, as tighter Fed policy works with a lag on the economy.

Importantly, the market will bottom before the economy and fundamentals- and market internals have drastically improved in the rally. The percentage of S&P 500 stocks above their 50-day moving average is up to 84% (approaching the 90+% seen out of bear market lows historically). CDS spreads (cost of insurance on bonds) have been a good indicator of market trends this year and recently broke down technically. Moreover, the breadth of advancers in the up-move has been solid and percentage of stocks reaching 4-week highs went above the desired 55%. All of this represents a more supportive technical backdrop and increases the odds that the June lows may prove durable as the bear market lows.

Nonetheless, we still expect market setbacks over the coming weeks and months, as the Fed continues its hike cycle and market concerns shift from inflation toward the economy. We also note that the S&P 500 is overbought near resistance in the short- term. So within a technical backdrop that has shown improvement (from the downtrend in 1H’22) but expected back-and-forth trading ahead, we recommend using pullbacks as opportunity to accumulate favored stocks.

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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