Q2 2023 Quarterly Letter

July 2023

Welcome summer! The Ratio Wealth Group Team hopes the first six months of the year were prosperous and wishes each of you an enjoyable remainder of 2023.

Investors had a lot to muddle through during the quarter. Geopolitical and economic risks continued to evoke strong emotional reactions – primarily fear. Add to the Russia/Ukraine headline, a US debt ceiling scare and the news outlets had plenty to focus on. Yet, global stocks rose 5.9% in the quarter, while US large-cap corporations rose 8.6% and US small-cap corporations rose 5.2%. While the bond markets were generally flat, year-to-date stabilization, slightly positive returns and healthy yields suggest the chaos from 2022 for fixed income is behind us. Add in a Denver Nuggets NBA Championship for those of us in the region and the last three months were not half bad.

In our last two communications, we highlighted our belief that a deep recession was likely avoidable. For several months, we have seen inflation trending downward at a healthy pace and the Federal Reserve in the later innings of increasing interest rates. We believe these factors will remain in the headlines throughout the year, with a more likely narrative as follows:

  • A recession is coming but more of the “mild” version.
    • The June 27, 2023, gross domestic product (GDP) forecast out of the Federal Reserve Bank of Atlanta for 2Q23 is a positive 1.8%.

  • Inflation is slowing but not fast enough.
    • The Consumer Price Index (CPI) showed a June 2022 peak of 9.1%. The May 2023 CPI number was 4.0%. (U.S. Bureau of Labor Statistics) June 2023 numbers will be released on July 12, 2023.

  • The Federal Reserve rate increases have had the desired effect but may have to be raised several more times to get the economy on a healthy footing.
    • The median projection for year-end 2023 fed funds rate is in the 5.625%, up from the current range of 5.0%-5.25% (Federal Reserve Board “dot plot” forecast – July 6, 2023).

While these macro topics will continue to dominate financial headlines, we believe that most market participants are acting under a general belief that the broader economy is stable. Attention is now rightly focused on market equilibrium and the prospects for realistic expansion.

Heading into the second quarter of 2023, our portfolios were positioned to be fully invested and diversified across major asset classes, with a tilt towards value-centric equity holdings and fixed income exposure that stayed shorter on the yield curve with a quality (investment grade) bias. Our investments reflected the belief (which was reinforced in late 2022) that valuations were “fair” across investable assets and that future gains would be derived from improving profits – always with a caveat that macro factors did not deteriorate drastically.

In the recent quarter, as in the first half of the year, aggregate performance across equities has been positive, but results have been extremely bifurcated. A heavily market cap weighted index like the S&P 500 saw the biggest returns from the largest names. The bulk of S&P 500 gains in the first half of 2023 were due to the positive reversals by Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVDIA and Tesla. These “Big 7” account for around 28% of the index and have returned 20% collectively. The rest of the S&P500 fell on average during the period. Note these Big 7 companies were down 34% on average in 2022. While the broad indexes show recent gains, a true “market” recovery has not materialized and some catch-up must be done between the economy and a larger representation of corporations that support global GDP.

For reference, broad year to date index performance as of 6/30/2023 is as follows:

  • S&P 500 16.9%
  • Dow Jones Industrial 4.9%
  • Russell 2000 (US small-cap companies) 8.1%
  • MSCI All – World Index 13.9%
  • Aggregate Bond Index 2.1%

Our early 2023 notion that multiples were generally reasonable, and that stock performance would ultimately be dependent on rising profits, has been tested in the short term. For example, the valuations of US large cap indexes grew during the quarter, pushing multiples to the high end of their historical ranges. As indicated by the performance dispersion above, the top 10 market cap weighted stocks in the S&P 500 have a current multiple of 29x vs the remaining S&P 500 stocks of 18x. Relative growth rates can impact this spread but can also create greater downward pressure if high multiple stocks fall short on growth expectations.

We maintain that while certain segments of the market are extended, broad global growth, relative to prices and expectations, is reasonable. Non-US equites and US small-cap indexes are displaying a more reasonable historical relationship between valuations and modest growth. Our belief is that while extremes can last longer than the short-term fundamentals support, the equity markets are searching for a more equitable distribution of returns as indicated by July’s outperformance of stocks outside of the previously mentioned “Big 7”.

Year to date, some of the rebalancing we have done for client accounts has focused on increasing exposure to underperforming technology stocks as well as a slight increase in smaller US equities. Our intent is to position our clients in anticipation of a reversion to the mean from the outperforming, mega cap tilt, towards the underperforming, more attractively valued rest of the equity market. This might take some time, but we believe our changes will benefit returns as investors recalibrate for modest growth coming out of the 2022 correction and the momentum chase that has occurred in large cap technology stocks so far in 2023.

In fixed income and cash allocations, near term fundamentals still support a 5% plus yield in short- term treasuries. A balanced ladder of treasuries, municipal bonds and corporate bonds can produce a yield closer to 5.5% (noting the use of tax-equivalent yields for municipal bonds). For accounts that target balanced risk, relative to return, we did continue to raise fixed income allocations slightly. Remember, it was only two years ago that a similar strategy was yielding less than half what we see today.

Additionally, our Team has been spending a fair amount of time researching opportunities in the alternative investments space. These tend to have less liquidity and lower correlations to traditional assets like stocks and bonds. The design is to complement a diversified traditional allocation with opportunities for growth and income that are not dependent on the same factors for success. In evaluating these alternative investments, we seek to strike the right planning balance between liquidity and risk appropriate growth. Areas of interest specifically include opportunity zones for tax efficiency and an emerging need for private credit as lending standards continue to tighten.

We know this time of the year tends to get busy with travel, vacations and other summer activities. For those with kids going back to school, that summer fun feeds directly into a chaotic fall. Please know the entire Ratio Team is available for portfolio review and planning updates at any time. If your summer schedule is cumbersome, please anticipate a fall meeting to include a financial check-up and planning adjustments for 2024 and beyond.

With gratitude,

Derek

Disclosure

Ratio Wealth Group, LLC (RWG) is a registered investment advisor located in Colorado. RWG and its representatives are in compliance with the current filing requirements imposed upon registered investment advisors by those jurisdictions in which RWG maintains clients. RWG may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. RWG’s web site is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment related information, publications, and links. Accordingly, the publication of RWG’s web site on the Internet should not be construed by any consumer and/or prospective client as RWG’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Any subsequent, direct communication by RWG with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of RWG, please contact the SEC, FINRA or the state securities regulators for those states in which RWG maintains a filing. A copy of RWG’s current written disclosure statement discussing RWG’s business operations, service, and fees is available from RWG upon written request. RWG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to RWG’s web site or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended or undertaken by RWG) made reference to directly or indirectly by RWG in its web site, or indirectly by a link to an unaffiliated third party web site, will be profitable or equal the corresponding indicated performance level(s). Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deductions of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Certain portions of RWG’s web site (i.e. newsletters, articles, commentaries, etc.) may contain a discussion of, and/or provide access to, RWG’s (and those of other investment and non-investment professionals) positions and/or recommendations of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current position(s) and/or recommendations(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from RWG, or form any other investment professional. RWG is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice.

To the extent that any client or prospective client utilizes any economic calculator or similar device contained within or linked to RWG’s web site, the client and/or prospective client acknowledges and understands that the information resulting from the use of any such calculator/device, is not, and should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from RWG, or from any other investment professional.

Shawn Wallace, CLTC
Managing Director

720.420.4866 Direct
shawn@RatioWealthGroup.com

“The first time I meet with prospective clients I love getting to know them, exchanging life stories and learning about their goals and dreams. The best moment is when they realize that we’re a great fit and that we are the advisors they have been looking for. I like to think my people skills rival my financial skills! At Ratio, I’m proud that everything we do revolves around our client’s plan. Our goal is for them to trust us as their advisor and planning resource for decades to come.“

Shawn has been a dedicated planning agent for the over seven years, focusing on the comprehensive insurance and investment needs of affluent clients throughout the country. He offers expertise in optimization tactics during the accumulation phase, as well as tax efficient distribution strategies for clients. Shawn also brings a unique perspective and industry knowledge to the table as a United Airlines pilot and Boeing 787 instructor.

After graduating from Indiana State with a Bachelor’s of Science Degree in Aerospace, Shawn flew for the United States Air Force and is a proud veteran of Desert Storm.

Work : Life

Shawn lives in Denver with his wife and two sons and they all love to travel and are avid sports fans. Shawn is also an avid microbrew fan and will happily tell you his favorites. He is also a Board Member of the Wings Over the Rockies Air and Space Museum.

Nancy Kimball
Executive Assistant

720.420.4860 Direct
Nancy@ratiowealthgroup.com

“Helping people find happiness in the little things, moments or even daily miracles brings me joy! I thrive to make sure the Team at Ratio is prepared for all of their clients’ needs in and out of the office. Patience, appreciation, research and knowledge are key to my success at Ratio. I love helping our ratio Team thrive every day.”

Nancy brings a long career in advertising sales where she worked for Blair Television in various cities including New York. She came to Denver where she worked at the NBC News Affiliate, Channel 9. After leaving the Television Industry, Nancy changed career paths to a more administrative supportive role. She worked for mortgage and real estate CEOs and supported various other CEOs as a Consultant. Nancy is well versed in planning, communication and anticipating the needs of the Ratio Team and their clients. She received a Bachelor of Arts in Speech Communication and Broadcasting from Colorado State University. She is also a Certified Yoga Instructor.

Work : Life
Outside of Ratio, Nancy enjoys spending time with her husband and cheering her son on during his many sports, especially hockey. Her favorite hobbies are Pilates and playing the piano. She enjoys volunteering wherever she is needed at her son’s school, on her HOA Board in her neighborhood, and serving the homeless in the Denver community.

Michelle E. Buquet Director Of Business Development

720.420.4860 Direct
michelle@ratiowealthgroup.com

“Life is most rewarding when you enjoy what you do. I truly love meeting new people and discovering what connects us; whether that is mutual friends, goals or passions. The one common thread throughout my career is helping other people attain their vision. Ratio Wealth Group does just that for their clients. I can personally speak to this as a client who believes in the process so much, I wanted to become a member of the team. Here, we take a holistic approach to helping individuals turn their financial aspirations into reality. As a client of Ratio and now a team member, I am confident in our services, candor and appreciation of the people we serve.”

As Director of Business Development at Ratio, Michelle brings a wealth of talents and experience to our team thanks to her varied background in sales and marketing. One of her most rewarding experiences was working for Colorado Ski County where she instituted the 5th Grade Ski Passport which allowed 5th graders to ski at almost every mountain in Colorado three times for free. Luckily for us, Michelle discovered her true passion is bringing people together and creating synergist partnerships.

Work : Life
Michelle is the proud mom of four kids. She is an adventurer, traveler and art lover. Her true passion is being with friends and family. She also loves taking advantage of all that Colorado offers; skiing, live music and hiking.

Lauren S. Young, CFP® Vice President, Client Advisor

720.420.4873 Direct
lauren@RatioWealthGroup.com

“I’m passionate about helping people determine their financial goals and then working with them to make sure they can achieve them. I enjoy helping our clients understand “financial language” so that they feel confident when making financial decisions. An important role I play is reminding clients of their goals and helping them stick with them. The difference between us and other financial advisors is our focus on getting to know our clients and connecting with them. That’s as important to us as performance results.”

Lauren has earned a Certified Financial Planner™ designation and has been working in Wealth Management industry for nearly 15 years. She has extensive experience in trust administration, estate planning, retirement planning, and education planning. She has a degree in Business Administration with concentrations in Marketing and Finance from Gonzaga University.

Lauren also created a Kids and Money workshop and is passionate about empowering teenagers with the knowledge and expertise to create their own financial futures.

Work : Life
Lauren is a sports fanatic and loves to ski, bike, go to the mountains, cheer on the Denver Broncos and Colorado Avalanche and spend time with her husband and two kids.

Josh Freedman, CFA
Chief Operating Officer

720.420.4863 Direct
josh@ratiowealthgroup.com

“After 30 years in the finance industry, I have seen many different investment strategies employed by multiple firms.  I am thrilled to be at Ratio Wealth Group because I believe that the firm’s holistic approach, our investment philosophy, and the services we provide are the best way to ensure our clients’ financial well-being and peace of mind.  It gives me great pleasure and satisfaction to work with such talented people – both coworkers and clients.”

Josh has worked in just about every aspect of the asset management business – from trading and securities research to compliance and operations. Before joining Ratio Wealth Group, Josh was Chief Operating Officer and Chief Compliance Officer for several independent investment advisors, most recently Ballast Equity Management, LLC. He has experience in investment research and portfolio management in both the equity and fixed income markets and began his career in client service and sales and marketing.

Josh holds a Bachelor of Business Administration degree from the University of San Diego and a Masters in Business Administration, with a specialization in Finance, from the University of Denver. Josh is a CFA charterholder and a member of the CFA Institute and CFA Society Colorado.

Work : Life
Josh and his wife enjoy traveling and being in the mountains to ski, ride and hike whenever they can. Josh is also a dedicated, if slow, swimmer and runner. His favorite pastime is annoying his grown sons with the worst dad jokes he can find.

Dominique Caraveo
Client Relations Manager

720.420.4867 Direct
dominique@RatioWealthGroup.com

“Money is an incredibly vulnerable subject. At Ratio, money can be discussed without fear of judgement or pressure all within a space that ensures trust and care. As a first-generation college graduate, I have learned what it’s like to not have been provided with the tools to make yourself financially successful until much later in life. At Ratio, financial advice is coupled with education to ensure that each of our clients has the tools and resources to write their own financial story.”

Dominique focuses on client relations management at Ratio Wealth Group. She has 5 years of client service experience helping clients navigate their financial planning needs. Dominique holds a B.A. in Liberal Arts and an M.S. in Marketing both from Regis University.

Work : Life
During her free time, Dominique enjoys playing tennis, pickle ball, cooking and spending time with her family.

Darren Spreeuw, PhD
Portfolio Manager

720.420.4879 Direct
darren@RatioWealthGroup.com

“I am an educator at heart. I love talking with clients about the economic theories that underlie financial markets, and helping to clarify their understanding about how things work. I’m also a musician, and a little known fact about me is that I pick up foreign languages easily – accents and all. I’m proud to work at Ratio because we are a true fiduciary, putting our clients first, while practicing and promoting best ethical practices with kindness, empathy, and respect.”

Darren has approached the capital markets from a myriad of angles over the last 22 years. At Ratio Wealth Group, he focuses on portfolio management, portfolio analytics, planning integration and client relations. He works closely with the entire Ratio team to insure complimentary investment strategies are thoughtfully integrated into tailored financial plans.

As an academic economist, Darren taught graduate level econometrics, finance and economic theory at several universities, and conducted firm-theory research in Eastern Europe as a Fulbright Scholar. In the private sector, Darren has provided thoughtful strategic analysis to a range of firms, from small family offices and RIAs, to big-data firms overseeing portfolios of mortgage-backed securities.

Darren is a Founding Executive Board Member of the Colorado Student Leader’s Institute, an affiliate of The National Conference of Governor Schools. He holds degrees from San Francisco State University (BA Econ) and The American University (PhD Econ).

Work : Life

Outside of the office, you’ll find Darren fixing anything that breaks at one of his many rental properties, cheering on his kids’ soccer teams, skiing, climbing, cycling, and playing beer-league hockey.

Beth Steininger Wraga
Managing Director

720.420.4865 Direct
beth@ratiowealthgroup.com

“I believe that taking a holistic approach to your financial well-being paves the way to a life abundant in success, happiness and meaning. I have a deep background working with financial institutions and a strong desire to serve others with empathy and integrity. This combination gives me an ideal foundation to aid individuals and families in planning and achieving their life goals.”

Beth brings twenty-five years of institutional financial services experience in sales, research, and operations to her role as Managing Director. Prior to Ratio Wealth Group, Beth worked as the Director of Investor Relations and Marketing for two different hedge fund advisors that were focused on the technology, media, and telecom sectors in the public and private markets. Previously, she worked for Goldman Sachs as a Vice President in Institutional Equity Research Sales and in the Global Investment Research Technology Group. She also worked at Paine Webber (now UBS) in Investment Research and started her career in its Management Audit and Controls analyst program. In addition, Beth is a Certified Life Coach – she uses this training and passion to help clients identify core motivations, values, and goals in their wealth management discussion. Beth received her Bachelor of Business Administration from the University of Texas at Austin.

Work : Life

Beth lives in San Francisco with her husband and three sons. She is passionate about travel, theater and cheering on her boys.

Graham C. Gerlach, CFP®, AEP®
Co-Founder, Owner, Partner

720.420.4871
Graham@RatioWealthGroup.com

Graham brings a varied and highly valuable combination of expertise to Ratio Wealth Group, advising on all aspect of our business. Graham is also a Co-Founder and Chief Revenue Officer of Inclined Technologies, a SaaS software company focused on driving better long-term outcomes for whole life policyholders.

Graham holds a (BA) from Denison University (Religion and Psychology) and is a member of the Denver Estate Planning Counsel.

Work : Life
Outside the office, you’ll find Graham enjoying American and European Football, cooking outside and fine tuning esoteric knock-knock jokes with his kids.

Derek J. Scarth
Co-Founder, Owner, Managing Partner

720.420.4872 Direct
derek@RatioWealthGroup.com

“I am incredibly grateful to assist families in developing a thoughtful strategy for their specific needs and imparting trusted advice. I truly subscribe to a life in service for others. At Ratio, we take a team approach to caring for our clients. I want individuals and families to know that we take tremendous pride in providing confidence and harmony around estate and financial objectives. We know that assets are only valuable as part of an prearranged mosaic and are truly dedicated to being a dependable resource at every turn.”

Derek’s professional experience began in public/private equity analysis and institutional portfolio management. He is well versed in business development and operational management for both for-profit and not-for profit entities. Prior to co-founding Ratio Wealth Group, Derek was a Portfolio Manager and Managing Director for Inspire Capital Partners. Previously, he was a Partner at Denver Investments LLC, where he served as Co-Portfolio Manager for Large-Cap Growth institutional clients and on the Westcore Large-Cap Growth Fund. In 2003, he assisted the investor relations team of Newmont Mining Corporation (NEM -NYSE) in a public offering capital raise. Derek began his investment career as an Analyst and Assistant Portfolio Manager for Berger Funds, which was acquired by Janus Capital Management in 2002.

Derek received his bachelor’s degree from Regis University and holds a master’s degree from the University of Denver – Daniels College of Business.

Work : Life

When he’s not actively engaged in the Ratio community, you will find Derek spending time in the Colorado mountains with his wife and their three sons. Derek is very proud to give back to his alma mater as the Regis University Board of Trustees Chair. He also is an assistant boys soccer coach and mentor at Regis Jesuit High School.

Disclaimer

No client or potential client should assume that any information presented should be construed as personalized financial planning or investment advice. Personalized financial planning and investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of our disclosure documents which we will provide upon request. For more regulatory information regarding Ratio Wealth Group please visit the SEC’s website at www.adviserinfo.sec.gov

Licensing

Investment advisory services offered through Ratio Wealth Group, a Registered Investment Adviser.

Graham Gerlach CA Insurance License #0C37975, State of Domicile, Colorado
Shawn Wallace CA Insurance License #0G59657, State of Domicile, Colorado

We have representatives licensed to sell securities in the following states: AZ, CA, CO, DE, FL, GA, HI, ID, IL, KS, LA, MA, MI, MN, MO, NC, NE, NH, NJ, NM, NY, OH, OR, SD, PA, TX, VA, WA, WY. State of Domicile, Colorado

Ratio CRD: 6705290