AMS: FOURTH QUARTER 2019 COMMENTARY

[Pages:6]AMS: FIRST QUARTER 2022 COMMENTARY

Key Updates

? The narrative of 2022 has thus far centered on Russia's invasion of Ukraine and the associated geopolitical and economic fallout.

? Compounding matters, ongoing global supply chain concerns and inflation woes, along with the first Federal Reserve (Fed) rate hike since 2018, put additional downward pressure on stock and bond markets in the first quarter.

? Stock managers who are strategically tilted toward the "growth" side of the Morningstar style box (which is where technology stocks tend to be identified) faced particularly heavy selling pressure in recent months, causing significant underperformance from some of our program's best performing funds over longer-time periods.

? All Select Investor Program (SIP) primary accumulation strategies posted negative returns in the first quarter, by amounts ranging from -5.2% to -7.8% (gross of fees).

? A targeted trade was made in February to swap the iShares S&P Mid Cap Value ETF (IJJ) to the Principal Mid Cap Value Fund (PVMIX) in select strategies, with the aim of providing improved risk-adjusted returns through a skilled active manager.

Performance (%)

Gross of account level fees

(as of 3/31/22)

SIP Aggressive Growth Benchmark SIP High Growth Benchmark SIP Wealth Building Benchmark SIP Moderate Growth Benchmark SIP Conservative Growth Benchmark SIP Capital Preservation Benchmark

Q1

(7.84) (4.67) (7.36) (4.85) (6.95) (5.00) (6.71) (5.17) (5.78) (5.11) (5.20) (5.14)

Year-toDate (7.84) (4.67) (7.36) (4.85) (6.95) (5.00) (6.71) (5.17) (5.78) (5.11) (5.20) (5.14)

1 Year

4.62 8.52 3.52 6.60 2.64 4.79 1.23 2.90 0.38 1.05 (0.71) (0.77)

Average Annual Return

3 Years

5 Years

10 Years

Since Inception

14.05 11.83 10.38 12.34

14.33 11.95 10.40 13.72

11.95

9.98

8.64

10.72

12.34 10.52

9.16

12.36

10.63

8.67

7.81

9.84

10.51

9.14

8.31

11.51

8.50

7.25

6.48

8.53

8.49

7.55

6.71

9.51

6.74

5.78

4.99

6.93

6.53

5.96

5.39

8.02

4.65

4.34

3.88

5.83

4.41

4.25

3.67

5.89

Inception date is 3/31/2009 for all Strategies listed along with their blended benchmarks. Past performance is not indicative of future returns. Strategy performance includes the reinvestment of dividends and capital gains. Please reach out to your advisor for gross return estimates for Strategies not included in this table.

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The Markets In our previous commentary, we said that the broad stock markets were due for a correction, and that is just what we got. After peaking at all-time highs right at the end of 2021, geopolitical and inflationary risks took center stage, resulting in an S&P 500 Index decline of roughly 13% by early March before recovering some of that by quarter end. Market declines were widespread, affecting the stock prices of large and small companies alike. International stocks also suffered, with emerging markets slightly outperforming developed markets, supported in part by the surge in energy prices related to the war between Russia and Ukraine.

Bond markets were also hit broadly due to rising yields across maturities, with the Bloomberg U.S. Aggregate Bond Index (a proxy for U.S. investment grade bonds) falling 5.93% in the first quarter. At its March meeting, the Fed elected to increase the benchmark Federal Funds Rate (FFR) target range by 25 basis points (0.25%), with strong signaling that they were prepared to hike rates even faster than previously expected to combat building inflationary pressures. The median member of the Federal Open Market Committee now expects the FFR to be 1.9% by the end of 2022, which translates into approximately seven total 25-basis-point rate hikes this year (though it is possible that one or more of those hikes could be 50 basis points).

Program Review

Performance Key

Positive

Neutral or Mixed

Negative

ASSET CLASS (INDEX)

ABSOLUTE INDEX RET URNS

RELATIVE FUND RET URNS

STOCKS

U.S. Large Cap Stocks (S&P 500 TR)

U.S. Mid Cap Stocks (S&P MidCap 400 TR)

U.S. Small Cap Stocks (S&P SmallCap 600 TR)

Developed Foreign Stocks (MSCI World Ex USA IMI NR)

Emerging Market Stocks (MSCI EM IMI NR)

REAL ASSETS

Real Estate (FTSE EPRA NAREIT Developed NR)

BONDS

U.S. Short Term Bonds - Taxable (Bloomberg US Govt/Credit 1-3 Yr TR) U.S. Investment Grade Bonds - Taxable (Bloomberg US Agg Bond TR) U.S. High Yield Bonds - Taxable (Bloomberg US Corporate High Yield TR) Emerging Market Bonds (JPM EMBI Global TR)

U.S. Large Cap Stocks were down (-4.6%)

U.S. Mid Cap Stocks were down (-4.88%) U.S. Small Cap Stocks were down (-5.62%) Foreign Developed Stocks were down (-5.18%) Emerging Market Stocks were down (-6.65%)

U.S. Large Cap Stocks were mixed on a relative basis; the best relative performers in the quarter were iShares Core Dividend Growth ETF and iShares MSCI USA Value Factor ETF; the worst relative performers in the quarter were Edgewood Growth and Fidelity Advisor New Insights

U.S. Mid Cap Stocks were mixed on a relative basis as MFS Mid Cap Growth underperformed and Principal MidCap Value outperformed the index

Not Applicable (we utilize passive index funds that track the benchmark index)

Foreign Developed Stocks were mixed on a relative basis as Artisan International Value outperformed while JOHCM International Select and T. Rowe Price International Discovery both underperformed the index

Artisan Developing World underperformed its benchmark in the quarter

Global Real Estate was down (-3.96%)

MFS Global Real Estate underperformed its benchmark in the quarter

U.S. Short Term Bonds were down (-2.49%) U.S. Investment Grade Bonds were up (-5.93%) U.S. High Yield Bonds were up (-4.84%) Emerging Market Bonds were up (-9.26%)

FPA New Income outperformed its benchmark in the quarter

BlackRock Total Return and Baird Core Plus both underperformed their benchmarks in the quarter

Artisan High Income outperformed its benchmark in the quarter

Fidelity Advisor New Markets Income outperformed its benchmark in the quarter

Please note not all funds and asset classes are included in each strategy. Please reach out to your Advisor for the most recent quarterly strategy sheet for additional detail on the current holdings.

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Looking Ahead

? War: The ongoing Russia/Ukraine conflict is obviously the biggest driver of economic uncertainty for the time-being, as any further escalation runs the risk of severely disrupting economic recovery in Europe, and potentially the world at large. Unfortunately, the war has caused fresh supply disruption just as the pandemic-linked shocks were beginning to abate. While the combined exports of Ukraine and Russia are relatively small on a global scale, they are considerable producers of numerous food items (such as wheat), various minerals for industrial use, and most importantly, energy.

? Inflation: Inflation numbers continue to be a primary domestic consideration, with year-over-year inflation in the U.S. hitting 7.9% in February. Even excluding the most volatile categories, core inflation (which excludes food and energy) was still up 6.4% during the same period ? the highest in 40 years! While inflation was expected to peak and then moderate going into the second half of 2022, the invasion of Ukraine, combined with a tight labor market and existing supply chain disruptions in China, is likely to result in elevated inflation for longer than initially anticipated.

? COVID: At the same time, COVID-19 restrictions around the world are thawing, which should provide a strong tailwind for economic growth going into the summer. However, the sectors that would have benefited the most from this development, such as tourism, are also going to take a material shock from surging oil prices, which clouds the outlook for the next quarter. Additionally, China has recently taken actions to limit spread by shutting down industry in limited areas, clogging ports along its own coast and again exacerbating supply-chain concerns.

? Employment: While the U.S. labor market is undoubtedly robust, skill mismatches are making it harder and harder for businesses to fill open positions. This has implications for longer lasting inflation as well, as wage increases, which are difficult to unwind, drive up labor costs for producers.

? The Fed: As for monetary policy, with inflation now primarily driving its decisions, the Fed elected to increase its target FFR for the first time in four years. The efficiency of the Fed's policy plans will depend on how stubborn inflation turns out to be. Their biggest fear is that inflation becomes entrenched in expectations, which will influence both consumer and business decisions (sentiment for both has turned materially lower in recent months). While the Fed is working hard to engineer a smooth path to policy normalization, economic risks associated with a more aggressive policy stance have risen materially.

? Politics: On the fiscal front, we still do not expect any major legislation making it through Congress during a highly contentious election year, although a recently revealed federal budget is proposing more direct payments to families in coming months.

Opportunities

? Despite much of the mainstream pessimism, it is worth remembering that the stock market is a discounting mechanism of longer-term expectations. There do seem to be numerous tailwinds for solid market performance later in 2022, even if volatility persists in the near-term.

? If the Fed can successfully tamp down inflation expectations through well-planned policy action, we could be back on track for the anticipated post-COVID/pre-war economic recovery. Given the correction that has already occurred, the more reasonable stock valuations that have resulted from it, and the fact that corporate profits remain robust, markets could be poised for gains. Needless to say though, this represents a best-case scenario dependent on several positive outcomes.

? COVID seems to be finally transitioning fully into an "endemic phase," which we alluded to in our last commentary. Countries across the world are lifting restrictions on travel and entertainment, which should provide some support to the "reopening" economic improvement we expected prior to the emergence of the Delta and Omicron variants.

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? If the war in Ukraine can be resolved diplomatically in the near term, economic growth should rebound considerably from current projections. Additionally, markets are likely to respond well, as this would serve as a headwind against further supply-linked inflation increases.

? Even amid the ongoing war, the U.S. economy may prove to be more resilient than European economies that are more dependent on Russian energy. While global GDP growth is expected to take an approximate 1% hit in 2022 (compared to pre-war expectations from the OECD), the negative impact on Europe will likely be longer lasting and more extreme.

Risks

? If inflation remains elevated, which is expected if the Russia/Ukraine conflict escalates or does not have a clear resolution, the Fed will likely have to take more aggressive monetary policy action. That could increase the chance of a policy error and sharper downturn in global growth, and could even lead to a recession.

? Despite recent reports that Russia is withdrawing troops from key areas in Ukraine amid peace talks, there is still a possibility that the conflict will persist, which increases the likelihood (albeit still low) of NATO involvement. That would represent the largest geopolitical shock we have seen in decades. A macroeconomic event of this magnitude is almost impossible to predict, but we can assume it would wreak havoc on financial markets around the world for quite some time.

? China may continue to attempt its "zero-COVID" policy, even in the face of more pressing external concerns, exacerbating logjams at their ports, which will further add to global supply-chain issues.

Data used in this report was provided by independent sources and is for information purposes only. Past performance is no guarantee of future returns. The views expressed are an appraisal of the current environment and possible events. Please consult with a financial professional before investing.

Asset classes referred to in this commentary are identified as follows:

Asset Class

Corresponding Index

Asset Class

U.S. Stocks

S&P 1500 TR USD

Global Real Estate

U.S. Large Cap Stocks U.S. Mid Cap Stocks U.S. Small Cap Stocks

S&P 500 TR USD S&P MidCap 400 TR USD S&P SmallCap 600 TR USD

U.S. Short Term Bonds

U.S. Investment Grade Bonds

U.S. High Yield Bonds

Foreign Developed Stocks Emerging Market Stocks

MSCI World ex USA IMI NR USD

MSCI Emerging Markets IMI NR USD

Foreign Developed Bonds Emerging Market Bonds

Corresponding Index FTSE EPRA NAREIT Developed NR USD Bloomberg 1-3 Year U.S. Govt./Credit TR USD

Bloomberg U.S. Agg. Bond TR USD

Bloomberg U.S. Corp. High Yield TR USD FTSE World Government Bond Index Non-USD TR

JPMorgan EMBI Global TR USD

AMS Strategy Benchmarks:

The AMS SIP Aggressive Growth Benchmark is composed of the following as of quarter-end: S&P 500 TR USD (48.5%), MSCI World Ex USA IMI NR USD (20%), S&P MidCap 400 TR (12.5%), S&P SmallCap 600 TR USD (8%), MSCI EM IMI NR USD (5%), FTSE EPRA NAREIT Developed NR USD (4%), and Bloomberg US Treasury Bill 1-3 Mon TR USD (2%). The benchmark is rebalanced daily.

The AMS SIP High Growth Benchmark is composed of the following as of quarter-end: S&P 500 TR USD (40.5%), MSCI World Ex USA IMI NR USD (15.5%), S&P MidCap 400 TR (10%), Bloomberg US Agg Bond TR USD (13.5%), S&P SmallCap 600 TR USD (6%), MSCI EM IMI NR USD (4%), FTSE EPRA NAREIT Developed NR USD (4%), Bloomberg US Corporate High Yield TR USD (2.5%), JPM EMBI Global TR USD (2%), and Bloomberg US Treasury Bill 1-3 Mon TR USD (2%). The benchmark is rebalanced daily.

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The AMS SIP Wealth Building Benchmark is composed of the following as of quarter-end: S&P 500 TR USD (33%), Bloomberg US Agg Bond TR USD (25%), MSCI World Ex USA IMI NR USD (12.5%), S&P MidCap 400 TR (8%), Bloomberg US Corporate High Yield TR USD (5%), S&P SmallCap 600 TR USD (5%), MSCI EM IMI NR USD (4%), FTSE EPRA NAREIT Developed NR USD (4%), JPM EMBI Global TR USD (5%), and Bloomberg US Treasury Bill 1-3 Mon TR USD (2%). The benchmark is rebalanced daily.

The AMS SIP Moderate Growth Benchmark is composed of the following as of quarter-end: Bloomberg US Agg Bond TR USD (37%), S&P 500 TR USD (24.5%), MSCI World Ex USA IMI NR USD (9.5%), Bloomberg US Corporate High Yield TR USD (7%), S&P MidCap 400 TR (6%), JPM EMBI Global TR USD (4%), FTSE EPRA NAREIT Developed NR USD (3.5%), S&P SmallCap 600 TR USD (4%), MSCI EM IMI NR USD (2.5%), and Bloomberg US Treasury Bill 1-3 Mon TR USD (2%). The benchmark is rebalanced daily.

The AMS SIP Conservative Growth Benchmark is composed of the following as of quarter-end: Bloomberg US Agg Bond TR USD (42%), S&P 500 TR USD (17%), Bloomberg US Corporate High Yield TR USD (8%), Bloomberg US Govt/Credit 1-3 Yr TR USD (8%), MSCI World Ex USA IMI NR USD (6.5%), JPM EMBI Global TR USD (5%), S&P MidCap 400 TR (4%), FTSE EPRA NAREIT Developed NR USD (3%), S&P SmallCap 600 TR USD (2.5%), MSCI EM IMI NR USD (2%), and Bloomberg US Treasury Bill 1-3 Mon TR USD (2%). The benchmark is rebalanced daily.

The AMS SIP Capital Preservation Benchmark is composed of the following as of quarter-end: Bloomberg US Agg Bond TR USD (53%), Bloomberg US Govt/Credit 1-3 Yr TR USD (12%), S&P 500 TR USD (9.5%), Bloomberg US Corporate High Yield TR USD (8%), MSCI World Ex USA IMI NR USD (4.5%), S&P MidCap 400 TR (3.5%), JPM EMBI Global TR USD (5%), FTSE EPRA NAREIT Developed NR USD (2.5%), and Bloomberg US Treasury Bill 1-3 Mon TR USD (2%). The benchmark is rebalanced daily.

Index Definitions:

The S&P 1500, or S&P Composite 1500 Index, combines three leading stock indices, the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, to cover approximately 90% of the market capitalization of U.S. stocks. It is a broad measure of the investable U.S. equity market.

The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

The S&P MidCap 400 Index, more commonly known as the S&P 400, is a stock market index that serves as a barometer for the U.S. mid-cap equities sector and is the most widely followed mid-cap index. The index's market cap covers nearly 7% of the total U.S. stock market. To be included in the index, a stock must have a total market capitalization that ranges from $2.4 billion to $8.2 billion at the time of addition to the index.

The S&P SmallCap 600 Index, more commonly known as the S&P 600, is a stock market index that serves as a barometer for the U.S. small-cap equities sector. The index's market cap covers nearly 3% of the total U.S. stock market. To be included in the index, a stock must have a total market capitalization that ranges from $600 million to $2.4 billion at the time of addition to the index.

The MSCI World ex USA Investable Market Index (IMI) captures large, mid, and small-cap representation across 22 of 23 Developed Markets (DM) countries excluding the United States. With approximately 3,490 constituents, the index covers approximately 99% of the free float-adjusted market capitalization in each country.

The MSCI Emerging Markets Investable Market Index (IMI) includes large, mid and small cap companies across 26 Emerging Markets countries. With 2,941 constituents, the index covers approximately 99% of the free float-adjusted market capitalization in each country.

The FTSE EPRA NAREIT Developed Index is designed to track the performance of listed real estate companies and REITS worldwide. The index incorporates Real Estate Investment Trusts (REITs) and Real Estate Holding and Development companies whose relevant activities are defined as the ownership, disposal and development of income-producing real estate.

The Bloomberg 1-3 Month U.S. Treasury Bill Index is designed to measure the performance of public obligations of the U.S. Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months.

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The Bloomberg 1-3 Year U.S. Government/Credit Index includes all medium and larger issues of U.S. government, investment-grade (IG) corporate, and IG international dollar-denominated bonds with maturities between 1 and 3 years. The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). The Bloomberg U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. The FTSE World Government Bond Index (WGBI) Non-USD measures the performance of fixed-rate, local currency, investment-grade sovereign bonds excluding that of the United States. It is calculated on a market-weighted basis and includes all fixed-rate bonds with a remaining maturity of one year or longer and with amounts outstanding of at least the equivalent of U.S. $25 million. The JPMorgan Emerging Market Bond Index (EMBI) Global TR is a broad, diverse USD-denominated emerging markets debt benchmark that tracks the total return of actively traded external debt instruments, both fixed-rate and floating rate instruments issued by sovereign and quasi-sovereign entities, in over 55 emerging market countries. ?2022 First Command Financial Services, Inc. is the parent company of First Command Brokerage Services, Inc. (Member SIPC, FINRA), First Command Advisory Services, Inc., First Command Insurance Services, Inc. and First Command Bank. Securities products and brokerage services are provided by First Command Brokerage Services, Inc., a broker-dealer. Financial planning and investment advisory services are provided by First Command Advisory Services, Inc., an investment adviser. Insurance products and services are provided by First Command Insurance Services, Inc. Banking products and services are provided by First Command Bank (Member FDIC). Securities are not FDIC insured, have no bank guarantee and may lose value. A financial plan, by itself, cannot assure that retirement or other financial goals will be met. In Europe, investment and insurance products and services are offered through First Command Europe Limited. First Command Europe Limited is a wholly owned subsidiary of First Command Financial Services, Inc. and is authorized and regulated by the Financial Conduct Authority. Certain products and services offered in the United States may not be available through First Command Europe Limited.

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