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Trade Memo – 3rd Quarter 2023 August 7, 2023 August!?! Man, this year is flying by too fast. I hope that this trade memo finds you and your family happy and healthy. So much has happened since our last set of trades. Here are some highlights: Fed Raises Rates (again) The Federal Reserve has implemented the anticipated increase in the federal funds rate, raising it by a quarter percent to a range of 5.25% to 5.50%. This decision was reached unanimously and brings the upper limit of the range to its highest point since 2001. Additionally, the Fed will continue its quantitative tightening strategy by allowing up to $95 billion per month in bonds to mature without reinvestment. The markets are grappling with a crucial question: Is this interest rate hike the highest point for this period, or can we expect more hikes in the future? Unfortunately, this question remains unanswered. During the last FOMC meeting in June, Federal Reserve Chair Jerome Powell suggested that the committee felt they were "close to their destination." However, based on Powell's recent comments, it seems that the Fed is uncertain about how far they are from achieving their goal. They do, however, believe that current policies are "restrictive," meaning they could potentially slow down growth and inflation. Despite this uncertainty, Powell assures us that the Fed is committed and determined to reach its inflation objective, even if it requires patience. To gauge inflation control, it is crucial to monitor economic growth and inflation. The Fed emphasizes a weaker labor market and below-average growth as indicators. Specifically, GDP growth has averaged 1.1% since the Fed indicated policy tightening, contrasting with the pre-pandemic average of 2.4%. However, there has been a recent rebound in GDP growth following a period of negative growth, potentially impacting the Fed's confidence in predicting a decline in inflation.1

Fitch Downgrades US Credit Rating On August 1st, Fitch Ratings shocked the market by downgrading U.S. Treasuries from AAA to AA+. This unexpected move was prompted by Fitch's concerns about the country's future fiscal outlook, its increasingly heavy national debt, and the erosion of governance compared to other highly rated peers. These issues have been evident in repeated debt-limit standoffs and last-minute resolutions over the past two decades. A few key points: • This is not about the ability of the U.S. to service its debt. It's about the willingness to service the debt. Fitch had warned during the debt-ceiling standoff earlier this year that it was considering a downgrade because a country refusing to pay its debts in a timely way was not entitled to a AAA rating. It is the same reasoning used by Standard & Poor's rating agency in 2011 when it downgraded U.S. debt to AA+ from AAA. Moody's Investors Service still rates the U.S. as Aaa. We don't expect the downgrade to affect many investments because few require AAA ratings. • The timing seems odd because it is well after the debt-ceiling standoff was resolved and the U.S. economy is growing at a healthy pace. However, Fitch is looking at the upcoming budget battle in Washington this fall and anticipating the potential for another government shutdown if Congress can't come to some agreement. This could weigh on economic growth and reduce tax revenues. • Fitch is considered the third-ranked rating agency and therefore has less influence on the market than S&P or Moody's. That may mitigate some of the impact of the decision. • Rising deficits and the ratio of debt to gross domestic product (GDP) is a concern over the longer run. The combination of tax cuts, followed by sharp spending increases during and after the pandemic has pushed the deficit and debt/GDP higher during the past few years. With the Fed hiking interest rates, the cost of servicing the debt is rising. Fitch projects the U.S. debt/GDP ratio to rise to118% by 2025, which is significantly higher than the average for AAA rated countries. • However, the U.S. has the ability to service the debt, even at higher interest rates. The economy is growing at a solid pace and foreign capital inflows continue to be strong. There is currently no reason to worry that the U.S. will default on its debt.2 Fitch's investment-grade rating scale is AAA, AA, A, and BBB and the sub-investment-grade scale is BB, B, CCC, CC, and C. The Moody's investment grade rating scale is Aaa, Aa, A, and Baa, and the sub-investment grade scale is Ba, B, Caa, Ca, and C. Standard and Poor's investment grade rating scale is AAA, AA, A, and BBB and the sub-investment-grade scale is BB, B, CCC, CC, and C. Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

What investors can consider now There is no question that U.S. Treasuries remain a secure investment despite the Fitch decision. While it brings attention to political challenges hindering debt/GDP control, there is still no replacement for U.S. Treasuries in the global market. The U.S. market continues to be the largest, most liquid, and safest option. Don't overreact to this announcement, there's no need to alter your financial plan based on it. Performance Commentary: US stock markets continue to thrive despite mixed economic signals, signaling a potential bull market. Headline inflation has hit a two-year low, with core inflation also showing signs of softening. The Federal Reserve held off on rate hikes in their June meeting, but the possibility of future increases looms. Meanwhile, European and emerging market stocks face challenges from a slow Chinese economy. In the bond market, US treasuries remain volatile while riskier bonds outperform. Most models performed well in June, surpassing their benchmarks for the quarter. US large cap, technology, and quality factor stocks were the main contributors to returns, with infrastructure stocks also adding to performance. However, the fixed income side of the portfolio saw marginal losses from US treasuries and mortgage-backed securities. Upswings in riskier investments like US high yield and emerging market bonds helped offset losses.3 What are we doing today: Our firm typically rebalances your retirement accounts quarterly, unless we have unusual market conditions. If you have non-retirement accounts, we rebalance at least twice a year, depending on your tax situation. Here are the key takeaways from this quarters rebalancing: Current investment themes: • Take profits on winners and recalibrate stock & bond bets for potential changes in market trends, reallocating risk across equity regions and styles, credit and rates. • Move overweight US stocks with a preference for lower octane growth and midcap companies, trimming tech as market breadth potentially widens.

• Balance US growth stock bets with an increase in value bets in Europe, as the respective paths of inflation and central bank policy in these regions diverge. • Take advantage of the recent (but possibly short-lived) surge in real yields by adding to Treasury Inflation Protected Securities Why are we making these changes? Stocks have defied expectations and risen steadily since March, shrugging off potential threats that would have sent markets into a tailspin in the past. Despite a banking crisis, the threat of default from Congress, and increasing interest rates, the market has remained resilient. This impressive performance has been led by a select few tech giants, dubbed the 'Magnificent 7', who have capitalized on the A.I. boom. However, we believe it's time to reassess our heavy investment in tech stocks. In the third quarter, we anticipate a slowdown in risk-assets and a shift in returns towards previously lagging midcaps. Are we out of danger yet? Perhaps not. Although the worst risks stemming from bank failures seem to have subsided and lending cuts are not as severe, the stock market has been buoyed by temporary injections of liquidity. These injections, from the Federal Reserve's emergency bank lending program and the drawdown of the US Treasury's General Account balance, are now being reversed. While these injections outweighed the Federal Reserve's ongoing quantitative tightening from March to June, the situation has changed and commercial bank reserves are declining again. We anticipate that this will cause some market turbulence in the third quarter. As a result, we have made adjustments to our investments in liquidity-sensitive assets, such as emerging market stocks and lower quality credit. The odds of a recession are now lower than they were four months ago, thanks to people spending more and the economy bouncing back. However, this could make it harder to combat inflation. The Federal Reserve is ready to raise interest rates to tackle the issue, and the Treasury market has reacted accordingly. We see this as an opportunity to invest in floating rate Treasuries and TIPS, which offer higher returns, along with long-term Treasuries. This strategy will help protect against the potential negative effects of the Fed's actions. It's the moment many have been waiting for: the possibility of a recession.

The recent events involving two major US regional banks have highlighted the alarming consequences of rapid financial tightening, potentially forcing the Federal Reserve to reassess its newly enacted hawkish policies. This could be a crucial step toward mitigating economic risk across America and promoting stability in our markets.3 How we can help: It's understandable that the future can be uncertain and intimidating, but reflecting on our past experiences can give us the reassurance we need to move forward. We recognize that the current situation may be challenging, but we want to assure you that we're here to support you whenever you need us! We empathize with the overwhelming nature of navigating markets and the financial unknown. That's why we prioritize working with a limited number of families, so that our team can give each client the personalized attention and assistance they deserve. Let's discuss any concerns or inquiries you have together! As always, please feel free to reach out to us if you would like to talk to us about your personal situation. Warmest regards, Kelly L. Olczak, CFP® Managing Partner, Private Wealth Manager Office – (585) 623-5982 eMail – kelly@lynnleighco.com Article Sources 1 Market and Economy – July 26, 2023, “Fed Raises Rates, Leaves Door Open to More Hikes” - Kathy Jones, Managing Director, Chief Fixed Income Strategist – Charles Schwab 2 Bonds – August 2, 2023, “Fitch Downgrades US Credit Rating” - Kathy Jones, Managing Director, Chief Fixed Income Strategist – Charles Schwab 3 Model Portfolio Summary – July 20, 2023 - BlackRock

4 This information is provided by LynnLeigh & Co. for general information and educational purposes based upon publicly available information from sources believed to be reliable – LynnLeigh & Co. advisors cannot assure the accuracy or completeness of these materials. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice. Past performance is not a guarantee of future returns. Investing involves risk including loss of principal. No strategy assures success or protects against loss. Tactical allocation may involve more frequent buying and selling of assets and will tend to generate higher transaction cost. Investors should consider the tax consequences of moving positions more frequently.