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Weekly Market Recap – April 5, 2024

Weekly Recap:

Equities finished the week lower, driven in part by escalating geopolitical risk in the middle east. Oil prices rose to 6-month highs, with Brent crude breaching $90 per barrel for the first time since October of last year. Energy stocks finished the week higher, and the sector is now among the best-performing in the S&P 500 so far this year.

Bonds were lower on the week, thanks to a backup in rates. Several FOMC members made public comments during the course of the week, with a fairly consistent message: the Fed is still not in a hurry to lower overnight interest rates. Futures markets responded by shifting the first “odds on” rate cut from June to July, and Treasury yields moved higher across the curve.

Macro data released last week suggested that the US economy remains on first footing as we head into Q1 earnings season, with the manufacturing sector continuing to show signs of a recovery in activity. ISM’s US Manufacturing PMI printed at 50.3 for the month of March, the first print in expansion territory (>50) in roughly a year and a half. This echoes the move higher in S&P’s US Manufacturing PMI, which breached 50 in January and has moved a bit higher in the two months since (the final March print was 51.9).

Meanwhile, the labor market remains strong, as it has throughout the post-pandemic period:

* There are 8.75 million open jobs in the US per the JOLTS report

* 303k net new nonfarm payrolls were reported for the month of March

* U-3 unemployment fell 10bp sequentially to 3.8%

Chart of the Week: Net Nonfarm Payrolls Added

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20.5x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning sometime this summer. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Weekly Market Recap – March 29 2024

Weekly Recap:

Mild weakness in large cap tech pulled the Nasdaq lower, but otherwise the holiday-shortened week was a positive one for most US stocks. The S&P 500 set a fresh record high on Wednesday and again on Thursday, the 23rd and 24th such highs reached already in 2024 (see the Chart of the Week). Meanwhile, small caps outperformed last week, closing some (but certainly not all) of the YTD relative performance gap with large caps. International stocks also posted modest gains on the week.

Fixed income was mostly stable, with yields rising slightly towards the front end of the curve and falling a few basis points in the long end. Credit spreads were stable and remain on the tight side of long run averages. Muni bonds underperformed slightly on the week, perhaps from being used as a source of funds for the upcoming tax deadline.

In macro news, there were mixed signals regarding consumer confidence in March. The Conference Board’s Consumer Confidence Index printed at 104.7 versus consensus expectations of 107.0, and the February print was revised lower across the board. However, the University of Michigan’s Consumer Sentiment gauge rose nearly 3 points to 79.4 in the final March reading versus the preliminary figure of 76.5 from two weeks ago.

Finally, PCE Deflator data for February was released on Good Friday while markets were closed, and mostly came in right in line with consensus:

* PCE Deflator rose +0.3% m/m and +2.5% y/y (consensus = +0.4%; +2.5%)

* PCE Core Deflator rose +0.3% m/m and +2.8% y/y (consensus = +0.3%; +2.8%)

Chart of the Week: S&P 500 (* Denotes Record High)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Weekly Market Recap – March 22, 2024

Weekly Recap:

Stocks and bonds of nearly all stripes enjoyed a strong week after a “goldilocks” FOMC meeting. While there was no uncertainty going into the meeting regarding the rate decision, investors were keenly focused on the committee’s outlook for the economy and future rate decisions, as reflected by the updated Summary of Economic Projections (SEP). And on that front, the committee delivered a welcome update, upgrading its consensus outlook for 2024 GDP growth while also maintaining a median projection of three 25 basis point rate cuts by year-end.

The front end of the Treasury curve breathed a sigh of relief, with 2y yields falling 14bp while 10y yields dropped 11bp. Meanwhile, credit spreads inched tighter yet again. The average OAS on Bloomberg’s US Corporate Credit Index finished the week at 88bp, a level not seen since Q4 of 2021.

Equity investors responded with enthusiasm. All three major US large cap benchmarks (the Dow, S&P, and Nasdaq) rose to fresh all time highs on Thursday. Small caps also posted solid gains, but remain well behind tech-dominated large cap benchmarks on a YTD basis. The same is true for international stocks, which continue to lag the US due to the more cyclical, less tech-heavy nature of international equity markets.

On the macro front, the most interesting development last week was the February release of the Conference Board’s Leading Economic Index (LEI). The index rose sequentially (+0.1% m/m) for the first time in nearly two years, extending what appears to be a recent stabilization after a long, protracted decline that began at the start of 2022 (see the Chart of the Week for a time series). The improvement in the LEI seemed to offer some corroboration of the Fed’s upgraded economic outlook, and was cheered by market participants.

Chart of the Week: Conference Board Leading Economic Index (Total)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 21x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Weekly Market Recap – March 15, 2024

Weekly Recap:

Financial assets struggled last week after hotter-than-expected CPI and PPI prints tempered investors’ expectations regarding the upcoming Fed pivot.

* Headline CPI rose +0.4% m/m and +3.2% y/y (consensus = +3.1% y/y)

* Core CPI rose +0.4% m/m and +3.8% y/y (consensus = +3.7% y/y)

* Headline PPI rose +0.6% m/m and +1.6% y/y (consensus = +1.2% y/y)

* Core PPI rose +0.3% m/m and +2.0% y/y (consensus = +1.9% y/y)

In response, futures markets pulled another 25bp rate cut out of 2024, reducing the total number of implied cuts from four (100bp total) to three (75bp), while repricing the odds that the first cut will come in June from ~90% down to ~60%.

Predictably, rates moved higher across the Treasury yield curve, especially in the front end. 2y yields finished the week higher by 26bp. Credit spreads tightened on the week, softening the blow to US corporates.

Meanwhile, equities struggled across most sectors, market caps, and geographies, with rate-sensitive real estate names more heavily impacted. Small and midcap benchmarks underperformed, due in part to their higher REIT concentrations as compared to large cap indices.

In contrast, energy stocks were an upside outlier. A report from the International Energy Agency predicted a global supply deficit could persist for the balance of 2024, and US stockpiles recently saw their first drawdown in nearly two months, driving WTI and Brent crude to 4+ month highs.

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20.6x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Weekly Market Recap – March 8, 2024

Weekly Recap:

For the first time all year, technology, communications, and consumer discretionary (collectively the “growth sectors”) all underperformed the broader market last week. Meanwhile, every cyclical and defensive sector outperformed. This same sector pattern resulted in small and midcap stocks beating large caps, and international benchmarks outperforming the US.

The bond market also reflected a mild risk-off sentiment last week, with rates falling 5-10 basis points across the curve. Jerome Powell’s congressional testimony made it clear that rate cuts are coming later this year unless inflation data inflects higher, but the committee is not ready to begin monetary easing just yet.

Much of the selloff in growth occurred on Friday in the wake of the February jobs report from the Bureau of Labor Statistics. To our eyes, there was little in the report that was of particular concern.

* Nonfarm payrolls rose 275k (consensus estimate was 200k)

* Unemployment (U-3) ticked higher by 20 basis points to 3.9%

* Average hourly earnings rose 0.1% m/m, and are up 4.3% y/y

* Labor force participation held steady at 62.5%

Other labor market data was solid last week as well. Jobless claims remain low, the ADP reported a net gain of 150k payrolls, and the Job Openings and Labor Turnover Survey (aka, the JOLTS Report) tallied 8.86 million open jobs in the US, down just slightly from 8.89 million the prior month.

Chart of the Week: Net Change in Nonfarm Payrolls

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Weekly Market Recap – March 1, 2024

Weekly Recap:

Stocks and bonds rallied last week, thanks in part to a PCE inflation print that came in right on the screws. Investors watched with a wary eye after the most recent CPI report had come in hotter than expected a couple weeks prior, but PCE did not cause the same level of consternation:

* Headline PCE Deflator was +0.3% m/m and +2.4% y/y

* Core PCE  Deflator was +0.4% m/m and +2.8% y/y

Rates eased lower in response, after mostly moving higher in the early part of 2024. This brought some welcome relief to bondholders, who have watched bond prices sag over the past couple months, much as they did in the early part of last year. However, credit spreads also reversed course and moved wider last week, after reaching 2+ year tights the week before. This widening in spreads resulted in muted price gains for US corporates, relative to Treasuries.

Stocks were mostly better as well, particularly tech which pushed the S&P 500 and Nasdaq to fresh all time highs on Friday. Pockets of weakness in staples, utilities, and healthcare head back the Dow Jones Industrial Average, which remains just a hair below the record high set a week earlier.

The other notable macro news from last week was the somewhat surprising drop in consumer confidence across both widely followed measures. The Conference Board’s Consumer Confidence Index fell four points from a downwardly revised January figure to print at 106.7, reversing a 3-month uptrend. Meanwhile, the final reading of the University of Michigan’s Consumer Sentiment Index for February fell nearly three points from its preliminary estimate, printing at 76.9.

Chart of the Week: PCE Deflator (y/y change)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Smart Money Moves: Paying Down Debt is Saving 

Introduction

In a financial landscape where interest rates on savings accounts are enticingly high, the decision between paying down debt or stashing cash becomes more intricate. This article aims to unravel a few of the complexities, arguing that even with the allure of a 5% interest rate in a High-Yield Savings Account, strategically paying down debt can often be a superior financial move. We will delve into the nuances of tax considerations and the importance of setting concrete financial goals to guide this decision-making process. 

The Emergency Fund

Prior to exploring better potential use-cases for idle cash, a proper emergency fund should be established. It is understood that the purpose of cash in an emergency fund is to provide financial security during uncertain times. For this reason, these funds need to be liquid, and as such, a High-Yield Savings Account is an adequate place to house this cash. 

The Temptation of High-Interest Savings

For funds above and beyond what is needed in an emergency fund, a 5% interest rate on a High-Yield Savings Account can be a tempting prospect, seemingly outpacing the interest paid on certain debts. However, the true impact of this nominal rate needs to be dissected, especially when considering the after-tax reality and the inherent trade-offs. 

Tax Considerations and the Reality of After-Tax Returns

One critical factor often overlooked is taxes. Interest earned in savings accounts is subject to ordinary income tax (the highest tax rates individuals can be subject to), which can significantly diminish the apparent superiority and allure of a 5% interest rate. The effective return, or after-tax return, will likely be much lower, potentially making the decision to pay down debt more appealing. 

Strategic Goal Setting

Rather than being swayed by high interest rates alone, individuals should set clear financial goals to guide their decisions. It comes down to determining a concrete purpose for every dollar in a financial plan. This could include saving for a home, funding education, or securing retirement. Defining a goal for each dollar allows for a clear answer as to how the funds should be used or invested. Rather than chasing the highest interest-bearing savings account in the short-term, it is necessary to shift to a long-term view. With a long-term focus and a goal for every dollar, the decision of what to do with additional funds becomes increasingly clear.

Paying Down Debt

A Closer Look at Mortgage Considerations: Take the example of a 3% mortgage on a home. While the nominal rate appears lower than the 5% savings interest rate, the tax implications must be considered. After accounting for ordinary income taxes (federal, state, and potentially net-investment income tax) on the interest earned in savings, the effective return may not be significantly higher, if at all (surprisingly, in the highest of personal income tax brackets, the calculation tips the scales in favor of paying down the debt in this scenario). In this light, paying down a low-interest mortgage, even in the current higher interest rate environment, can be a financially prudent move if there is alignment with the overall financial plan. 

Long-Term Debt as a Strategic Asset

Even when interest rates on savings appear attractive, individuals with long-term, low-interest debt, such as a mortgage, may find value in paying down this obligation. By strategically reducing debt, they enhance their financial flexibility and free up cash flow to use in pursuit of other goals. For this reason, paying down debt is saving. 

Conclusion

In the dynamic interplay between high-interest savings and debt repayment, strategic wisdom lies in the details. Nominal interest rates on savings accounts can be alluring, but after-tax considerations and the strategic goals one sets can redefine the narrative. As advocates for financial wisdom and well-being, we urge careful consideration of the overall impact on goals before deciding to invest or pay off debt. 


Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance.

Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.


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Weekly Market Recap – February 26, 2024

Weekly Recap:

Last week’s headline event was Nvidia’s quarterly earnings release, which investors treated as a measuring stick for the strength and durability of the boom in generative A/I. The company didn’t disappoint. Revenue and EPS growth far exceeded consensus estimates as Wall Street analysts struggle to keep up with Nvidia’s hockey-stick growth trajectory. Q1 revenue guidance of $24.0 billion also exceeded consensus estimates by nearly 10%, resulting in further revision of expectations and yet another re-rating of the stock. NVDA finished 8.5% higher on the week, despite slumping in the days prior to Wednesday’s release.

Reassurance that A/I growth continues unabated plus a benign week for rates allowed US stocks across all industries to push higher. The S&P 500 and the Dow Jones Industrial Average closed the week at fresh all-time highs, while the Nasdaq eased back just slightly on Friday after reaching a new high on Thursday.

The picture remains mixed on the macro front. On the plus side, jobless claims fell sequentially and continue to indicate a strong labor market, S&P’s US Manufacturing (51.5) and Services PMIs (51.3) printed in expansion territory in the preliminary February reading, and existing home sales ticked higher in January thanks to some moderation in mortgage rates around year-end.

However, the Conference Board’s Leading Economic Index (LEI) painted a different picture, falling for the 22nd month in a row. The index is down 7.0% on a y/y basis, and has fallen 13.4% from its peak in December of 2021. In the past, declines of that magnitude have always been followed by a US recession (see Chart of the Week).

Chart of the Week: Conference Board LEI (y/y change)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Weekly Market Recap – February 16, 2024

Weekly Recap:

Stocks were mixed and bond yields rose after higher-than-expected CPI and PPI prints dampened investors’ enthusiasm regarding near term interest rate cuts:

* Headline CPI was +0.3% m/m & +3.1% y/y (consensus +0.2% m/m & +2.9% y/y)

* Core CPI was +0.4% m/m & +3.9% y/y (consensus +0.3% m/m & +3.7% y/y)

* Headline PPI was +0.3% m/m & +0.9% y/y (consensus +0.1% m/m & +0.6% y/y)

* Core PPI was +0.5% m/m & +2.0% y/y (consensus +0.1% m/m & +1.6% y/y)

Bigger picture, the disinflationary trend largely remains in place, but as expected the final leg of the journey back to the Fed’s 2% target is proving to be a somewhat slow and bumpy ride.

In response, futures markets pushed the first “odds on” FOMC rate cut from May to June. Yields rose across the Treasury curve, particularly in the front end as market participants once again recalibrated their expectations regarding the path toward monetary policy normalization.

Meanwhile, credit spreads tightened yet again, cushioning the downside in US corporate bonds.

Finally, equity performance was strictly ordered by duration last week, with technology and other growth stocks lagging while dividend-paying cyclicals and defensives were better. Energy stocks also got a boost from rising oil prices as tensions rose in the middle east amid signs of escalation in the conflict between Israel and Hamas. Small and midcap benchmarks outperformed large caps on the week, mostly due to differences in industry composition.

Chart of the Week: Headline CPI and PPI (y/y change)

Albion’s “Four Pillars”:

Economy & Earnings

The US economy was resilient last year, and Wall Street analysts expect full-year 2023 corporate earnings to be roughly flat y/y versus 2022. Analysts are forecasting low double digit EPS growth in 2024; growth of that magnitude will depend on the economy avoiding recession.

Valuation

The S&P 500’s forward P/E of 20x is above the long run average, so valuation could be a headwind to future returns. More predictive metrics like CAPE, Tobin’s Q, and the Buffett Indicator (Eq Mkt Cap / GDP) suggest that compound annual returns over the next decade are likely to be in the mid single digits.

Interest Rates

Futures markets imply that the Fed will cut overnight interest rates several times in 2024, most likely beginning mid-year. The belly and long end of the curve have already priced in a rate cutting cycle, with yields falling more than 100bp in November/December of 2023.

Inflation

After reaching 40yr highs in mid-2022, inflation has moderated significantly over the past 18 months. Goods inflation has fallen due to softening demand and supply chain normalization, while services inflation remains somewhat elevated, in part due to heavily lagged shelter costs.

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Conference Call Recording – February 2024

Albion Financial Group – February 2024 Conference Call Video Recording

In our most recent conference call our panelists delved into the economic context of early 2024, touching upon various topics such as tax deadlines, interest rates, Artificial Intelligence, recession forecast, inflation and pricing trends, monetary policy, portfolio asset allocation, Secure 2.0 legislation, estate planning, and more!

Stream the audio of yesterday’s conference call at this link.