Peapack-Gladstone Financial Corporation (PGC) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Thank you for joining. So if you have any questions, please feel free to use the Q&A button at the bottom of your screen as we go through this webinar. And to get us started, I'll be turning it over to John Creamer. John?

Thank you, John, and thank you, everyone, for joining us this afternoon. We really appreciate your time. For those of you who I have not had the opportunity to be introduced to and don't know me, my name is John Creamer. I'm the Chief Investment Officer of Peapack Private Wealth Management; Jeff Fisher, who is our Chief Strategist and IR, cohosting this call, and then we both co-manage the investment group here at Peapack Private Wealth Management. Jeff and I want to share our thoughts in regard to the current economic conditions and market environment. But more importantly, I want to discuss the outlook for the second half of this year. Today, we're fortunate to be joined by several senior members of our strategy team, who will also be going through the information with us today. Taking a quick look at our agenda. I will briefly go through the first 6 months of the year just to kind of give a framework for the rest of the presentation. Then I'll turn it over to Rick Barfuss, who is the Senior Managing Director at Peapack, who not only sits on our strategy team, but also the co-lead of our fixed income team, and he'll share his thoughts in regard to interest rates, the Fed and fixed income strategy. I'll then turn it over to David Dietze, who is the Managing Principal and Senior Portfolio Strategist at Peapack Private, and he will discuss the emerging market themes or the themes that are emerging in the market and important equity themes that we think investors should be aware of as we look forward. And then we've all been somewhat jarred by the volatility this year. There's -- if you look at the number of 2% inter-day moves this year, it's back to the level it was in 2008, 2009. So it's substantially higher than it's been for many years. And we thought it would be important to address the mindset that's appropriate for this type of market. Diahann Lassus, Managing Principal here, will also share her thoughts on that topic. And finally, most importantly, we'll turn it over to Jeff Fisher to talk about the second half and what our expectations are for the second half as we kind of move through the back end of this year. Looking at the year itself, it has been very challenging. John, if you could flip to the S&P 500 slide. So here's a look at the S&P 500, it's a simple line chart that shows the market itself. And obviously, it's been a difficult year. If you look at it on a 12-month basis, the S&P is down about 2.5%. But if you look at it on a year-to-date basis, obviously, the drawdown has been fairly sizable, down 13.5%. And it's been across the board regardless of what equity index you look at, the drawdown has occurred in 2022 with the small cap down 15.8%, the growth index down 22.1%, which is the Russell 1000 Growth Index. And growth index investors have fared worse than the value investors, Russell 1000 Value Index down 5.17%, international down 12.6%. So it doesn't really matter what index you look at, you've had experienced a negative return in the first 6 months of this year. One of the things I would point out, though, that is kind of interesting, and this is true, I think, all market drawdowns, it's really a series of sell-offs and rallies. So you look at the chart here, we began the year 4,800. We sold off to 4,173 by mid-March. And then by the end of March, we were back up 10% to 4,600 and then sold up again another 15% down to 3,900, and we've experienced a little bit of a rally more recently back to the 4,125 level of about 6.8%. One of the -- just looking at the valuations, which is the next chart, this is a chart that looks at the PE multiple, the 4P multiple. And it puts bands around it, the 25-year average is 16.85%. Perhaps the only benefit of a market drawdown is that it corrects valuation excesses. And that's certainly the case this time around as well. So we began the year with the market north of 22x. Today, we're at 17.35x, which is close to the 25-year average of 16.85. So we began the year well above a 1 standard deviation overvaluation, and now we're back to essentially a fair valuation. So we've set the stage for better equity market returns when the fundamentals improve and there's more clarity in regard to the how the economy is going to perform going forward. Looking at the fixed income returns quickly. Again, duration has not been your friend, regardless of whether it's been in the equity side or the fixed income side. Across the fixed income landscape, returns are negative. We look at the total bond market return. It's down 8.83%, but really negative returns across the board in the fixed income world. So there really hasn't been anywhere to hide. And the reason really is that the core activity market selloff, the fixed income markets selloff, the markets are in sync. Essentially, higher inflation leads to -- especially in an overheated economy, it leads to higher interest rates. That's driving negative returns in both the equity and fixed income areas of the market. Looking at the challenges in the first half. And I'm going to really focus on, I think, the first two. The inflation surged to a 4-year high earlier this year, and we're expecting the CPI number to be released on Friday. Our expectation is -- this is consensus numbers, 8.2%, which is down from its peak in March of 8.5%, but still exceptionally high inflation number. And the Fed tends to focus on the PCE number, and the core PCE is 4.9%. Right now, that's the April statistic. The overall number is 6.3%. Regardless of what inflation statistic you're looking at, you're looking at an inflation number that is alarmingly high, and the Fed has reacted to that, and they've aggressively shifted monetary policy. One of the things that kind of everyone focuses on is the gasoline price, which is an easy thing to focus on, and we all pay it. So it's something we're all aware of. Inflation has driven gas prices to $4.92 per gallon, which was $3.22 a year ago. So it's up substantially. If you're fortunate enough to live in California, you're paying $6.37 a gallon right now. So inflation is on an alarming level. And the Fed is at this point moving aggressively to stem that. And I think the major thing that's kind of driven the equity markets and the fixed markets here is the fact that the Fed has had such a shift in their mindset and their approach. Back in July of 2021, Powell said that the Fed was nowhere close to considering a rate hike. We've now said that essentially there was no substantial further progress on the equity side or on the economic side so that they were not going to consider a rate increase and certainly out into perhaps the back end of 2022. And the Fed was still buying additional bonds, so they're still expanding their balance sheet by $120 billion per month. At that point, inflation was accelerating. Some calls were calling for Fed action, but the Fed was content to stay on the sideline. Unemployment rate at that point was 5.4%. The number of unemployed people was 8.4 million, and the continued claims number was 3.1 million. You flash forward to today, the unemployment rate is 3.6%, the unemployed number of people was 5.9 million and the continuing claims is 1.3 million. And just to frame it, we have over 11 million people in this country -- or unfilled jobs in this country today. So clearly, there's a supply-demand problem in the labor market, and that's driving wage rates higher. And to be frank about it, the Fed simply missed on what's wrong on inflation. There was too much fiscal and monetary stimulus for an economy that was already supply-constrained. So the Fed ultimately realized this in December when they announced tapering, where they're going to begin the process of reducing their bond purchases. By January, they had doubled the rate of tapering. By March, they had done their first rate increase of only 25 basis points. 5 weeks later in their May meeting, they realized that they had to be even more aggressive and bumped rates 50 basis points, and we would anticipate that rate going forward. To give you a sense of the magnitude of the change in terms of how it's impacted the markets, the 10-year treasury yield was 1.47 in July of last year. It was only 1.51 in December of this year -- at the end of last year or beginning of this year. And today, it's 3%. So just a dramatic doubling of the yield on a 10-year treasury as the markets realize the Fed was behind the curve and had to be much more aggressive. And that's really caused the carnage in the equity side. So -- and then you couple that with the Russian-Ukrainian situation, which creates additional supply shocks, especially in energy and the food area, and you can see why it's been a difficult environment for -- a challenging environment for investors in the first half of this year. With that, let me turn it over to Rick, who'll talk a bit more about the Fed and the interest rate environment.

Great. Thank you so much, John, and thank you for your time today. Please switch to the next slide. Just to go into more detail on the treasury curve and the movements we've seen year-to-date. I know John touched on the 10-year. But looking at where it's been most impactful thus far this year is really the 2-year tenor. And you can see that that's up. And this is as of 6 -- June 2, but that's up anywhere from 100 -- almost 200 basis points. It started the year at about 73 basis points. As of June 2 was 2.65%. It did hit about 2.8% not that long ago and has been in somewhat of a trading range over the last few weeks, but really just a dramatic move across the curve. You can see the front end of 3-month bill started the year at almost 0, so 4 basis points, now up to 1.14%. So a move of about 109 basis points. And as John had mentioned before, the 10-year treasury really almost doubling, going from 1.51% to almost -- as of yesterday was 3%, but as of June 2, 2.92%, so up about 141 basis points. So just a dramatic, dramatic move across the treasury curve. And really, the pain that's been felt in the fixed income market thus far this year has really been on the rate side. Credit spreads are starting to expand, but the rate movement has been really where the pain has been felt thus far, but we'll get more into credit spreads as we move through the presentation. So if we move to the next slide. So just talking about market-based inflation expectations. So I know John had spoken about CPI, headline CPI, core PCE, we really like to look at what the market thinks inflation is going to do over the foreseeable future. And this breaks it down according to the TIPS market, so the Treasury Inflation Protected Securities. And over the next 2 years, the market expects inflation to come down from its current elevated levels of about 8% at the headline CPI, an average about 4% over the next 2 years. Now that was as high as roughly 5% as recently as late March, so that has actually come down to a certain degree. And so peak inflation may be behind us. But the big question is, how quickly can we go from, say, 4% over the next 2 years down to the Fed's target of roughly averaging 2%? That's the big question. And even as you go out 10 years, you can see the market is expecting the 10-year average inflation according to CPI to be roughly 2.8%. So we're not going to quite get there. So the Fed has obviously missed the mandate on inflation. And now they have to try to tighten financial conditions to get the economy to slow down without really disrupting their second mandate, which is stable employment. So it's a very fine line that they have to balance. And the market feels that they're not going to quite get to 2%, particularly over the next decade, but they may be okay with having inflation just slightly above that, given the fact that the previous decade they were below that 2% inflation objective. So if we move to the next slide. So the probability of a rate hike, and this is according to Fed Funds Futures. Like John had said, the Fed raised 50 basis points in May. And it was the first time they had raised 50 basis points since 2000. The market is expecting the Fed to raise at its meeting next week another 50 basis points. And then in June -- July, excuse me, 50 basis points as well. Once we get to September, the probability of another 50 basis rate hike -- or basis point rate hike is roughly 66%, so it comes down a little bit. And then towards the end of the year in November and December, additional 25 basis point rate hike. So the Fed does a lot of its heavy lifting in the early portion of -- in the mid portion to late portion of this year. And ultimately, by the end of the year, they're looking to get the Fed Funds rate up to about 2.85%, which, from their perspective, is close to neutral, and they want to get to neutral as quickly as possible so that inflation expectations don't become entrenched. So if we move to the next slide, just looking a little further out. So the dots on this page are the FLMC members projections for where Fed Funds rate would be at the March meeting. And so these are a little stale at this point. So don't pay much attention to the green line. But really, the white line is the Fed Funds Futures expectation. And as we had said before, in 2022, they're looking to move that rather dramatically up to close to 3%, 2.8% roughly, then in 2023 increase maybe another 25 basis points. But that's really the peak that the Fed Funds market sees in terms of the Fed Funds Futures, getting just a little bit above 3%. And then actually, in 2024, having to come down a little bit, thinking that inflation may be under control at that point in time, but they don't quite get to the long-run, long-term expectation of about 2.4%, 2.5% anytime soon. So if we move to the following slide. So with that being said, we look at the forward treasury curve matrix. And this is just a market-implied expectation as to where treasury yields will be in the future. And we always take this with a grain of salt. It's constantly changing, but we do want to point out that over on the left-hand side are the tenors, so starting at the 1 month going all the way out to 30 years. And then as you move across to the right, it shows the forecast periods into the future. So what I want to focus on is really the 1 year forward. So 1 year forward, it's saying that the treasury yields have really come up quite a bit thus far this year, and it's really largely due to forward guidance that Fed starting to raise interest rates and also the taper of the balance sheet -- excuse me, the quantitative tightening, so the reduction of the balance sheet, which has actually started this month and will ramp up to twice the pace, which will be roughly $95 billion in treasury securities and mortgage-backed securities, agency mortgage-backed securities, by the time we get to September. So that will also put upward pressure on yields. But basically, the forward market is saying that a lot of the heavy lifting has been done this year so far and that the front end is going to come further as we see from the forward market. But the back end, really the 10-year at close to 3% 1 year forward is showing only 3.12%, so another 12 basis points of increase at the 10-year tenor. So it's showing that typically during a rate hike cycle, -- the Fed Funds rate generally towards the end of the cycle gets close to where the peak treasury yields are. And the market is saying right now that 3%, the mid- to low 3% range might be where the treasury market tops out when it's all said and done. Now the big caveat is if inflation does come under control. If it does not, then the Fed is going to have to go from neutral, so they went from extremely accommodative to neutral. If they have to go to tightening beyond where they currently think the neutral rate is up to close to where the rate of inflation is and core PCE is roughly 4.9%, that would be a whole another realm of tightening in terms of financial conditions. So switching gears and looking at treasury spreads, credit spreads. We can see that the high-yield option-adjusted spread, which is the green line, is still relatively low, relatively tight, according to its historic long-term average, which goes back to 1993. So the current high-yields option-adjusted spread is about 407 basis points, below the average of just under 500 basis points, but you can see it's moving in the upward direction. And that might be in anticipation of future potential defaults given the tightening in financial conditions. In terms of investment-grade credit spreads still below the long-term average of 1.27 at 1.21. But again, moving in the upward direction. So most of the pain that we've seen in fixed income market -- in the fixed income market thus far this year has really been on the rate side as opposed to the spread side, but the spread side is starting to come up. So if we look at the following slide, this really shows that the high-yield bond market, the fundamentals are fairly strong. You look at the blue line, which is the default rate, as of June 1, that was 72 basis points, well below the long run average of 3.61%. But you can see it starting to tick up. And in anticipation of an increase in default rates due to tightening financial conditions, spreads are starting to widen. Now spreads are still historically tight, and we don't recommend dipping down in terms of credit. We still recommend staying high in terms of credit quality, just because you're really not getting paid to take too much credit risk at this particular juncture. And the fact that with the Fed tightening monetary policy, we could see increased volatility and an increase in new credit spreads. So in terms of the municipals, municipals have had a rough year-to-date, just like most sectors of the fixed income market, but they really started to price relatively attractively over the last month or 2. And we can really see that in the upper right-hand corner, where we look at the prime muni yields as a percentage of treasury yields. And the dash is the average and the diamond is the current position where that resides. And you can see we're getting really close to fair value in terms of the 5-year tenor, the 7-year tenor and the 10-year tenor. So if you're willing to take a little bit of duration risk, munis do make some sense. And to further that point, if you look down at the graph in the lower left-hand corner -- the lower right-hand corner, excuse me, this is the municipal credit comparison ratio. So the dash is the median, which is roughly 0.7. And when you see the green line above that median, it means munis are cheaper than credit. When it's below that dash line, it means munis are pricier than credit. So we can see in 2021 munis were very, very expensive, but they've really sold off quite a bit. Up until just recently, a lot of crossover buyers have come into the market. So there's been an increase in demand. And there is typically a summer lull in terms of issuance, so net supply is negative over the next 30 days or so. So we have seen somewhat of a rebound. But over the course of May, we saw the muni market from a total return perspective increased about 1.5%, although it's still down about 7% year-to-date. So I guess the main point is that there's been a lot of pain in the first half of the year in terms of fixed income total returns, but a lot of that pain may be behind us, particularly if inflation can top out and start to come down as we move forward. So with that being said, I'm going to switch it over to my distinguished colleague, David Dietze, to talk about equity market themes.

Thank you so much, Rick. Thank you all for watching here. So at the next slide here, what we can simply see here is that this first half of the year has seen really almost unprecedented volatility. Indeed, it hit us harder because we've had a long string of favorable market since the subprime crisis in 2009 and now we've had to come to grips with the worst starts to a year ever. As we sit, the S&P is down close to 14% so far this year, and the NASDAQ is down close to 23%. So one thing to keep in mind is that many younger and less experienced investors have never had to cope with such a drawdown perhaps ever before. So we can all sit here and say, okay, this is kind of like the March 2020 pandemic drawdown, The Great Financial Crisis of 2008, the dot-com selloff starting in 2000. Nevertheless, watching years of gain kind of melt away this year is unnerving to anyone. And to make matters worse, there have been a few places to hide. Usually, during a tough stock market, you have solid high-quality fixed income markets. But because of the rising interest rates, they have not been the safe haven. Cryptos have been much valued as a diversifying tool, but that has not worked out this year, and many hedge funds have been under pressure. So that's made portfolio management even more challenging. Next slide. So this slide does a good job. It's showing you what's happened this year in context. And I think what you see here is that sharp selloffs are actually pretty normal. If you look at the red numbers below each year, that was the drawdown during that year. And you can see there's almost no years where you haven't had a significant red drawdown, but also you can see that the solid gray bars show you how the full year ended up. So that even though most years have seen a sharp drawdown, 32 out of the 42 of the last 4 decades, the mark has ended up. So while getting back to even this year is hardly guaranteed, based on history, it certainly could happen, and we certainly could do much better despite this poor start. Based strictly on those past averages, while it's not a consensus forecast, there seems to be a 75% chance of ending the year on a more positive note. I think the other key takeaway from this chart is that selloffs are a regular phenomenon. This is nothing new. But staying the course, maintaining that longer-term perspective has been invariably the right call, and we certainly believe that to be just as true today. Next one. The price you pay may well be the most important factor in the success of any investment. At least, that's the fundamental factor you can be most sure about. However, whether you're getting a good price depends a lot on what you're getting for the price. For a stock investor, that would be the amount of profits in relation to your investment outline. So a big silver lining, as John Creamer explained before, to the recent volatility is that valuations have come down dramatically. And you can see that with the tailing off on the purple line with the valuations coming down. They're now between 16, 17x earnings, something like that. So valuations are lower than the average of the last 5 years, but not lower than what they got during March of 2020. You can see that chart spike down when the pandemic first hit, nor lower than the selloff of Christmas 2018, nor are they below the average of the last 20 years. So stocks are far more reasonably priced, but I wouldn't necessarily call them cheap. The inverse of the price-to-earnings ratio is the earnings yield, which should be about 6% based on PE of 17. 2 caveats. Next year's earnings are not as predictable as interest on a bond. If earnings don't materialize this forecast or forecast are reduced, those valuations can go back. Second thing to keep in mind is earnings yields are compared versus bond yields. At the start of the year, that 10-year treasury yielded just 1.5%. The current earnings yield of around 6% would be a nice incremental pickup versus that rate. Unfortunately, that 10-year is now around 3%. So stock valuations are a little less attractive given the current higher interest rate environment. Next. Now this slide also shows value -- also shows valuations, but not just of our market, but of overseas markets, including upper right, Europe, Japan is on the lower left and then the emerging markets lower right. The takeaway here is that valuations overseas have come down dramatically as well, which is not surprising since their stock markets have sold off this year like ours has. Here's a couple of things to note. On an absolute basis, overseas markets are cheaper than the U.S. They are also cheaper, more cheaper relative to their own 10-year average than we are relative to our 10-year average. Certainly, the conflict in Ukraine is pressuring overseas markets even more of their own. And probably the closer you are to the Ukraine, the more the pressure as you're more reliant on energy and agricultural commodities from that area. Do note that overseas markets generally have less tech than the U.S. market as tech is one of the most expensive market sectors. That's one reason why the U.S. market is more expensive. All things being equal, you'd want to invest in a cheaper market. But obviously, the U.S. is currently perceived as a relatively geopolitical safe haven in light of the Russian situation, plus has made more progress against COVID-19 relative to many countries. Next. So another key thing -- key theme here, as John Creamer mentioned, is value stocks have done better than growth stocks, including under the value category, dividend-paying stocks and defensive ones. Well, it's easy to see the chart, and you can see the upper line is your performance of your value stocks and that lower line is growth stocks, the key thing is what's behind the difference in performance. I think the #1 reason is that interest rates have risen dramatically, and the forecast is for even higher rates. Why would that favor value stocks versus growth stocks? Well, you can analogize value stocks and growth stocks to short-duration bonds and long-duration bonds. When interest rates rise, interest payments, or in the case of stocks earnings, that are seen as further off are marked down more severely than bonds which will mature very soon, or in the case of stocks, companies which are producing large cash flows today and dividends now. There is less discounting in the profit to value companies versus high PE growth companies whose earnings are much further out in the future like long-dated bonds. But there are other factors at play. Many energy stocks are deemed valued stocks And of course, the recent disruptions in the market due to the Russian war have boosted their values. Value stocks have really underperformed ever since The Great Financial Crisis. So given that historically, these things, growth versus value, are cyclical, perhaps they're do for a bounce. Second, many growth stocks profited dramatically due to the pandemic trade. Think zooming, food delivery, home exercise equipment. To the extent we're moving away from a COVID world it does look a little less appealing. Next. So this slide puts a number behind the different movement between growth stocks and value stocks as well as smaller companies. So on the left, we show the historical performance of growth versus value, small versus large, plus the so-called blended valuation somewhere between growth and value and mid-cap sized companies somewhere in between large and small over the last 10 years. So what's the takeaway from that complicated graph? Basically, over the last 10 years, the larger you were and the growthier you were, the better you did. But since the pandemic low of March 2020, the more you were a value stock and smaller you were, the better you did. That trend has started to accelerate this year. Where does that leave us going forward? Well, if investment predictions were simply extrapolating historical charts, it's going to be the best investors, but it's something to keep in mind here. And on the right, we show the current valuation as measured by the price-to-earnings ratio for small and large companies and large -- and growth and value companies. And the key takeaway is that the smaller you are, the more value-oriented you are, the cheaper you are and the cheaper you are relative to history. Now all things being equal, why wouldn't you prefer cheaper? Do keep in mind that valuation has never been a great timing tool. Something that is cheap can stay that way for a long time. And second, smaller companies have historically exhibited more volatility than larger companies. It's an individual preference where you come out versus do you want less risk in exchange for less return or will you accept more risk for more return. There is no right answer, but it's a theme that's lurking out there. Next, concentration. One of the themes over the last few years has been the gravitation of investment dollars to the largest companies in the S&P 500. These mega cap tech, sometimes called the FANGs, came to have an outsized influence on the index as a result since the S&P is market cap weighted. It's almost twice the weighting in the top 10 stocks than was the case as recently as 2015. And since those top 10 stocks had very high valuations, it skewed the overall value of the S&P higher than through -- if there wasn't such a concentration in the top 10. But as discussed, the theme this year is a bit of a reversal of money flowing out of the bigger stocks into the smaller ones. The takeaway is that this trend could go on for a while. But of course, nothing is guaranteed and a reversion to the mean, in fact, could take a decade or more. Next. So briefly, they say it's a market of stocks and not a stock market. It's also a market of sectors, meaning stocks grouped together by virtue of being in the same industry. Next, the next chart here shows the dispersion of results of the various sectors, which are listed at the very top. Basically, the #1 sector is energy, up a stunning 43% this year, and the runners-up like consumer staples and utilities, are close to flat, while the big laggards have been technology and communication services, think Netflix. Well, many now might want to board that energy train because of that performance. Anytime something is up so dramatically, caution is advised. And end of hostility the Ukraine could bring down energy places, plus the world is gravitating, of course, to a renewable energy future. On the other hand, energy valuations are still relatively cheap, and many see higher commodity prices on the horizon spurred on potentially by inflation. Next. Let's talk international. The recent trends, as I mentioned before, at least over the last 12 months, has been domestic stocks outperforming overseas ones. A minute a geopolitically dangerous world and a COVID challenged one, the U.S. has stood tall. Next slide. However, the reason to stay the course with overseas stocks, as you can see, the purple shading indicates periods when overseas stocks are doing better and the grayer shading is when domestic ones are doing better. And as you can see, that's all cyclical. So given the long string of solid domestic years recently, a movement -- and coupled with the movement towards value stocks and ending of COVID and perhaps ending of geopolitical strike, that may start the pendulum towards international stocks in a positive direction. And finally, my last slide, next, valuations, helping the cause of international stocks is the extreme value discount of them versus their domestic counterparts, plus the much greater dividend yields. So on the left, you can see that international stocks are normally cheaper than domestic ones by about 14% cheaper, but now they're close to 30% cheaper. And on the right, you can see that, normally, international stocks do pay a higher dividend by about 1.1%, but now that's expanded to 1.7%. So the takeaway, as we've said, valuation is never a timing tool, but it does counsel not throwing in the towel on overseas stocks despite their lagging performance over recent years. Thank you. Now I'd like to turn over the Diahann Lassus.

It's always a good thing to remember to unmute before you start talking. I'm going to talk a little bit about the volatility in the markets, how investors think about it and deal with it. And I've broken it into 3 areas for discussion: what we know, what we think about and what we can do. What we know is financial market volatility drives emotions. We know that. We see it on a daily basis. When the markets are going up, we're much happier than we are when the markets are going down. And even as professionals who work in this environment, it still has an impact when you have that negative energy. And think about the headlines in the news that we now get 24 hours a day, 7 days a week. And these headlines definitely drive volatility in emotions and send us on so many roller coaster rides, and this year has been a record for those roller coaster ride. But the reality is we must be in the market to earn market returns. And being out of the market when a recovery begins can be very costly to your returns. There are a lot of studies out there that talk about being out of the market for just a few of the high-performing days can really dramatically impact your performance in a negative way. We know diversification works. The old saying, don't put all your eggs in one basket, is popular for a good reason. It's very good advice. And we know we're long-term investors. Even if we aren't young anymore, and I'm speaking for myself here, we still have many years left in terms of our life expectancies. And if you're planning for future generations along with yourself, that long-term investment becomes 60 and 70 and 80 years. So I would say most of us are long-term investors. Next, let's talk about what we think about during these volatile times. First, we think about current and future cash flow needs and making sure we have that emergency reserve we're always talking about. We also need to look down the road and make sure we have a plan in place for cash flow needs in the future. And we want to make sure we have the dollars to cover any surprises like my new air conditioner last week. It's working very well. Long term, we want to look at our long-term planning and our objectives because we want to make sure our plans are aligned with objectives. So we know objectives change over time. It's a good time to think about your current asset allocation and make sure it still supports your long-term objectives. Reviewing your overall investment plan periodically is a very good practice. The next step is determining what we can do. We can focus on what we can control, and we know we can't control the economy, inflation, the financial markets. We can tune out daily news cycles. I'm constantly amazed at how dramatic the headlines are on the news these days. I'm sure you've noticed that instead of saying that Dow has fallen 1%. It's -- the headlines pretty much scream Dow crashes 300 points. It has an emotional impact on us as we're watching these programs. So when I think about the news today and the cycle and the volatility, I flash back to 2008. I had a client who used to watch news cycles every single day. And he said to me once, he said, "I had to get on my exercise bicycle in order to get rid of some of the stress so that I could continue to watch the news." Well, obviously, what I said to him was, "Turn it off. Don't watch the news so often." But sometimes we can't turn it off. So how about moderation in the news that we watch? And that's a really good practice for all of us. We need to sometimes just take a step back and take a deep breath or 2 or 3. And yes, it does help. This is one of those lessons I learned in 2008. And remember, we're long-term investors. So we do need to look through the short-term volatility and stay invested for the long-term best results. And last but not least, when the markets make you feel nervous or unsettled or a little crazy, speak with your adviser. We're always here to assist you during these difficult times. And I'd like to turn it over to our Head of Investment Strategy, Jeff Fisher.

Thanks, Diahann, and thanks especially for that reminder to maintain a long-term perspective. I'm going to bang on that theme and themes that the rest of my colleagues have mentioned as I talk about the outlook for the balance of the year and looking into 2023. And as I think about that outlook, I'm impressed by the extremes by which investment strategists and talking heads are viewing the current environment, the extremes of bullishness on one hand and a deep pessimism on the other, I think, are dominant. What you'll hear from us is a more balanced and a more nuanced perspective, I hope, but what I'm reminded of when I hear these kinds of extreme statements is Charles Dickens writing 160 years ago saying, "It was the best of times. It was the worst of times." Of course, he's writing about the French Revolution, an era of great change and a great uncertainty, and we're certainly living in an era of great uncertainty that gives rise to these extreme perspectives. But just to play out those perspectives, the bulls in the market today have a strong case. They pointed out that consumers are in great financial shape, corporate America as well is in very strong financial position. Unemployment is incredibly low at 3.6%. And in this view, inflation likely has peaked and is coming down. GDP growth is above trend, and retail sales are strong, suggesting the consumer is strong as well. Pretty compelling, but the bear case could be equally convincing, reaching inflation with CPI at 8.3% and producer prices up 11% year-over-year. We've got a Fed that, depending on your perspective, is either too reactive or too aggressive. We have war raging on in Ukraine. We've got broken supply chains with shortages of computer chips, baby formula and food insecurity around the world. New Omicron variants are appearing. And so that's not the rearview mirror. And consumer and CTO confidence are way down. So strong cases in either case. And this uncertainty, this variability in perspectives is driving a lot of the volatility in markets, which you'll see on the next slide that my colleagues have mentioned. Equity market valuation is up, and this chart shows you the prior decade is pretty consistently well below the levels we're seeing on the far right of this chart. But that volatility isn't only in the stock market. On the next chart, you'll see that it's equally present in the bond market, where the right side of the chart from September on you can see a substantial rise in bond market volatility. And this is not really surprising. What is happening is that its data points from the economy and from companies come in varying very much one day to the next. It's confirming one narrative, then it's confirming the other, and then you see a market reaction that is extreme in each direction. So with that as a backdrop, let's talk about the fact that this volatility is more likely to persist than not for some months ahead. So the message there is keep the seatbelt fastened. We think it's going to take more clarity after the Fed's success in bringing down inflation before this tug of war can reach some kind of armistice and some kind of resolution. So with that said, what are we seeing when we look ahead into the balance of the year? On the next slide, you can see clearly that unambiguously the outlook for yields is up. This is a repeat of a chart of Rick's, but I'm going to emphasize a couple of additional points there. There are red dots here representing the median expected year-end Fed Funds rates. So Fed Funds this year are likely to -- or predicted by the Fed to end the year close to 2% and above 2.5% next year. Just for reference, Fed Funds today are 75 to 100 basis points or half of where we are today. They're going to double by year-end if this forecast holds. And again, for reference, they started the year at 0 to 25 basis points. So dramatically higher rates. This is the Fed telling us this, and there's little reason to believe that, that isn't the case. The Fed has prepared us for 250 basis point rate hikes at the next 2 meetings and 25 basis point rate hikes heights. So fairly unambiguously, we would expect to see higher rates for the balance of this year. And as the next slide shows, the market has already moved in anticipation of the Fed's moves. The blue line on the bottom is of the interest rate curve for the start of the year, and our red curve at the top of the chart is the interest rate curve more recently. And you can see that everywhere along the curve rates are substantially higher year-over-year. But the other takeaway from this chart is how steep it is on the left side of the chart and how much it flattens out on the right side. This is to say that there's a lot of value from our perspective in the 1- to 4-year part of the chart where you can see that for each incremental year that you invest you're getting paid incrementally substantially more. And by contrast, once you get out to the 5-, 6-, 7-year part of the curve, you're seeing very little incremental return for extending duration. So our position in here is shorter duration, as Rick mentioned as well, with a preference for higher quality. And that's because we want bonds to have a negative correlation with equity markets should we see further slippage in equity markets, particularly if we look like we're headed for a downturn or even a recession early in 2023. So one last point on our bond outlook. Many pundits are declaring this a bond bear market and suggesting that this is a very bad and dangerous time to be a bond investor. We'd make the argument that higher yields are bond investors' friend in that every time a bond matures and we have a reinvestment opportunity we're looking at being able to invest in a higher coupon than the bond that matured. So there's some good news out of the bad news, if you will. When we turn to the stock market, I think we'd have to say that the outlook is a lot less certain. So on the next chart, you can see, first off, that dispersion is dramatically higher in the last year or so than it had been dispersion, meaning the degree to which stocks are moving differently one from another. And we're seeing that happen because operating results this year out of companies both across and within industries are varying more than they had previously. Last year, we had the situation of Verizon tide that fairly well lifted all boats, not the case this year. The environment of greater dispersion generally suggests that this could be a good opportunity for stock pickers. Active investing has the best opportunity for outperformance in an environment in which dispersion is high. On the next chart, though, I'm going to highlight 1 or 2 risks to the equity markets as we see them today. As David and John both pointed out, equity markets have substantially reset with valuations down from 22x at the start of this year to something under 17x. And it's a simple story of higher interest rates, warrant lower equity valuations. But having said that, with equity valuations more or less fairly priced certainly cheaper than they had been, there certainly is the risk that equity markets get cheaper still. And what would cause that to happen, we would suggest that, if inflation runs hotter than currently expected and, therefore, the Fed has to move more than currently expected, that we could see those valuations come down further 16x, 15x. And we could see markets overshoot and move from fair value to inexpensive. Having said that, we think that a vast majority of the reset has already occurred and going from 22 to 17x earnings. The second risk that we would highlight on the next chart is that earnings expectations are fairly optimistic or at least fairly elevated. This chart shows on the second from the right bar chart the first gray one, that the S&P earnings are expected to grow by 9% to 10% this year, and that comes on top of strong profit recovery last year. The risk to this is that companies are facing higher input costs, transportation, raw materials, supply chain disruptions and, in particular, higher labor costs. So we're looking at what happened historically, high profit margins. These are risk unless companies are able to pass along those higher costs, and we had earnings warnings this morning from Target and J.M. Smucker both indicating that they were seeing pressures on profit margins. So this is a watch word for us. When we think about how do we want to be positioned in today's market, we would say that a fundamental bias we have in favor of value is particularly apt at this junction -- juncture. As was noted, value starts are shorter duration compared to growth stocks. And in a rising interest rate environment, that provides more defense. From a factor perspective, we've got a preference for quality, which we define as companies that have high returns on invested capital, stable profit growth, strong balance sheets and high recurring cash flow, which we think is particularly appropriate for a late-cycle environment that we find ourselves in. From an asset-class perspective, we're fairly neutral on U.S. equities, except as David noted, view favorably small caps from a valuation perspective, particularly small-cap value. On the international front, I think the relative cheapness of international markets is somewhat offset by slower growth, so we're relatively neutral there. So having highlighted a couple of risks to the equity markets today, on the next slide, I've got a bit more of an upbeat comment to make an observation reinforcing earlier comments that the cost markets have reset as much as they have, we may expect higher equity returns in the future because we're starting from a lower valuation perspective with equity valuations at around 16x expected earnings, future annual returns start. We have been in the 9% to 10% annual range. That's versus that 22 multiple we started the year at, from which 5% to 6% annual terms are expected. So bringing this to a conclusion, I'm going to congratulate all of us for having lived through an unusual time. Stocks and bonds declining at the same time occurs only 9% of market times, and we've lived through one of those. Markets are adjusting to this new regime of higher inflation and higher interest rates. The reset may not be fully concluded, but we're substantial way through it. So our takeaway for you, for all investors, is don't fall into the trap of thinking in extreme terms. Just as a reminder, that Dickens paragraph about best and worst times concludes with an observation that in challenging and changing times like this everything is described in superlative degrees of comparison only. Let's not go to superlatives. It's not the biggest. It's not the worst. It's not the most. So again, bearing in mind, long-term investors is going to be well served by sticking to their investment strategy, and bond and stock markets both have higher future return expectations given the reset that we've seen. So with that, I think we've run a little bit long. But if we've got time for 1 or 2 questions, we'd be glad to take that.

Thanks, Jeff. So there are no further questions from the audience, but for everyone attending, if you watch this webinar and you do have questions, of course, please feel free to reach out to your adviser, and we will get you an answer. And I'll turn it over to John Creamer just for some quick closing comments.

Thank you, John. I appreciate it, and thank you to my colleagues for an insightful presentation and thoughtful comments. If there are any questions, please reach out to any of us. We'll be happy to talk to you privately in regard to your questions. And if you have any comments, we obviously would love to hear those as well. So I think the message is stay the course. Obviously, we're in a period of correction in terms of the inflation environment. The economy is a bit uncertain as we kind of look out into the year. Equity markets could be volatile going forward, especially as we kind of look in regard to earnings expectations and as the economy slows down. But we've been through this before. Inflationary periods are periods that we've dealt with and the Fed has dealt with. They will ultimately, although they're behind the curve right now, get it fixed and the equity markets are in the process of resetting as are the fixed income market. So we're longer term, optimistic, although, obviously, we're in a bit of an uncertain time today. But please reach out with any questions or comments. We appreciate the opportunity to serve your investment needs and your financial planning needs and your wealth management needs. So thank you very much.