Moderate 4-30-23 12-31-22 Commentary 2022 was full of challenges for the global financial markets in both stocks and bonds. It included a bear market in stocks and the worst year in the history of the bond market, with the Bloomberg Aggregate Bond Index falling 13%, as the Fed raised policy rates seven times totaling 4.25%, which presented challenges even for the moderate-balanced eSAM Moderate Account. eSAM Moderate seeks to maintain an allocation of 60% Stocks and 40% Bonds over time. Bonds typically provide a ballast against stock volatility; however, 2022 was an anomaly that saw extreme volatility in both. The catalyst of the volatility was when the Fed started aggressively raising interest rates last March to fight high inflation and end its Covid-19 emergency Quantitative Easing policy. On the bond side of the eSAM Moderate portfolio, we were defensively positioned against rising interest rates, with 40% in Short-Term Bonds (relative to Bonds), which helped to a nice degree. It was a generational shift in fixed income overall, as interest rates rose sharply across the yield curve.While the 2022 downturn was very rough for both stock and bond investors, it did create attractive forward return expectations for stocks, with more attractive valuations, and also for bonds, with a foundation of higher yields, that were less attractive ending 2021. In December 2022, we began a monthly process of moving towards a Neutral Bond Allocation in eSAM Moderate for an eventual normalized interest rate environment. We call this process a Duration Twist, gradually reducing our Short-Term allocation in 5% monthly increments (relative to Bonds) and adding it to our Intermediate-Term allocation in Vanguard Intermediate-Term Bond ETF and SPDR Portfolio Aggregate Bond ETF. We completed Phase 1 of the Duration Twist process in April, bringing our Short-Term Bond allocation to 15% and raising Intermediate-Term Bond to 85% (relative to Bonds). While the yield curve is still inverted, with short-term rates higher than longer-term and a leading indicator of a recession, we anticipate a return to a normal, positively sloped yield curve over time (short-term rates lower than longer-term) and we are prepping eSAM Moderate in advance.While largely absent last year and a rare occurrence, we anticipate a return of the virtues of diversification and the traditional risk relationship between stocks and bonds, with bonds again providing a ballast against stock risk and volatility. The Fed has been aggressively raising interest rates to combat high inflation, including two 0.25% hikes in Q1 and nine times overall since last March totaling 4.75% (ending April). We are close to the end of that process, as inflation has been steadily trending down since last June, though at 5.0% (March) it has remained stubbornly above the Fed's 2% target ending.In February, we further reduced our iShares Edge MSCI USA Quality Factor ETF position, which started in November last year, with proceeds going into large-cap value Schwab US Dividend Equity ETF, a process that will continue through the year to further concentrate eSAM Moderate on Core Allocations and continue to support our ultra low-expense mandate to keep eSAM weighted expenses at or under 0.10%. Given the more attractive valuations in stocks created in 2022, we also began scaling out of our defensive iShares Edge Minimum Volatility Global EFT allocation and reallocating back to US stocks in the small-cap SPDR Portfolio S&P 600 ETF and Schwab US Dividend Equity ETF, and in March it went into SPDR Portfolio S&P 500 ETF. The last 1% will go to our International allocation as we move closer to a neutral International position given the attractive long-term valuations overseas. [Update]: We expected another 0.25% at the early May Fed meeting, and that is what the Fed delivered with its 10th straight rate hike totaling 5.00%. While a pause is now expected, as recession risks have risen, the market is pricing in one or more interest rate cuts by year-end; however, the Fed is not projecting a rate cut until 2024. Volatility remains in the forecast for the market, including interest rates and bonds, as recession risks remain elevated. We will continue to prudently manage those risks with a long-term focus on capital appreciation with modest income and moderate-risk for our eSAM Moderate Account. All Content is CLIENT APPROVED. 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