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A periodic newsletter from Idaho Trust Bank

Most major global stock indices had a very strong year in 2023. Inflationary pressures have begun to ease and the Federal Reserve Bank signaled that it may soften its aggressive monetary policy stance taken to combat inflation. Higher rates should benefit returns on fixed-income securities going forward.

2023 Year-end Review

The equity markets had a strong showing last year as the S&P500 advanced over 26%. The year got off to a slow start with worries about Fed rate hikes and bank failures at Silicon Valley Bank, Silvergate, and others. By March, the S&P500 was about where it had started the year. Near the end of March, however, rate-hike expectations were cut amidst more dovish language from the Fed, and the market would rally significantly. August and September are historically bad months for the markets, and 2023 was no different. The S&P500 dipped over 10% from a high in late July, but the “Santa-Claus” rally would more than offset this dip as the S&P500 recovered almost 14% in just the last two months of the year. At the end of 2023, the market was basically in line with the high point in late 2021.

Much of the story in 2023 has focused on “the magnificent seven” stocks, and companies in the best positions to make use of new artificial intelligence technologies. For much of the year, the S&P500 was only in the green due

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to these large stocks. However, this changed a little in late 2023. The contribution of the top 10 stocks in the S&P500 did account for most of the return, but the S&P500 still returned roughly 7% outside of the top 10 holdings. While the rally in 2023 was undoubtedly concentrated in the top stocks, their contribution was notable but not a historical record. We only need to go back to 2020 to see a more disproportional contribution. Still – such a concentrated rally worries some economists that the gains we’ve had are more vulnerable. Continued growth across the broader indices would be an encouraging sign moving forward.

It was a strong year for information technology, communication services, and consumer discretionary stocks. The economic promise of breakthroughs in artificial intelligence helped technology companies like Apple and Microsoft return over 50% for the year. Communication service stocks like Meta (+188%) and Netflix (+63%) had great years as they recovered substantially from particularly dismal years in 2022. Consumer discretionary stocks were aided by stronger than anticipated spending on discretionary items like cars and travel. Amazon, Tesla, travel booking companies, and large cruise lines all had outstanding years in this category. Utility and energy companies lagged the broader market. This can largely be attributed to falling energy prices. The World Bank energy price index was down over 24% in 2023.

Middle ($2B-10B) and small (<$2B) capitalization stocks were outshined by large stocks but still had solid years with both finishing the year up over 16%. Despite lagging behind the S&P500, smaller stocks are considerably “cheaper.” The S&P small-cap index has a price-to-earnings ratio of around 13, and mid-cap is around 14.5. Both are considerably lower than the S&P500 price-to-earnings ratio of 24. In the most recent Vanguard Capital Markets Forecast, economists published favorable outlooks for smaller stocks and value stocks over the next ten-year period. Developed international stocks are in a similar position. They were also outshined by the S&P500 last year, but the EAFE index returned a respectable 18%. Currently, Vanguard is predicting international stocks to have the strongest returns over the next 10-year period.

The market seems to like what they are hearing from the Federal Reserve. It seems all but guaranteed at this point that rates have reached their peak for now. Powell has been quoted recently saying that rate cuts “begin to come into view.” As of this writing, the market is pricing in rate cuts starting in Q2 of 2024 – and there is an implied Fed Funds rate of roughly 4% at the end of 2024 (lower than the official forecast of 4.6%). This has caused rates to fall, especially along the short end of the yield curve.

It is too early to say that the US economy is on pace for a soft landing, but there are reasons to be optimistic. The labor market has stayed incredibly tight with the unemployment rate falling to 3.7% in November (and staying steady at 3.7% in December), consumer spending has remained high even amid persistent inflation, and housing prices have rebounded significantly since a dip in 2022. Consumer confidence metrics have also been

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trending upward since a

record low in June 2022.

One potential risk

remaining is the

commercial real estate sector. Coming out of the pandemic era, commercial real estate may be the biggest detractor, as many businesses moved to a remote work model. Commercial real estate poses a unique risk, as unlike residential mortgages, commercial real estate loan payments are typically “interest-only” with a single “balloon payment” paying off the principal at the end of the term. This can leave lenders with more risk. With commercial real estate values having fallen over 20% since May 2022, this exposes lenders to significant risk. The combination of higher vacancies, remote work, and

higher rates have made it so that many office owners can’t pay back their existing mortgages. Delinquencies on commercial mortgage-backed real estate have tripled over the last year to nearly 6%. There has been a tightening of credit availability as many lenders have cut back activities with property values falling.

Conclusion

Given the large number of unknowns surrounding inflation levels, it is likely that volatility levels will remain high in the first half of this year. Therefore, markets could continue to be volatile in the near term. However, we believe that the long-term investment outlook remains solid with a healthy economic backdrop as well as higher rates which should benefit fixed-income returns going forward.

S&P 500 Index

1 Year 26.26%

3 Year 10.22%

5 Year 15.86%

MSCI EAFE Net

Index

1 Year 18.24%

3 Year 3.79%

5 Year 8.25%

Barclays Aggregate

Bond Index

1 Year 5.53%

3 Year -3.28%

5 Year 1.15%

As of 12.30.2023

Boise Branch

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[email protected] www.IdahoTrust.com

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1. Consult an Idaho Trust Bank financial consultant for more details. Securities and insurance products are

offered through LPL Financial and its affiliates, Member FINRA/SIP. Idaho Trust Bank is not a registered broker/

dealer and has a brokerage affiliate arrangement with LPL Financial. Idaho Trust Bank is a separate company from

LPL Financial. Investment accounts generally under $300,000; Insurance and Annuities of all sizes.

2. Please see the Idaho Trust Bank Schedule for Fees. Investment accounts generally over $300,000.

3. Please see the Idaho Trust Bank Schedule of Fees. Investment accounts generally over $500,000.

Certain products may be provided by a Financial Consultant of Idaho Trust Financial is utilized: (1) Securities and

insurance products are offered through LPL Financial and its affiliates, Member FINRA/SIPC; (2) Idaho Trust Bank

is not a registered broker/dealer and has a brokerage affiliate arrangement with LPL Financial; and, (3) Idaho Trust

Bank is a separate company from LPL Financial, Idaho Trust Bank does not provide tax or legal advice. Overlay

Asset Management utilizes external and/or internal managers selected by Idaho Trust Bank.

4. Certain products may be provided by a Financial Consultant of Idaho Trust Financial. Securities and

insurance products are offered through LPL Financial and its affiliates, Member FINRA/SIPC. Idaho Trust Bank is

not a registered broker/dealer and has a brokerage affiliate arrangement with LPL Financial. Idaho Trust Bank is a

separate company from LPL Financial. Idaho Trust Bank does not provide tax or legal advice.

5. Exchange Traded Funds (ETF), mutual funds and individual stocks are subject to risks and fluctuate

in value. Neither asset allocation nor diversification assure a profit or protect against loss. International investing

involves special risks including increased volatility, political risks, and differences in auditing and other financial

standards. Small-cap stocks have historically experienced greater volatility than average. High yield, lower-rated

securities generally entail greater market, credit and liquidity risks than investment grade securities and may include higher volatility and higher risk of default. Bond prices are sensitive to changes in interest rates and a rise in

interest rates can cause a decline in their prices. Past performance is no guarantee of future results. No representation is hereby made of the risk and/or return of any particular portfolio. There is no guarantee that any suggested

investment strategy will work in any market. You should fully and carefully consider all objectives, risks, expenses

and fee before you invest.

6. Portfolios are illustrative only. ActualLifeNeedsTM Portfolios will vary from time to time as determined by

Idaho Trust Bank. No representation is hereby made of the risk and/or return of any particular portfolio. There is no

guarantee that any suggested investment strategy will work in any market. You should fully and carefully consider

all objectives, risks, expenses and fees before you invest. Past performance is no guarantee of future results.

Exchange Traded Funds (ETF), mutual funds and individual stocks are subject to risks and fluctuate in value.

Neither asset allocation nor diversification assure a profit or protect against loss. International investing involves

special risks including increased volatility, political risks, differences in auditing and other financial standards.

Small-cap stocks have historically experienced greater volatility than average. High yield, lower-rated securities

generally entail greater market, credit and liquidity risks than investment grade securities and may include higher

volatility and higher risk of default. Bond prices are sensitive to changes in interest rates and a rise in interest rates

can cause a decline in their prices. Past performance is no guarantee of future results. For more information about

performance of Idaho Trust Strategies and our performance calculation methodology, please contact us. Actual

client performance may vary from the performance of model portfolios and/or any strategy. No representation is

hereby made of the risk and/or return of any particular portfolio. There is no guarantee that any suggested investment strategy will work in any market. You should fully and carefully consider all objectives, risks, expenses and

fees before you invest.

Portfolios are illustrative only. Actual LifeNeeds™ Portfolios will vary from time to time as determined by Idaho Trust Bank. The Idaho Trust investment strategies will vary from time to time as determined by Idaho Trust Bank. The information and analysis expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Information contained herein has been obtained by sources we consider reliable, but is not guaranteed. Any opinions expressed are based on our interpretation of data available to us at the time of the original publication of the report. These opinions are subject to change at any time without notice.

NOT A DEPOSIT • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT GUARANTEED BY THE BANK • MAY GO DOWN IN VALUE

Rev. 12.31.2023 ©Idaho Trust Bank, 2023. All Rights Reserved.