Election 2024 Countdown: Economic, Market & Geopolitical Risks in the Year Ahead

Election 2024 Countdown: Economic, Market & Geopolitical Risks in the Year Ahead

Tony Roth, Chief Investment Officer
Luke Tilley, Chief Economist
Meghan Shue, Head of Investment Strategy 

Tony Roth: Welcome to capital considerations. I'm Tony Roth, chief investment officer for Wilmington Trust. On November. 6^th, I hosted a webinar, Election 2024 Countdown, Economic, Market & Geopolitical Risks in the Year Ahead. Chief Eonomist Luke Tilley and Head of Investment Strategy Megan Shue joined me to discuss what we believe is in store for the economy and investors for the fourth quarter and beyond as we came down to election day, 2024.We think you will find the discussion insightful.

There's been a lot of stress on the stock market over the last couple of months. Notwithstanding what we've seen in the last three sessions. And there's also been a lot of geopolitical risk and we're also just about one year in advance of next year's election, which would also make it for an interesting year ahead in many different ways. So we thought it would be a really good time to update everybody on how we've done for the year to date.

How we are seeing things from an overall economic standpoint and where we are from a market positioning standpoint and where we think we may be going in our portfolios.

We will be talking a bit about the kinds of trends that we typically see in election years, and I want to be very clear that we are neither endorsing nor speaking ill of any political player or party. And secondly, we will be talking a bit about geopolitics, principally what's happening in the Middle East.

I just want to say that our hearts go out to all the innocent people that have been affected by the situation in the Middle East, which is tragic. So, with that, let's jump in. What’s happened in the markets over the last three or four sessions has been very emblematic of how we've been thinking about the economy for most of the year this year.

And so I thought I would talk a little bit about how the market has behaved in the last few sessions because it's very fresh in everybody's memory and then relate that to our key takeaways for how we're seeing the overall economy and environment, and that might make things a little bit more compelling for everybody.

We had come from a period since let's call it Labor Day where we had received a fair amount of consistent data that showed that the economy was performing more strongly than anybody had expected. And in fact, the first quarter read on GDP [gross domestic product], which we got a couple of weeks ago, show that in the third quarter of the US economy returned about 4.9% growth on a real basis, which was a big number, much bigger than anybody expected. And in general, came into the year this year, just to remind everybody where most participants expected that by this time of year, we would indeed be in a recession and we're not in a recession, I'm very glad to say.

So, overall, economic growth has surprised to the upside this year, but we had economic data that showed the opposite. I'll start by citing the labor report, which was a comparatively weak labor report to what we've seen for most of the year, where we only created around 160,000 private payrolls¹, which was a pretty weak number relative to expectations.

We also received, last year, some productivity information, which suggested that the ability of companies to deliver their goods and services as a function of the unit of labor that goes into that effort had searched, which is great for inflation because it means that with our existing workforce, the hours worked, we can produce more for the same amount of fixed cost that's going to pay for that workforce. So that was positive for the economy and for the inflation picture in particular. And then feeding into that, Fed Chairperson Powell talked a lot about supply side of the economy in his press conference after the Fed chose not to raise interest rates.

And specifically, he cited the significant reentrance into the labor market and the fact that there has been tremendous new supply in the labor market to heal, if you will, a lot of the inflation that we've been experiencing for the last year, a year and a half in terms of compensation pressures in the labor market.

And then lastly, the Treasury department provided its estimates for new Treasury issuance over the next two calendar quarters and that came in lighter than expected. And the reason that was positive was because it suggested that the Treasury expects interest rates to come down. It's not really a commentary on the size of the deficit going forward or how much money is needed to fund the government per se.

It's more of a technical commentary on where interest rates are and the fact that the Treasury is holding off on raising more debt, which suggests that Treasury thinks that the rate environment is peaked and that rates are going to start to come down. Putting all this together over the last couple of months where we saw the market stock market in particular fare so poorly, and we saw the bond market actually not do well either as rates continue to climb and even get up to the 5% level on the 10-year bond², that was all essentially predicated on the idea that the economy was moving so quickly that the Fed would not, in fact, be able to start to lower interest rates next year, but might actually have to continue to raise interest rates, and that's what we call the no landing scenario of a hot economy. That narrative reversed itself. And it essentially was the constituency of the market that believes that we're going into a soft landing with a much slower economy, not a recession, but a soft landing, almost even a Goldilocks scenario, if you will.

So we're not having that hard landing with much higher rates. We're not having a recession, which would be inherently unattractive for equities as companies delever, but instead we're having a soft landing. As of late October, October, 26th or 27th, we had actually given back 80% of the gains that we had achieved in the stock market this year, which was a big amount.

But over the last three or four sessions, we've made back much of that give back. So now we're about halfway in between the highest for the year and the low for the year. We want everybody to appreciate this big change in narrative and how it sort of feeds into the broader view that we've had for most of the year that, in fact, we do expect to see a soft landing and we'll get to the probabilities in a second on the different scenarios.

But let me just complete the takeaways. I mentioned the equity market, Meghan will talk more about the equity market a little bit later in the conversation and how it compares to the bond market. But basically, what we see right now is that the relative attractiveness of stocks and bonds is pretty comparable.

There's not a lot in it one way or the other in terms of which we see to be more attractive going forward over the next 9 to 12 months. We’ve had a slight underweight to equities, which we maintain, and we're probably looking to get back to an equal weight, or maybe even an overweight some point between now and the end of the year.

And we think that we will have a better opportunity than where we are today to get back into a full allocation to equities, if not a slight overweight. I'll talk more about geopolitics as it relates both to the situation in the Middle East and the election in a year. But we think that there is certainly risk that the situation in the Middle East could have a more negative impact on markets than it has to date. I'll talk about why it has not had a lot of impact to date. But essentially, the biggest factor is probably the price of oil, which has been very quiescent and that's the lever of the fulcrum, if you will, that could cause the situation in the Middle East to really impact the global supply chain and to be inflationary and push prices up, after having now, made it over this inflation hurdle, we believe. And then we'll talk about what typically happens, if you will, in a political election year.

We have an economic environment which is recessionary. We don't think it's going to be a deep recession, but we still call it hard landing because it is a recession and we see this probability of maybe one in four, maybe 25% occurring, still. We have a soft landing, which is a maybe two out of three chance, maybe 60%, 65% chance and then we have the so called no landing, which as recently as a week or two ago, many participants in the markets believed that the no landing scenario was the base case scenario.

We never held that view and today we believe it's probably only a 10% chance that the economy is going to continue to race forward. The consumer continues to overspend relative to expectation and that the Fed, in fact, actually has to move higher on rates rather than lower on rates as we move forward from here. With that, I want to bring in Luke Tilley, our chief economist, to talk more about this probability of a soft landing. Luke, take us through your reasoning on a soft landing.

Luke Tilley: Certainly Tony. And I think the most important things here, we need to see the economy slow to below trend, which you think of as roughly below 2%. Different places will have a different estimate of trend. Think of it as roughly below 2%. We think that that is going to happen because consumers have been either spending or putting away or investing the excess savings that had built up.

We do see inflation slowing down and we started to see the unemployment rate rise. Now, critically, the unemployment rate has been rising, not because there has been widespread job loss, but because we have more and more people entering the labor market, and they're simply not finding jobs as quickly as they did a year ago or two years ago.

That is a critical component, as I said of this, and it's really gonna be how businesses respond to the current environment. But if they do not engage in cutting jobs across the economy, we think that continued slower job growth will be enough to keep the economy's head above water, but not real strong.

Now we do have three quarters worth of data for 2023. That third quarter number came in incredibly strong, 4. 9%. And it mostly looks like volatility to us. We don't think the economy is truly growing at almost a 5% rate.

There's a lot of shifting of spending from 1 quarter to the next. We've seen inventories give a huge boost to the third quarter numbers and those are famously volatile. They'll shoot upwards in one quarter and then move back down. But all of the minutia aside, what we expect to see is that slowdown as we move into the fourth quarter that we're currently in, and then also into next year. And you can see us expecting 1.2% growth next year. And that is reflective of consumers slowing their purchases, less of those excess savings, and then also businesses that are facing higher interest rates, higher costs of rolling over debt, some challenges in some parts of the economy. And ultimately, what we see is an economy that does slow down, but not enough to tip it into recession.

Job growth, a key important part. We got the job number for October. 150,000 jobs³, and that was below the consensus of economists or the median expectation. But I think an important context here is that way back before the pandemic and before we had such large swings from the pandemic and stimulus and everything afterwards, 150, 000 jobs is pretty normal. I mean, that was the normal gauge for how's the economy doing when it's chugging along. It should be creating just about that many jobs to keep up with population and labor force growth. You get down to 100,000 or so, and it can get a little bit concerning. But if you go up to 200,000 or 250,000, this economy is really cooking.

Firms have cut the overall number of job openings, the number of positions that they are looking for. And that is, I think, encouraging. We need some normalization in the labor market. The previous couple of years have been sky high openings and everybody fighting for that person to join. And we see workers jumping from one job to the other, very high quit rates over the past couple of years.

And driving wages much higher. But we've seen that slow down quite a bit. The number of people who are quitting their jobs voluntarily in any given month has dropped down to basically pre-Covid levels. And we've seen a lot of people join the labor force. One hundred fifty for October is a low number. Clearly, we had some stronger months before that.

The stronger job growth, stronger than 150 actually can help on the inflation side of things. So inflation is obviously one of the key concerns here. One of the key things that the Federal Reserve is going to react to and broadly what we've seen is that that massive slowdown in inflation from roughly 9% now down to 3.5%. It dipped down to right around 3%, 3.5%. And then the last couple of months in a year-over-year sense back up to the to the 3.7%.⁴ In our forecast, we expect it to keep slowing as we go forward, and an important component of this in the early period was the improvement of supply chains.

I'm sure we all remember, even though we'd like to forget how bad the supply chains were and how much that drove up the cost of goods. As inflation has come down at the early stages where the supply chain is coming down, and then we've also seen some of that slowing of demand as consumers have less and less of those access savings on hand. The strong job growth has been helping on this inflation side, too.

And that's sort of a nuanced point, because a lot of people will see a strong job growth number and get sort of concerned about it and say, well, that's not slow enough. We really need the labor market to slow down, but there's a less mentioned, positive part of people joining the labor force and seeing that strong job growth, especially with the amount of jobs we've seen growing in the leisure and hospitality.

So restaurants and then also hotels and venues, the kind of strong job growth over there has really helped restaurants open more sections of restaurants, accommodate more customers, hotels and motels being able to turn over more rooms and really eased some of the inflation pressure that we had seen in those sectors.

So again, we do expect this to come down a little bit as we go forward.

Tony Roth: On the one hand, we do have this additional supply in the labor market of new entrants to the job market, which Chairperson Powell really emphasized as being very positive. We were seeing a big deceleration in wages relative to peak wages earlier in the year, but there's also an argument to be made that they've sort of plateaued with wage growth around 4%.

So we have the employee cost index that we received for the third quarter, which showed around about a 1% for the quarter, which would be about 4% annualized and even the average hourly earnings didn't come down quite as much as we might have liked to have seen them. And so the question is, how confident are you that with all the additional entrants and with the important increases that we seem to be registering on productivity that the wage costs are, in fact, going to come down to a level that's consistent with the 2% target? Do wages need to come down to 2% or can they stay structurally higher and have the overall picture meet the 2% target, at least on a headline basis?

Luke Tilley: There's a couple parts of that question. The first one is how confident are we that wages would keep coming down and I would expect it to keep coming down giving the growth in the labor force and it continues to outpace the demand for jobs. The second part is much more challenging. It's what is the level of wage growth that is consistent with 2% inflation.

It's really not consistent over time. It's a real tenuous relationship in terms of wages and inflation moving together. Clearly, the dynamic has been pretty strong, and it seemed pretty strong over the past couple years. And labor has had a very good place at the bargaining table, you know, the upper hand, if you will, in getting wage increases over the past couple of years.

But that is starting to disappear. In the sense that it's driving inflation, you know, it's how firms react to it. I think of it as when firms are facing higher wages, they've got three options. They can either take it on the chin and lose some profitability. They can pass on those costs through their pricing, and that would be inflation, or they need to get more productive.

There has been, I think, some eating into the profitability from historic highs. On the second one, less and less pushing through of those prices, and that brings back the importance of the data release that you mentioned from last week, Tony, that showed the higher productivity, and we've had the sense in talking to clients and customers and anecdotal evidence that firms are getting more productive.

So this is something that the Fed has been wrestling with, too. How in the world could we have inflation come down from that peak of nine down to three and a half already? Even though the high labor costs, and I think it comes from productivity. And as we get to the continued slowdown and inflation next year, the economy slowing down in that soft landing scenario, we'd be increasingly looking towards rate cuts from the Fed by the middle of next year.

And then it's really gonna turn to how quickly would those come. Market here pricing anywhere between 50 and 100 basis points by the time you get to the end of next year, it fluctuates quite a bit on in any given week. But we would expect those cuts to start by the middle of the year and then be accelerating.

If our soft landing scenario plays out of slower growth and lower inflation. And then lastly, the kinds of things that would push towards those lower percentage experiences and pathways for the economy. On the hard landing side, it would be consumers retrenching more than we currently expect. They have had those dwindling savings, but we do think a lot of them have put it into investment vehicles that are still somewhat available. We do see some credit delinquencies rising. We know that there are some weaknesses in the commercial real estate market, and those are all viable risks. And then on the no landing side, even though that this scenario has decreased in probability, as Tony said, it's still possible that we could have an economy that's operating above that 2% level, and it would end up driving the economy higher.

And the important part here is not that the economy is so strong, but this would create more inflation pressure if it remained too strong, and if we didn't get those productivity gains, and that would end up leading to a recession later on, because the Fed would have to hike and it would be further down the road, if you will.

Tony Roth: Okay, thank you very much Luke. And I think what's interesting here is the fulcrum point is the consumer. How is the consumer going to behave? Does the consumer continue to have enough built-up savings from the pandemic era?

And in addition to that, having positive real wages now, over the last couple of calendar quarters that they can continue their strong spending, or will they consolidate if you will, and cause a harder landing. So, Meghan, we've been slightly underweight to risky assets, and we've been very patient, all year, I'm very proud to say through a very difficult year to navigate.

So maybe just take us through our positioning how it's worked. And where is it within equities? We've been able to focus the portfolio in order to accomplish those gains. That actually puts us in a good position for the year.

Megan Shue: It's been a really remarkable year, because we started off like many others, having a fairly pessimistic view of the economic prospects for the U.S. in 2023. And that has improved of late, certainly. But if you recall, we had a remarkable first half of the year in the equity markets, and valuations got a little bit ahead of themselves, certainly investor sentiment. And so we have remained patient. The third quarter was a bit of a reset for the market with about a 10% correction from the July highs and during all of that, we've maintained a slight underweight to equities. But importantly, we stayed neutral to U.S. large cap, which has by far been once again, the standout performer in equities. Our underweights to us small cap and international developed, which have significantly lagged that of U.S. large cap haven't hurt all that much again, a small underweight, but also because those asset classes have detracted quite a bit.⁵ And as it relates to U.S. small cap, the Russell 2000, for example, is basically flat for the year compared to about a 13.5% year to date return for the S& P 500.

Through all of this, we've played a little bit of defense on the field with an overweight to investment-grade fixed income, where yields definitely climbed in the 3rd quarter and hurt returns in that relatively short period for investment-grade fixed income. But going forward where we see the prospects for interest rates falling over the year ahead as well as where we've gotten to in terms of about a 4.5% yield on the 10-year Treasury, the return prospects are very good going forward for investment grade fixed income. And we think the year ahead could be a much better one again for that diversified investor. And then lastly, I'll just point out cash on the bottom where we've had a slight overweight to your point, Tony, waiting for an opportunity to deploy that into a higher returning asset class, but cash has been a really attractive place to be in terms of the yield you can get for basically taking on no risk.

The way we look at positioning equities is we look at a lot of different lenses, but one of the most important ones is to look at factors, which are basically the building blocks of returns. So look through a particular strategy and see how it's composed.

We have had a lot of swings over the past couple of years between value and growth, and getting those wrong has been very painful for investors if you've been on the wrong side of some of those very violent moves. As of right now, we're pretty balanced between value and growth, where we see some good prospects for growth equities given dominance in technology, and the prospects for some decline in interest rates going forward, but also not getting too over our skis on value where you tend to get a little bit more cyclicality.

And there's been obviously some pain points in the manufacturing parts of the sector, industrial sector and parts of the market like that. But importantly, quality is something that we've really had an important focus on, and this can be hard to understand what that means. But quality basically means looking across companies and picking those that have the best balance sheets, the most cash, the lowest debt levels and the highest, most-sustained profitability.

Which in a time of rising interest rates and slowing growth, uh, that's been really rewarding for investors to be holding. And some examples of those are some of the stocks I would call sort of the sweet spot of technology related companies. Not those high flying, super expensive companies, but the ones that have a lot of cash and those really sound balance sheets and good profitability.

So, some of the mega cap tech names that you might be familiar with Apple, Google, things of that nature tend to have a higher exposure to quality. And we've been focused on that in our positioning.

Tony Roth: A lot of those names are ones that historically people thought of as growth companies and more speculative companies, but they've reached a point in their life cycle and their maturity where through strong markets or in strong economies, or even through recessions, they can continue to deliver very consistent cash flow.

And it's really that consistency that makes them quality companies and which attracts us subject to understanding evaluation, of course, but attracts us to those companies to include them in our portfolios. When you think about going forward, given your picture of where we are today, I talked about stocks and bonds being roughly equal attractiveness.

If Luke is right and when I hear about rates being cut, makes me salivate for stocks. On the other hand, if rates are coming down, that's good for bonds. Because existing bonds will go up in value if new bonds are being issued at a lower rate. And it also means the credit spreads tend to come in, which is also good for the value of bonds.

Could you please put it all together for us?

Megan Shue: The way to think about it is that we are being a little cautious on the equity market, waiting for a slightly better entry point, but also not getting terribly pessimistic during the post global financial crisis era when interest rates were very, very low and bonds were not really an attractive prospect, stocks looked good.

Today, we find ourselves almost at even going forward the earnings prospects for stocks versus bonds. Look fairly similar, of course, equities carry more risks. So you have to take that into consideration. It really does come down to interest rates and the prospects for interest rates to decline in the future, we’d get a little bit more excited about the stock market. For now what we're watching is really profitability and signs of what companies are doing and seeing going forward on the earnings front.

Tony Roth: Given that almost all the gains, frankly, we're concentrated in the new term is Magnificent 7 stocks, maybe this would be a good time to just sort of dump them and move to the rest of the market, which is much cheaper.

Megan Shue: Possibly. So the S&P 500 through October was up about 10.5%, but those Magnificent 7, those big mega cap, the largest of the large seven stocks have returned almost 80% here to date.⁶ If you strip those out, the rest of the index is totally flat. So, on the one hand, there is actually a good deal of potential opportunity in the rest of the index. Valuations are not stretched for the balance of the index.

And if you were to shift into some of those other companies, you're going to get a little bit more exposure to what's been beaten up. For the long-term investor, there's definitely opportunity there. There's a reason why we've seen the Magnificent 7 perform as they have and they're driving a tremendous amount of the earnings growth of the overall index. That can continue.

And as we look in the year ahead, a lot of the earnings growth that's expected for the index is coming from some of those stocks in the tech, communication services, and consumer discretionary sectors. So I would not want to deviate too far in terms of reduced significantly reducing exposure because they are continuing to hold a tremendous market advantage, especially as we look at some of the transformations happening in the industry and in the tech space related to artificial intelligence.

This is a part of the market that's very difficult to put a valuation on with tremendously uncertain, but maybe very large profits in the future. And that is part of what we're seeing.

Tony Roth: These stocks, notwithstanding their relatively expensive valuation, we're not the only ones that like them. They really provide an intersection between growth and quality.

And that's why they're in our portfolios. They provide very consistent earnings in both good and bad economic times alike. But on top of that, they also can grow their share of the economic pie in absolute terms because of innovation, like AI, et cetera, and they're just so attractive for those reasons.

Megan Shue: We have in our client portfolios tend to use a mix of active, passive and custom indexing strategies.

It's a very difficult environment for active management to do well, when you see this type of lopsided performance in the market. When the very largest stocks are doing so much better than the rest of the index, active management does tend to lag and that's because it's difficult to get significantly overweight these big stocks, because a lot of managers have limits on how much they can hold in a particular single name.

Tony Roth: So, what do you think it's going to take from a catalyst standpoint to convince you and me and Luke and the other few people that are on our Investment Committee to actually redeploy assets away from bonds and cash and back into stocks, given how unappealing the economic outlook is for Europe. As an example, what do you think the catalyst is likely to be given that we are actively trying to find that entry point? And do you think maybe we've missed it given the rally we've had in the last three or four sessions?

Megan Shue: We'll only know in retrospect, if we “missed it”. You do tend to see very large market movements off of the bottom, but I don't really think is a catalyst. I don't think we need to see is a further dramatic reset in valuations. We’ve already gotten to a fairly respectable place in terms of of [RP1] where the markets trading relative to its own history.

So I think valuations are creating an opportunity to be considering getting back into equities. What else we would need to see? I would say this is a pretty pivotal quarter for the consumer. We had a very, very strong 3rd quarter, as you and Luke discussed. We expect the consumer to slow. I would expect that we'll get a good read on whether we're getting a slowing to that Goldilocks level or that retrenchment that might signal greater risks of a hard landing.

And then, I think, continuing to keep an eye on inflation and what it could mean for interest rates. We saw increased conviction that rates would start to drift lower. I think that would be the signal for equities to trade higher in the year ahead.

Tony Roth: So, I want to just talk about the geopolitical issues that I alluded to at the outset of the call. We're focused on the price of oil around a proxy, if you will, for whether or not the conflict in the Middle East is likely to spill into global economic activity. As surprising as it may be. We actually had the price of oil, notwithstanding the conflict in the Middle East drop by 12% to 15% during the month of October.⁷ Even though we have a lot of disruption around the areas that are hydrocarbon producing areas of the world, there are so many different forces at work, including the global disinflation and the global slowing in economic activity relative to where we thought it might be or where the market thought it might be, which is really just pushed oil prices lower.

What we think it would take for the situation in the Middle East to really impact the global economy and the economy at home is for the price of oil to probably get to 120 or so or higher to materially impact. And that's almost 50% increase from where we are today, 40% increase. We're just bystanders, of course, we don't have any way to predict or know what's going to happen in terms of the war and where that goes and how it plays out.

The other geopolitical risk factor is our election that's coming up next year. Historically, you typically see as you come into the opportunity for a first-term president to be elected, you typically see a pretty strong economy with pretty strong markets and that is because the administration is typically doing what it can to support the economy and support markets, because there's probably consensus on the fact that no single factor has a bigger impact on the mindset of electors than the strength of the economy coming into the election. Now, what's also interesting, regardless of whether the incumbent party wins or loses, you have a market rally after the election, and that for the entire year on election year, typically produces pretty good results for the equity market. That concludes our conversation for today. I really appreciate Luke and Megan for your great insights.

Look for new episodes as well as our 2024 for capital market forecast, which is coming in December. This will detail where we are seeing opportunities and how we're positioning for the year ahead.

¹ Data as of November 3, 2023. Sources: Macrobond, Bureau of Labor Statistics.

² Source: Bloomberg and S&P 500 Index. As of October 31, 2023.

³ Data as of November 3, 2023. Sources: Macrobond, Bureau of Labor Statistics.

⁴ Data as of October 31, 2023. Sources: Bureau of Labor Statistics, WTIA.

⁵ Data as of October 31, 2023. Positioning reflects our monthly tactical asset allocation (TAA) versus the long-term strategic asset allocation (SAA) benchmark. For an overview of our asset allocation strategies, please see the disclosures.

⁶ Data as of October 31, 2023. Sources: Bloomberg, WTIA.

⁷ Data as of October 31, 2023. Source: Bloomberg.

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An Overview of Our Asset Allocation Strategies

Wilmington Trust offers seven asset allocation models for taxable (high-net-worth) and tax-exempt (institutional) investors across five strategies reflecting a range of investment objectives and risk tolerances: Aggressive, Growth, Growth & Income, Income & Growth, and Conservative. The seven models are High Net Worth (HNW), HNW with Liquid Alternatives, HNW with Private Markets, HNW Tax Advantaged, Institutional, Institutional with Hedge LP, and Institutional with Private Markets. As the names imply, the strategies vary with the type and degree of exposure to hedge strategies and private market exposure, as well as with the focus on taxable or taxexempt income. On a quarterly basis we publish the results of all of these strategy models versus benchmarks representing strategic implementation without tactical tilts.

Model Strategies may include exposure to the following asset classes: U.S. large capitalization stocks, U.S. small-cap stocks, developed international stocks, emerging market stocks, U.S. and international real asset securities (including inflation-linked bonds and commodity-related and real estate-related securities), U.S. and international investment-grade bonds (corporate for Institutional or Tax Advantaged, municipal for other HNW), U.S. and international speculative grade (high-yield) corporate bonds and floating-rate notes, emerging markets debt, and cash equivalents. Model Strategies employing nontraditional hedge and private market investments will, naturally, carry those exposures as well. Each asset class carries a distinct set of risks, which should be reviewed and understood prior to investing.

Allocations

Each strategy group is constructed with target policy weights for each asset class. Wilmington Trust periodically adjusts the policy weights target allocations and may shift away from the target allocations within certain ranges. Such tactical adjustments to allocations typically are considered on a monthly basis in response to market conditions. The asset classes and their current proxies are: • Large–cap U.S. stocks: Russell 1000® Index • Small–cap U.S. stocks: Russell 2000® Index • Developed international stocks: MSCI EAFE® (Net) Index • Emerging market stocks: MSCI Emerging Markets Index • U.S. inflation-linked bonds: Bloomberg US Treasury Inflation Notes TR Index Value Unhedged USD (took effect 8/1/22) • International inflation-linked bonds: Bloomberg World ex US ILB (Hedged) Index • Commodity-related securities: Bloomberg Commodity Index • U.S. REITs: S&P US REIT Index • International REITs: Dow Jones Global ex US Select RESI Index • Private markets: S&P Listed Private Equity Index • Hedge funds: HFRX Global Hedge Fund Index (took effect 8/1/22) • U.S. taxable, investment-grade bonds: Bloomberg U.S. Aggregate Index • U.S. high-yield corporate bonds: Bloomberg U.S. Corporate High Yield Index • U.S. municipal, investment-grade bonds: S&P Municipal Bond Index

Risk Assumptions

All investments carry some degree of risk. The volatility, or uncertainty, of future returns is a key concept of investment risk. Standard deviation is a measure of volatility and represents the variability of individual returns around the mean, or average annual, return. A higher standard deviation indicates more return volatility. This measure serves as a collective, quantitative estimate of risks present in an asset class or investment (e.g., liquidity, credit, and default risks). Certain types of risk may be underrepresented by this measure. Investors should develop a thorough understanding of the risks of any investment prior to committing funds.