Third Quarter 2024 Investment Commentary

Market Recap

It was far from a quiet summer for the financial markets. Markets have been volatile as investors parsed through economic data attempting to gauge whether the economy will slow, and how much the Federal Reserve would need to lower interest rates to prevent a recession. Toward the end of the quarter, the Fed opted for a bold start to its shift in policy, reducing rates by a half percentage point. This was the first cut since 2020, and Fed Chair Jerome Powell said the larger-than-average cut was intended to show the Fed’s commitment to “maintaining our economy’s strength” in the face of a slowdown in the labor market. Year to date, the economy has proven resilient thanks to strong consumer spending, lower inflation, and healthy corporate earnings.

Despite the volatility, the stock market reached new highs with the S&P 500 gaining 5.9% in the third quarter, pushing its year-to-date return to 22.1%. Notably, there was a rotation out of large-cap growth tech stocks and into a broader range of sectors and styles. The Nasdaq, which led the market higher in the first half of the year, gained 2.8% but lagged other benchmarks in the quarter.  Large-cap value (Russell 1000 Value) gained 9.4% and outperformed large-cap growth’s (Russell 1000 Growth) 3.2% gain, and small-caps (Russell 2000) rose 9.3% outpacing large-caps’ (Russell 1000) 6.1% gain. The equal-weighted S&P 500 index (up 9.6%) easily outperformed the cap-weighted S&P 500 during the quarter. At the sector level, traditional defensive sectors were by far the big winners, with utilities, real estate, and consumer staples gaining 19.4%, 17.2%, and 9.0%, respectively.

Internationally, developed international stocks (MSCI EAFE) gained 7.3%, finishing ahead of domestic stocks in the three-month period. Emerging markets stocks (MSCI EM Index) were relatively quiet for most of the quarter but rose sharply in the last week of the period after China announced their boldest stimulus in years in an attempt to boost their ailing economy. Emerging-markets stock finished the quarter up 8.7% thanks to a 23.5% gain for China during the month of September.

Within the bond markets, returns were positive across most fixed-income segments. The benchmark 10-year Treasury yield declined from 4.36% to 3.81% amid lower inflation and recession concerns. In this environment, the Bloomberg U.S. Aggregate Bond Index gained 5.0% and credit performed well in the quarter as high-yield bonds (ICE BofA Merrill Lynch High Yield Index) were up 5.5% in the quarter.

Overall, domestic economic and corporate fundamentals remained relatively healthy in the quarter, although rich valuations remain a risk. Looking ahead, the expectation is that the Fed will continue to cut rates this year and next in an effort to guide the economy to a soft landing and avoid a recession.

Macroeconomic and Investment Outlook

At its mid-September meeting, the Federal Reserve lowered the target for the federal funds rate by 0.50%, or 50 basis points, to a range of 4.75% to 5.0%. The cut came after one of the most rapid series of hikes in history in an effort to combat the highest level of inflation since the early 1980s.  Outside of the emergency pandemic reduction, the last time the Fed cut by 50 basis points was in 2008 during the global financial crisis. (See chart below, gray vertical bars represent a recession.)

Powell said this larger-than-usual half-percentage-point reduction—rather than 25 basis points—demonstrates the Fed’s commitment to its dual mandate of maintaining a strong job market while keeping inflation in check; balancing these two goals helps ensure a healthy economy. Powell emphasized that the recent cut was a “recalibration” of policy, bringing it in line with the current conditions and ensuring the Fed does not “get behind the curve” in normalizing rates. This comment was aimed at investors who believe the Fed has been too slow to start reducing rates, thereby increasing the odds of a recession. Powell further indicated that two more cuts (likely 25 basis points each) are likely in the upcoming November and December meetings. He ended the press conference saying that he does not see a recession on the horizon. On the final day of the quarter, Powell reiterated his view saying that the economy is in solid shape with a healthy labor market and inflation heading towards the Fed’s 2% target.

Since the Fed’s July meeting, inflation declined faster than the Fed had anticipated, while the unemployment rate has risen more than expected. When it comes to inflation, our view since early this year has been that inflation was under control and that it would be trending lower in the second half of the year. (See chart below.) Powell is now saying the recent decline in inflation has given the Fed the confidence to lower rates.

With inflation less of a concern, the Fed’s focus has shifted to its full-employment mandate, and over the past few months, the job market has slowed. Powell stated that the “balance of risks” has shifted, and now, supporting the job market is the focus, saying “the committee is strongly committed to supporting maximum employment.” This was evident in the FOMC’s September Summary of Economic Projections. Bill Dudley, the former president of the New York Federal Reserve, noted this shift in a recent opinion article—FOMC participants see a growing risk to the unemployment rate and more balanced risks to inflation. This is evident in the changing perceptions between June and September (see chart). By moving their focus to the labor market, the hope is to safeguard a soft landing for the economy.

FOMC Participants See Growing Risks to Labor Market and Balanced Risks to Inflation

The question now is the pace of cuts going forward. According to the Fed’s so-called “dot plot,” which indicates where various members of the Federal Reserve expect the fed funds rate to be over the next few years, the Fed expects another 150 basis points of cuts by the end of 2025, and more modest cuts in 2026. As is typical, the farther the outlook, the wider the range of estimates, i.e., there is less consensus on rate cuts for 2025 and 2026. Powell emphasized that the Fed remains “data dependent,” meaning that any future policy decision will be based on economic data, and he was reluctant to commit to any level of cuts saying decisions will be taken “meeting by meeting.”

Looking longer-term, the Fed’s long-run estimate of the fed funds rate, or the “terminal rate,” moved up slightly from the previous meeting from 2.8% to 2.9%. This is up from 2.5% from the year-ago figure, which implies a belief that the economy will continue to grow at a strong pace.

Regarding the labor market, the current employment picture remains in decent shape. However, there are signs of slowing, and extrapolating recent trends can start to paint a recessionary picture. The question is whether recent trends are a return to normalization or if the deterioration will continue. Since the pandemic, the labor markets have been in flux. Post-pandemic, there was a significant worker shortage, and the ratio of job openings to unemployed job seekers was 2 to 1, meaning jobs were plentiful for employment seekers. This imbalance has since corrected, and the ratio is now closer to 1 to 1.

Part of the right-sizing of the labor markets has occurred thanks to an influx of foreign-born workers over the last couple of years. This eased pressure in the labor markets and helped bring down the wage pressures companies were experiencing in the aftermath of the pandemic. The increase in the labor supply has also been a driver behind the recent increase in the unemployment rate (i.e., more workers looking for the same number of jobs), which points to the increase in unemployment as “artificial” according to some market participants. BCA Research points to some truth in this—calculating that roughly 40% of the increase in unemployment since its low in 2023 has been due to new entrants into the labor force. Increasing the labor force is a long-term driver of potential growth for the overall economy—something that has been a drag on growth in many developed Western economies. However, BCA also points out that half of the increase in the unemployment rate is due to job loss. Further job losses would be worrisome for the Fed since consumption drives the economy, which is why investors are so keenly focused on the labor market. For now, the labor market is slowing, not breaking, but it needs to be closely monitored.

Comparing the Fed’s outlook for the fed funds rate to what the market is pricing in, we can see in the chart below that through the end of 2024, the market is in line with the Fed. Each dot represents one of the 19 Fed representative’s outlook for the fed funds rate.  But if we look to the end of 2025, the Fed is expecting the fed funds rate to be between 3.00% and 3.50%. Importantly, this scenario assumes the Fed manages to guide the economy to a soft landing. Any change in the economic outlook will influence this range higher or lower. The bond market, however, is currently pricing in a fed funds rate of 2.7% at year-end 2025/early 2026; see the green dashed line. This difference between what the bond market is pricing in, and the Fed expectations, is the market pricing in the possibility of a recession. In other words, the market is saying the Fed will need to lower rates more than their current soft-landing scenario.

If the Fed’s short-term rate estimates materialize over the next couple of years, we believe there may be limited benefit to owning intermediate- to long-term duration bonds such as core bonds and 10-year Treasury notes. In fact, if the Fed is wrong, and fed funds move lower than currently expected, say by 50-75 basis points, we still think duration will have a relatively limited long-term benefit. In the chart below, we illustrate a potential range of outcomes for the Treasury yield curve that we think is likely over the next 15 months. The shaded circle indicates the base-case range for the 10-year Treasury. Given this range of outcomes, we believe that shorter-term, higher-yielding investments likely offer better relative returns over time compared to core bond benchmarks.

Certainly, a recession or a geopolitical event could trigger an abrupt flight to safety where lower risk assets such as core bonds and Treasuries rally below the lower range we anticipate. In such an environment, shorter-duration, higher-yielding bonds would underperform for a short-term period. But we believe that over a longer period, these shorter duration, higher-yielding bonds are likely to generate returns that would more than compensate for any shorter periods of underperformance. That said, we think there is a risk that short- and long-term rates remain at higher levels than most expect, and yields could possibly increase from current levels as the curve normalizes. As such, at the time of writing this commentary, we are preparing to adjust our fixed-income exposures by increasing allocations to shorter-term, higher-yielding securities and reducing exposure to longer-term, interest-rate sensitive securities. These changes are based on current market expectations and are subject to revision as conditions evolve.

Overall, our view is that the economic data currently remains generally healthy. For example, real GDP for the second quarter was 3.0% and the estimate for the third quarter (according to the Atlanta Fed) is currently 2.5%. Meanwhile, inflation continues to moderate, corporate earnings remain relatively strong, corporate defaults remain low, consumers (and the government) continue to spend, and interest rates are heading lower albeit at a questionable pace. Lower rates should lead to lower mortgage rates, and it’s possible we could see a rebound in the housing market, which would be inflationary.

The Fed is currently in line with our view, but to be clear, we are not hanging our hat on the Fed; we view them as we view all forecasters: imperfect. Powell said, “we’re not seeing rising (unemployment) claims, not seeing rising layoffs, not hearing from companies that that’s something that’s going to happen.” He further commented, “the time to support the labor market is when it’s strong and not when you begin to see the layoffs. We don’t think we need to see further loosening in labor market conditions to get inflation down to two percent.” The Fed’s forecast is for unemployment to peak at 4.4% in 2025, up from its current 4.2% level, before declining back down to the low 4% range. Of course, the data could change but we don’t see an imminent recession. We want to note that on October 2, payroll processing firm ADP reported that private companies added 143,000 jobs in September, an acceleration from 103,000 in August and better than the 128,000 consensus forecast, indicating the labor market is holding its ground.

In summary, our near-term view is that a soft landing is the most likely outcome for the U.S. economy. Current conditions should be positive for both bonds and stocks, although we expect the pace of gains to slow. We believe fixed-income returns will be driven by income and not price appreciation, and equities will need earnings growth to justify premium valuations. We also believe that the Fed’s decision to start cutting rates could be a potential game changer, shifting the market away from large-cap technology stocks and short-term cash-like investments. We think the “Magnificent 7” and the strategy of “T-bill and chill” will no longer be the only games in town.  We also think the market is baking in too many rate cuts and it’s likely that the longer-term bond yields will reset higher over time, creating a source of volatility; we are willing to give up some potential near-term returns in exchange for higher longer-term returns. And of course, we expect the market to continue parsing through economic data, which should result in pockets of volatility. The upcoming election will also likely be a contributor to volatility. We plan to stay vigilant and seek attractive risk-reward opportunities.

Presidential Election

With the U.S. presidential election one month away, we want to reiterate our long-held view that portfolio positioning should be guided by an analysis of longer-term risks and rewards, not election outcomes. We recognize that it’s natural for investors on both sides of the aisle—especially in today’s polarized environment—to believe that an election outcome could have a big impact on the financial markets. This intuition, however, is not supported by the historical data and we provide some evidence below that stocks have historically trended higher regardless of the political party of the President.

We think, ultimately, the market is driven by economic fundamentals, such as the fed funds rate, corporate earnings, valuations, fiscal imbalances, interest rates, inflation expectations, among other factors. Undoubtedly, headlines will influence short-term market fluctuations but longer-term, fundamentals are what drive market performance. Our intention is not to minimize the gravity of the election, but to point out that the gears of the economy are not overhauled based on an election outcome. For example, the U.S. economy is consumer driven and that’s not going to change. We maintain the view that the fundamentals of the economy don’t change overnight, and we don’t think an investment strategy should either.

We believe that making changes to portfolio positioning based solely on an expected election outcome would require a high level of conviction in a view that is materially different from market consensus. However, such non-consensus views are challenging to achieve, and history shows that short-term market timing can be detrimental to long-term returns.

Second, we’d have to be highly confident that our non-consensus view will result in a specific investment outcome, and that portfolio changes can successfully capture this. But history shows little connection between election results and market impact. Even if we were convinced of both the outcome and the policies that would be implemented, the ultimate effects would nonetheless remain highly uncertain because macroeconomics is a highly inexact science given the multitude of other factors and variables impacting economic and capital market outcomes.

Market Performance Around Elections

As for market performance around elections, there have been elections that resulted in stock market volatility and declines, notably when incumbents lose (a result that begs the question of whether a bad economic backdrop is what led the incumbent to lose). While technically there is no incumbent in this election, markets typically see a strong rebound in the year following any post-election declines. The chart below shows that historically, elections have not had a meaningful or long-lasting effect on investment performance. That means investors are wise to remain focused on the longer-term drivers of markets and even be prepared to take advantage of any post-election market declines.

The lack of consistency in the impact of past elections on investment results runs deeper than just the overall stock market level. Analysis by Richard Bernstein Advisors goes deeper and demonstrates the variability of returns at both the asset class and industry sector levels under past administrations (see charts below).

It’s important to note that the election and post-election year results shown in these charts reflect the average result historically, and the sample size is relatively small. There are many reasons the market could respond differently in any given election. But the broad point is that instead of betting on election results, we remain true to our longer-term investment discipline, in which we consider multiple macro scenarios, and assess the potential risks and returns for numerous asset classes and investments in each scenario. We are focused on fundamentals and our investment approach is built on confidence that over time securities prices will reflect these fundamentals.

Meanwhile, Presidential election or not, in the shorter term we are prepared for the inevitable periods of market volatility and shorter-term downside risk. This is where risk tolerance becomes important and is the reason we recommend different portfolio strategies to suit varying levels of discomfort with volatility and shorter-term loss. Regardless of where an investor falls between conservative and aggressive, it is critical to remember that volatility and temporary losses are a normal part of owning stocks and other higher-expected-return “risk assets.”  With partisanship and news flow in overdrive in these final weeks, there will be many distractions. Our objective as always will be to look past these distractions and focus instead on dispassionate long-term analysis of our investment environment.

Fixed Income

In September, the longest inverted yield curve on record finally ended. The two-year Treasury yield closed at 3.76% and the 10-year bond closed at 3.77% early in September. The last time the yield curve was normally sloped—when the short-term bond yield is below the long-term yield—was in July 2022. Historically, an inverted curve has been a warning sign of an impending recession. Typically, the curve un-inverts around the beginning of a recession as investors anticipate rapid Fed rate cuts amid a slowing economy.

An inverted curve is no guarantee of a recession. Interestingly, many recession indicators that have good track records of predicting recession have not worked this cycle, or at least not yet. We have written in prior commentaries about Fed policy being extremely accommodative while the curve was inverted, which signaled to us that a recession was not imminent. More recently, we have been saying that policy was on the verge of becoming too restrictive. Our belief was that the Fed should at least reduce rates in proportion to declines in inflation to prevent policy from choking the economy. So, we are pleased that the Fed initiated a shift in policy.

As mentioned above, we believe the Fed’s recent shift may signal a turning point in the fixed-income market. The Fed’s recent cut and shift to a more accommodative stance could start a new chapter for fixed income. As central banks lower rates, yields move lower and reinvestment risk comes into play for short-term instruments and investors will increasingly start to look for higher returns elsewhere. This, too, will result in generally lower yields across the fixed-income market.

One concern in today’s market is tight credit spreads, where corporate bonds are not offering much additional yield for the incremental risk relative to risk-free Treasuries. As shown in the chart below, investment-grade bond spreads are 0.97% over 10-year Treasury bonds, compared to their 1.22% average. High-yield bond spreads are 2.85% over Treasuries compared to their historical average of 4.76%. If spreads are below their long-term average, bonds are considered expensive, and vice versa. Based on current credit spreads, we believe both investment-grade and high-yield bonds may be less attractive relative to their historical averages.

The biggest reason that spreads are narrow today is good economic news. Persistent economic growth has made the odds of a recession less likely. Furthermore, strong fundamentals have played a role, as companies have responsibly improved balance sheets, locking in lower rates during the pandemic. As a result, corporate defaults have been in the low-single digits, below their historical mid-single digit average.

While spreads are tight, the yield on both investment-grade and below-investment-grade (high-yield) bonds are relatively attractive, especially when compared to just a few years ago. Investment-grade bonds are currently yielding 4.76% and high-yield bonds are yielding 6.37%. Importantly, yields are a much better predictor of returns than spreads, and starting yields are a very good predictor of returns over the next three to five years.

For clients’ portfolios, we continue to recommend a significant underweight to core bonds relative to a traditional bond benchmark. But we still want some core bond allocations as ballast in the event of a deflationary recession or traditional “flight-to-safety” market shock. Our strong preference, however, remains for flexible, shorter-duration and credit-oriented fixed-income allocations, which we think will generate better yields over time. Importantly, we do feel that we are not “stretching” for yield, i.e., taking on excess risk to achieve attractive returns. Many of our selections have exposures that are investment-grade or are conservatively positioned within the high-yield space. As always, we are weighing a range of shorter-term risk scenarios against each asset’s medium- and longer-term return potential and portfolio diversification benefits assuming different macro environments (inflation/disinflation, growth/stagnation).

Equities

Through the first nine months of 2024, U.S. large-cap equities have delivered an impressive 22.1% return. While much of that year-to-date return can be attributed to the largest companies getting larger — i.e., market-beating returns concentrated among the largest weighted companies in the index — returns started to broaden out to other areas in the quarter. Small-cap stocks, value stocks, and international stocks finally outpaced the S&P 500 during the quarter.

This was one of the strongest year-to-date returns through September since the 1990s, once again proving that valuations are a poor market timing tool. The majority of the S&P 500 return year to date is due to expanding valuations. The trailing 12-month GAAP Price/Earnings ratio has gone from 24.8x to an estimated 28.2x (nearly 14% higher). This accounts for two-thirds of the market return. The remainder is due to earnings growth (about 5%) and dividend yield. While it is normal for short-term equity returns to be driven by valuation expansion or contraction, we believe that earnings growth is the more reliable driver of long-term returns.

With valuations now near historic highs (see chart below), earnings growth will need to do the heavy lifting in order for investors to realize the same pace of returns (double-digit) as they have in recent years. While it is not out of the realm of possibilities, such an outcome will be harder to come by given historically high profit margins and valuations.

Overseas, an announced stimulus package in China sent their equity markets higher in the second half of September. After slowing and disappointing economic data throughout the summer, Beijing signaled their support for the economy and financial markets. After falling more than 13% from mid-May through mid-September, Chinese stocks (MSCI China) surged 28.7% in the final weeks of September.

So, what was announced in China, what impact might it have on the economy, and does it change our outlook for emerging-market equities? The short answer: the long-term impact on the economy is unlikely to change based on what was announced, however, given the nature of Chinese markets, investors should not rule out a cyclical, short-term rally.

Some of the stimulus measures announced include further cuts to borrowing rates (policy and mortgage rates), lower reserve requirement ratios at the banks, lower down payment requirement from home buyers, and support for the stock market. There were also reports that fiscal transfers to Chinese households could be on the table—something that pundits have been clamoring for given the weak consumption trend. The government also signaled that further measures could be announced. However, as can sometimes happen in China, announced measures can often lack the necessary follow-through. It remains to be seen if these measures are fully implemented and if they provide enough support to the economy to recover, but at a minimum it should provide a floor in the near term.

Ultimately, government officials need and want the stimulus to jump start Chinese consumer confidence. The economy has been hindered by deflationary pressures for well over a year—its worst stretch since the 1990s—and confidence remains in the doldrums.

With the housing market still weak and stock markets having gone nowhere in years, there was a lot of negative momentum in China and the government ultimately felt the need to act to protect their growth target. We believe that further monetary measures in China may not be sufficient to improve the situation. —borrowing rates have fallen for years but there is little demand for additional credit. Instead, households and businesses remain focused on saving and repaying current debt loads. Household consumption remains well below that of other developed nations and is — in our opinion — the key to turning the economy around. The stimulus package does play a role in spurring confidence, which can then impact consumption. But the government largely seems to want to continue to prioritize investment and exports as the primary growth engines for their economy instead of consumption. And as we’ve seen in recent years, any monetary stimulus has had a short-lived impact on the stock market. Any meaningful shift to their fiscal policy would deserve greater analysis and could change the currently dreary outlook for the economy. For now, any fiscal moves are rumor but could be announced by leaders in coming weeks.

Marketable Alternative Strategies

We continue to use marketable alternative strategies as a diversifier to traditional stocks and bonds. Managed futures, which are held in portfolios, had a rollercoaster ride in 2023, as the indexes were down sharply in the first quarter, rebounded strongly in the second and third quarters before falling again in the fourth quarter to finish for the year down 3.5% for the SG CTA Index. This year has seen a continuation of the up-and-down path, this time starting to the upside with strong performance in the beginning of the year (the CTA Index was up 9.7% in the first quarter), followed by weakening performance in the second and third quarters. The end result is a modest year-to-date gain of 2.5% through September.

As always, the reversal of a strong trend is challenging for managed futures. Early August brought with it the unwind of the Yen carry trade, a popular and very large trade where investors borrow Yen (paying Japan’s low interest rate) to invest in other currencies (or other assets) that pay higher interest rates. The Bank of Japan raised interest rates more than the market collectively expected, causing the Yen to appreciate and making the funding of the trade more expensive. Because carry trades often use copious amounts of leverage, this caused significant losses, prompting investors impacted by the trade directly to reduce exposure, which exacerbated the movement, essentially creating a classic “short squeeze.” Ultimately, the Yen, which was down approximately 13% for the year as of early July, rallied over 12% in under a month, almost 7% in five trading days, and almost 4% in the two trading days ending August 5th,­ ­dramatic moves for a very liquid, developed market currency. In a deleveraging event, investors also reduce exposures in other parts of their portfolio, including stocks. The Japanese stock market (Nikkei 225 Index) fell by more than 12% on August 4th before subsequently rallying back to finish almost flat for the month. Other major positions reversed as well, with core bonds (the Agg) rallying over 2% in a week.

Conclusion

We remain cautiously optimistic about the current investment landscape. While there are promising signs of growth and resilience in the economy, we are also acutely aware of the potential risks that could impact market stability and will remain vigilant in monitoring developments. Our focus will continue to be on identifying opportunities to improve long-term returns in line with the risk targets for different portfolio strategies. By staying disciplined and opportunistic, we aim to navigate the complexities of the market and position investments for long-term success. As always, we appreciate your trust.

 

Important Disclosure

This report is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities. The opinions expressed herein represent the current views of the author(s) at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this report has been developed internally and/or obtained from sources believed to be reliable; however, Litman Gregory Wealth Management, LLC (“Litman Gregory” or “LGWM”) does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions, and other information contained in this article are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and LGWM assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements. In particular, target returns are based on LGWM’s historical data regarding asset class and strategy. There is no guarantee that targeted returns will be realized or achieved or that an investment strategy will be successful. Target returns and/or projected returns are hypothetical in nature and are shown for illustrative, informational purposes only. This material is not intended to forecast or predict future events, but rather to indicate the investment returns Litman Gregory has observed in the market generally. It does not reflect the actual or expected returns of any specific investment strategy and does not guarantee future results. Litman Gregory considers a number of factors, including, for example, observed and historical market returns relevant to the applicable investments, projected cash flows, projected future valuations of target assets and businesses, relevant other market dynamics (including interest rate and currency markets), anticipated contingencies, and regulatory issues. Certain of the assumptions have been made for modeling purposes and are unlikely to be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in calculating the target returns and/or projected returns have been stated or fully considered. Changes in the assumptions may have a material impact on the target returns and/or projected returns presented. A list of all recommendations made by LGWM within the immediately preceding one year is available upon request at no charge. For additional information about LGWM, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (adviserinfo.sec.gov) and may otherwise be made available upon written request to [email protected].

LGWM is an SEC registered investment adviser with its principal place of business in the state of California. LGWM and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which LGWM maintains clients. LGWM may only transact business in those states in which it is noticed filed or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by LGWM with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

Index Disclosure

Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

The Dow Jones Industrial Average measures the stock performance of 30 leading blue-chip U.S. companies.

The Standard & Poor’s 500 Composite Stock Price Index is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy. Stocks in the Index are chosen for market size, liquidity, and industry group representation.

The Russell 1000 Index ® measures the performance of the 1,000 largest companies in the Russell 3000.

The Russell 1000 Growth Index ® measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 7% of the total market capitalization of that index, as of the most recent reconstitution. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

The MSCI ACWI Index represents the performance of large- and mid-cap stocks across 23 developed and 24 emerging markets. The index covers 2,900 constituents across 11 sectors and approximately 85% of the free float-adjusted market capitalization in each market.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries* around the world, excluding the US and Canada. With 799 constituents, the index covers approximately 85% of the free float- adjusted market capitalization in each country.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.  The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates.

The MSCI Hedged Indexes include all of the securities and weights of each corresponding unhedged MSCI Parent Index, enabling investors to measure the impact of hedging currency, for all the constituents of the Parent Index.

MSCI World ex USA Index: captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries*–excluding the United States. With 871 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of June 2007, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar- denominated, fixed-rate taxable bond market.

The US High-Yield Market Index is a US Dollar-denominated index which measures the performance of high-yield debt issued by corporations domiciled in the US or Canada.

The ICE BofA US High Yield Index is market capitalization weighted and is designed to measure the performance of U.S. dollar denominated below investment grade (commonly referred to as “junk”) corporate debt publicly issued in the U.S. domestic market.

The ICE U.S. Dollar Index is a geometrically-averaged calculation of six currencies weighted against the U.S. dollar.

The SG Trend Index, also known as the SG Trend-Sub Index, is a market-based performance indicator that tracks the daily rate of return for the 10 largest trend-following CTAs (commodity trading advisors) in the managed futures space. The index is equally weighted and designed to correlate with the returns of trend-following strategies.