First Quarter Review

The United States economy appears to have continued to grow in the first quarter, albeit at a more modest pace. With the final revised estimate of fourth quarter Gross Domestic Product (GDP) registering 3.4%, the forecasted level of 2% for the first quarter shows deceleration but certainly not imminent recession. Data reported throughout the quarter continued to reveal a stable labor market as the unemployment rate, while ticking up to 3.9% in February, stepped back down to 3.8% in March. Claims for unemployment, both continuing and initial, also continued to show relatively modest readings over the period. Increases in nonfarm payrolls continued to exceed the level necessary to absorb the flow of new entrants into the labor market.

Consumer sentiment also continued to contribute positively to the economic story as the University of Michigan Consumer Sentiment Index reached its highest reading since mid-2021, with the final reading of 79.4 released March 28. The March reading represented the largest intramonth increase in 18 months. Key contributors to the improved reading included a reduction in inflation expectations and an improved outlook for the economy.

Looking Forward

As stated previously, the GDP forecast, according to FactSet, for the first quarter is 2%. This level of growth was not being forecast for the first quarter a few months ago, but given the strength seen in the United States economy for the third and fourth quarters of 2023, estimates have ratcheted higher. Growth is expected to decelerate in the second quarter with FactSet looking for an increase of only 1.1%. We are in agreement with the more modest outlook but still do not feel it is indicative that a recession is right around the corner.

While the labor market has shown some signs of moderating momentum, as mentioned above, it continues to maintain a level of strength that should keep the economy moving forward in the second quarter. In addition, the strong year-to-date performance of equity markets creates an enhanced wealth effect that contributes to continued consumer confidence.

While we anticipate continued growth for the economy, we are not oblivious to some of the potential pitfalls that may become troublesome as the year progresses. Continued stickiness of service sector inflation could delay the much-anticipated Federal Reserve cuts in the Fed Funds rate. We have already seen the forecast number of cuts reduced from six to three and our view is that the number could be reduced to two cuts in the 2024 calendar year. Also, budget concerns are becoming more prevalent as the United States continues to borrow increasing amounts of cash at the current elevated level of interest rates. This translates into a rapidly growing level of interest expense associated with the debt.

As always, we will monitor the full array of factors prospectively impacting the economy and if necessary, adjust our outlook accordingly.

Asset Allocation Overview

While equities continued to advance in the first quarter, bonds saw their values decline as interest rates moved higher in response to the likelihood that the Federal Reserve would not be cutting interest rates as quickly or as deeply as previously forecast. As a result of these movements in the financial markets
six of our seven allocation benchmarks delivered a positive first quarter return. The only exception, not surprisingly, was the income objective which is totally comprised of fixed income assets.

The primary driver of performance in the first quarter was United States equities as evidenced by the return of 10% generated by the Russell 3000 Index of domestic equities. While international equities also moved higher over the three-month period, their gain was roughly half that of domestic markets as the MSCI ACWI ex-US Index returned 4.7%.

In terms of the allocations associated with each of our seven investment objectives, there were no changes made during the quarter to either the asset classes comprising the objectives or their weights relative to our strategic
benchmarks. Our continued neutral positioning is a byproduct of the numerous meetings of our Asset Allocation Committee and the materials reviewed in those meetings.

Over the past year there have been numerous suggestions from various market strategists that shifting a portion of balanced allocations to small cap domestic equities or international equities would be very timely as these market segments were perceived to be poised to outperform domestic
large cap equities. And there have been brief periods where these asset classes did show glimpses of superior relative performance. As more time passed however, it was the United States and more specifically, domestic large cap equities that provided the strongest returns. For example, over the past
12 months the Russell 1000 Index of large and mid cap United States stocks
returned 29.9%, while the Russell 2000 Index of small cap United States stocks returned 19.7% and the MSCI ACWI ex-USA rose 13.3%. So, while all major equity indices had meaningful, double-digit returns over the past year, the relative performance did not warrant a move away from our current positioning even though there was some very brief rotation in leadership that occurred over the period. We do not totally disagree that a case can be made to increased exposure to international and small cap domestic equities. It is for this reason that we maintain our neutral positioning in these market segments. However, we continue to feel that the case for going to an overweight position in either of these is not sufficiently strong enough to take action.

On the fixed income side of the asset allocation ledger, we anticipate the Federal Reserve will begin the process of lowering interest rates later this year. While the cuts are not anticipated to be as frequent or as deep as was originally perceived as the year began, we believe they will still materialize. Given this outlook we are currently maintaining our fixed income weightings at neutral, which is similar to our equity positioning.

As discussed above, we will be monitoring economic data, earnings reports and the guidance accompanying those reports to determine if the investment environment will lead us to deviate from our current neutral status.

In conclusion, we encourage investors to review their current investment objective, including their asset allocation, and evaluate its level of appropriateness given their goals and level of risk tolerance.

The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.

This content is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and should not be interpreted as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.