2021 FIRST HALF MARKETSUMMARY AND YEAR AHEADMARKET OUTLOOK

CONTRIBUTORS: MICHAEL SOUZA , GIRI KRISHNAN & CHAD WILLIAMSON

FIRST HALF 2021 MARKET SUMMARY - A CHANGE IN MARKET LEADERSHIP &MUTED VOLATILITY

PORTFOLIO POSITIONING – ASSETALLOCATION DISCIPLINE & MEANREVERSION

OUR MARKET THOUGHTS – RETURNTO NORMALCY, INTEREST RATES,MARKET CYCLES, EARNINGS ANDVALUATIONS

KEY INVESTMENT PORTFOLIOCHANGES – POSITIONING FOR ARECOVERY WHILE MAINTAININGBALANCE

CONTENTS3

4

5

8

FINANCIAL PLANNINGSUMMARY

11

FIRST HALF 2021 MARKETSUMMARY – A CHANGE IN MARKETLEADERSHIP & MUTEDVOLATILITYAfter a fairly noisy first quarter when the Democratic administration took over in Washington

and meme stocks/Nonfungible Tokens (NFT’s) were all the rage, the second quarter was a little

tamer by comparison. With a steady dose of vaccinations available in the US, economic growth

accelerated, the employment picture improved and most corporations posted strong earnings

growth heading into a quarter with low expectations. In contrast, international growth was

mixed given the slower pace of vaccine distribution and insufficient vaccine availability in

smaller countries. Consistent with typical early cycle market cadence and low interest rates,

Value names have outperformed Growth names YTD notwithstanding growth’s recent spurt.

During the first half of the year, we saw a continuation of some Q4 2020 trends, with the S&P

500 posting better-than-average returns of 15% Year-to-Date (YTD)[1], outperforming Developed

and Emerging Markets which rose 9% and 8% respectively[2], but lagging the small cap Russell

2000 index which rose 18%[1]. From a sector standpoint however, there was a pronounced

change in market leadership with cyclical, value-oriented sectors such as Energy and Financials

leading the charge, up 49%/27%[2] respectively while defensive sectors such as Utilities and

Consumer Staples lagged with low to mid single-digit returns. Also, the bond market saw one of

its toughest starts in recent years, with Treasuries down 4%[2], US and Global Bonds down low

single-digits while Munis, Floating Rate bonds and Convertibles were among the few bright

spots.

Sources: [1]CNBC [2] JP Morgan

PORTFOLIO POSITIONING –ASSET ALLOCATION DISCIPLINE& MEAN REVERSIONOne of the true-and-tried maxims in investing is the following: “Diversification is the

only free lunch”. Keeping that in mind, we spotlight the importance of asset allocation

and prudent diversification through JP Morgan’s “Guide to the Markets” publication.

We favor the chart below since it highlights mean reversion, a key tenet of investing,

whereby the best and worst-performing style factors have swapped spots over the

past 15 years. To us, this illustrates why we build globally diversified portfolios and

rebalance portfolios periodically, both to weather market volatility and take advantage

of shifting market cycles.

OUR MARKET THOUGHTS – RETURN TONORMALCY, INTEREST RATES, MARKETCYCLES, EARNINGS AND VALUATIONS

As we look ahead to the second half of 2021, we face a market environment that is likely tofeature a strengthening economy driven partly by a post-Covid return to normalcy bybusinesses and individuals. We expect an improving employment picture, a rise in spending bybusinesses/individuals, rising inflation and a Federal Reserve mindful that it may need to startraising short term interest rates. While the existing investor ‘wall of worry’ is encouraging, wehave observed pockets of complacency (for e.g. meme stocks, SPACs, the flood of venturecapital chasing deals at inflated valuations) and recent market outperformance has also raisedthe bar for future returns. Below are a few key issues/drivers that we believe will be key forinvestors to pay attention to in the months ahead.

Through the second quarter, we have seen meaningful progress toward normalcy in the USand Europe, driven by an encouraging pace of vaccinations thanks to governmental initiativesto promote the manufacture and distribution of Pfizer and Moderna’s vaccines. Theworldwide rollout in other parts of the globe has been less consistent and we continue to seelockdowns in countries like India and Brazil. After a shaky winter when vaccinations peaked,the US has led the way with vaccine rollouts, with the Europe/UK right behind and emergingeconomies bringing up the rear partly due to ineffective rollouts and/or limited vaccineavailability. While Covid variants (e.g. the Delta variant) may result in episodic recurrences,the investment markets appear ready to look ahead constructively to the continuation of aneconomic recovery in 2H2021 and 2022.

RETURN TO NORMALCY IN A POST-COVID WORLD.

FEDERAL RESERVE, INTEREST RATES ANDINFLATION. Since the 2008 Financial Crisis, the Fed has continued to play a larger and larger role by

injecting massive amount of liquidity into financial markets, influencing investor

confidence. 2020 was the latest chapter in that book - while some have criticized these

unprecedented actions, we believe they may have saved us from a deeper recession post-

pandemic. Among reasons for the sharp-but-short lived recession in 2020 was the fact that

the Federal Reserve slashed rates to near zero during the pandemic, boosted its balance

sheet in excess of $8 trillion to do asset purchases and resolved to leave rates unchanged for

the foreseeable future. However, with the economy on much better footing and liquidity

sloshing around in the markets, the Fed has begun to hint at the possibility of starting to

reduce excess liquidity to the financial markets sooner than originally telegraphed a little

more than a year ago.

OUR MARKET THOUGHTS – RETURN TONORMALCY, INTEREST RATES, MARKETCYCLES, EARNINGS AND VALUATIONS -CONT...

Given the quick rebound in Global Composite PMIs which are now in expansionary

territory[2], it is fair to wonder whether we are hovering between early & mid-cycle mode.

As in most scenarios involving markets, everything is obvious in hindsight, hence we would

rather approach portfolio construction by extending our typical investment timeframes out

a few years. In the early stages of any market cycle, it is not atypical to witness International

Markets trump US markets, and this is relevant now given that the former trades at a 20%+

discount to historical average forward P/E ratios vs. US markets which trade at a premium.

Cyclical value-oriented sectors such as Financials/Industrials/Materials/Energy also

typically outperform defensives such as Consumer Staples/Utilities, as has been the case

this year; notwithstanding recent pullbacks in Cyclicals and a move toward Growth, we still

believe the Cyclical trade is far from over.

WHERE WE ARE IN THE MARKET CYCLE ANDINVESTMENT IMPLICATIONS.

In their recent June Federal Open Market Committee (FOMC) meeting, the Fed

acknowledged upside inflation risks and median Fed funds forecasts now point to two

interest-rate hikes in 2023. While we expect the 10-year to be range bound for the rest of

2021, we believe that the Fed will be walking a tightrope as they attempt a slow-and-steady

course correction in order to ward off overheating in the economy and a potential spike in

inflation without spooking markets. Based on historical US equity market performance

since 1962 [Source: Goldman Sachs], US equity market real returns have been higher during

periods of low inflation than during periods of high inflation. Thus far, we have seen

inflation pick up in areas such as employee wages, housing prices and in the semi-

conductor landscape, with the latter caused due to supply chain bottlenecks; eventually,

these may help reflation beneficiaries such as Cyclicals, but the key unresolved question is

whether these spikes in inflation are transitory or more permanent.

OUR MARKET THOUGHTS – RETURN TONORMALCY, INTEREST RATES, MARKETCYCLES, EARNINGS AND VALUATIONS -CONT...

Inflation Covid resurgence Fed tapering and Retail speculation.

First quarter earnings growth was robust across most sectors, but with stocks rising even

more than earnings most US markets now trade in the top decile of their historical

valuation ranges[2]; in contrast with Emerging Markets and Europe ex-UK markets which

look relatively more attractive as they trade in the top quartile or top half of historical

valuation ranges[2]. While valuations in isolation have rarely been predictive of future

market returns, they are important to be aware of in the context of evaluating long-term

returns expectations across various investment alternatives.

From the standpoint of risk, it is worth noting that in a recent CNBC survey of institutional

investors that asked about their biggest perceived risks to the market, that they cited in

order:

1.

2.

3.

4.

Historically, markets have suffered drawdowns from the one or two underappreciated risks

that no one saw coming; what these risks may be that precipitate the next correction is

anyone’s guess.

EARNINGS GROWTH, VALUATIONS, ASSETCLASS RETURNS AND RISKS.

Sources: [1]CNBC [2] JP Morgan

KEY INVESTMENT PORTFOLIOCHANGES – POSITIONING FOR ARECOVERY WHILE MAINTAININGBALANCEIn the past, we expounded on a few tenets of our investment philosophy: a preference for high-

quality companies with secular growth tailwinds, value-oriented franchises trading at

meaningful discounts to fair values, and fund/ETF offerings from top-notch investment

organizations that have stellar track records spanning market cycles. We also lean toward

constructing diversified portfolios that can combat the inevitable market downturns while

patiently compounding capital in a shifting economic landscape. Lastly, we adopt a barbell

approach within our Equity bucket, splitting it into Secular Growers, Cyclical Growers and

Defensive Dividend Payers; we utilize a balanced core approach within our Fixed Income bucket

where opportunities seem to be scarce.

Over the last few months, we made a few noteworthy changes to our investment portfolios,

while keeping a 3-5-year investment timeframe in mind:

WE INITIATED A POSITION IN WHAT WEBELIEVE IS A SECULAR GROWTH-ORIENTEDTHEME I.E. CYBERSECURITY.

WE ENHANCED OUR POSITIONING INCYCLICAL SECTORS INCLUDING FINANCIALS(PRIVATE ASSET MANAGERS) ANDINDUSTRIALS (DEFENSE & AEROSPACECOMPANIES).

WE EXITED OUR POSITION IN A GLOBALLARGE CAP GROWTH FUND AND ADDEDINSTEAD TO OUR HOLDINGS IN OUREXISTING GLOBAL SMALL CAP FUND.

FINALLY, WE CONTINUE TO ADD TO OURALLOCATIONS TO ALTERNATIVES.

WE INITIATED A POSITION IN WHAT WE BELIEVE IS A SECULARGROWTH-ORIENTED THEME I.E. CYBERSECURITY.

WE ENHANCED OUR POSITIONING IN CYCLICAL SECTORS INCLUDINGFINANCIALS (PRIVATE ASSET MANAGERS) AND INDUSTRIALS(DEFENSE & AEROSPACE COMPANIES).

Currently, there are a few enduring global multi-year growth themes that we believe are worthinvesting in, and Cybersecurity is one of the more prominent ones as recent incidents like theColonial Security pipeline hack and the JBS Ransomware attack have shown. Per Gartner, theleading IT services research firm, worldwide spending on information security and riskmanagement technology/services is projected to reach $150 billion, which implies a double-digitspending CAGR; organizations estimate cybersecurity to be a top spending priority for ChiefInformation Officers (CIOs) at large corporations. Accordingly, we invested in a leading CyberSecurity ETF from an established provider, which we believe provides arguably one of the bestways to play this theme through exposure to mid/small cap cybersecurity companies that coverthe entire spectrum of security software and services such as Cloud & Network Security,Application Security & Infrastructure Security.

In our effort to balance Growth Equities within our Equity Bucket with Cyclicals which we believehave further room to run, we have been adding to our Financials and Industrials exposure.

Within an environment of low bond yields and what is likely to be an environment of highervolatility in 2H2021/2022, we believe institutional allocations to alternatives will only increase asthey seek non-traditional sources of income or equity-market returns with lower volatility. Hence, we initiated positions in two of the world’s leading Private Asset Managers; both are best-in-class global alternatives investment firms with close to 2 trillion in assets, which boast industryleading franchises in Private Equity, Infrastructure, Real Estate and Distressed Debt. Higherinstitutional allocations to alternatives could helpgenerate double-digit AUM growth and fee-related earnings growth.

Also, we added to our holdings in one of the world’s leading commercial airplane manufactures asour non-consensus post-vaccine return-to-normalcy play, which is evidenced by a spate of recentplane pre-orders from major global airlines and the opening up of international travel borders. Wealso added to our holdings in a major US defense company, which we believe is one of the bestpositioned aerospace/defense companies with leadership positions in areas like hypersonicmissiles & space, trading at a below-market earnings multiple with strong free cash flowgeneration that supports a steady and growing dividend.

KEY INVESTMENT PORTFOLIO CHANGES –POSITIONING FOR A RECOVERY WHILE MAINTAININGBALANCE - EXPLAINED

WE EXITED OUR POSITION IN A GLOBAL LARGE CAP GROWTH FUNDAND ADDED INSTEAD TO OUR HOLDINGS IN OUR EXISTING GLOBALSMALL CAP FUND.

FINALLY, WE CONTINUE TO ADD TO OUR ALLOCATIONS TOALTERNATIVES.

Consistent with our view that Small Caps globally should fare well in the early stages of a marketcycle, and our view that beaten down international markets are more favorably valued thandomestic markets (i.e., the former trades at a 30% premium while the latter trades at a 15-20%discount), we added to our weighting in Global Small Caps. In this case, we chose a stellar PortfolioManagement team that has a 20+ year track record of compounding capital in excess of itsbenchmarks, has the room to stay nimble within Portfolio Construction and has meaningful side-by-side ownership within the fund.

In the context of a low-interest-rate higher-volatility world where the 10-year Treasury yields lessthan 1.5% (Source: treasury.gov) and the return prospects for multiple fixed income segmentsappear underwhelming, we continue to research/allocate toward areas like private real estate,private credit, private equity and hedge funds in a manner that both diversifies client portfoliosand lowers overall correlations with public market investments. To this end, we favor institutionalquality firms such as Blackstone/Starwood which have a track record of investing private capitalsuccessfully across multiple market cycles anchored by a thoughtful risk management philosophy.

For the sake of illustration, our Private Real Estate and Private Credit investments target a 5-8%annual distribution (Sources: breit.com, bcred.com), well above the yield of the 10-year Treasuryor the Barclays Agg, with the former treating much of its annual 5% distribution as return ofcapital.

KEY INVESTMENT PORTFOLIO CHANGES –POSITIONING FOR A RECOVERY WHILE MAINTAININGBALANCE - EXPLAINED

FINANCIAL PLANNING SUMMARY –NEW CHILD TAX CREDIT MONTHLYPAYMENT DETAILSSince the beginning of the year there has been a lot of chatter in Washington about varioustax reform and estate tax changes, yet none have come to fruition at this point. However, oneitem that is set to begin is the new increased child tax credit. Starting on July 15th theincreased child tax credit will start to be mailed out monthly for those who qualify. Prior tothe American Rescue Plan Act (ARPA) qualifying families with minors received a $2k annualtax credit per child when they filed their taxes. Now families can receive up to $3,600 (insome cases) throughout the year. Similar to other changes found in the ARPA, these new rulesare just temporary for the 2021 calendar year and come with some caveats.

Before we get in to how much child tax credit one should expect to receive, let us review thechanges and qualifications to get the new credit. As of 2020 anyone with a child 16 or younger,who had a modified adjust gross income of $400k for married couples filing jointly (or $200kfor single/head of household filers) received a $2k per child when filing their taxes. Movingforward, the child tax credit is increased for children 5 or younger to $3,600/year and forchildren between the age of 6 – 17 (including 17-year-olds now!) can now qualify for a $3kcredit. There are different income requirements to qualify for these new benefits (see below)and for those who phase out, the lower $2k credits can still be claimed.

FOR CHILDREN 0 – 5 YEARS OLD

FOR CHILDREN 6 – 17 YEARS OLD

FINANCIAL PLANNING SUMMARY –NEW CHILD TAX CREDIT MONTHLYPAYMENT DETAILS - CONT...

Besides the changes to the actual size of the credits, the government is now testing how payingthese credits out to qualifying families during the year can help. Depending on the adjustedgross income reported on your most recent tax return filed, qualifying families will begin toreceive a portion of their annual credit on a monthly basis staring July 15th. For new parents orfamilies that may have qualified for the credit in 2020 but no longer qualify due to higherincome, you will soon be able to update your information using the Child Tax Credit UpdatePortal.

If you are wondering if there is any catch to this new credit payment option, the answer is “No”.These payments are considered tax credits (which are not taxable) however, there are someplanning aspects one should keep in mind so there are no surprise tax bills at the beginning ofnext year. The first being if you typically owe taxes or don’t get much back after filing taxes, youshould review your current tax withholdings with your CPA to ensure you won’t owe IRS moneywhen it comes to tax filing season. Reason being, for families that rely on this tax credit, the halfyear worth of credit payments paid in 2021 will reduce the lump sum credit families used to getwhen filing taxes.

FINANCIAL PLANNING SUMMARY – NEW CHILDTAX CREDIT MONTHLY PAYMENT DETAILS -CONT...For Example, a couple with two kids who only qualify for the $2k credit per child will automaticallyget $2k worth of credit payment from July through December and will only get a lump sum creditwhen they file their taxes of $2k instead of the $4k they received in 2020. Another item families shouldkeep in mind, is the increased credits and monthly payment features are only for the 2021 tax year.Unless new legislation is passed before 2022, families that qualify for the credits will go back toreceiving the lower $2k annual credit per qualifying child. For those who don’t want to adjust theirmonthly budget now or in January of 2022, it might be beneficial to waive the monthly payments untilthere is more certainty on this becoming a more permanent item one can count on.

Overall, the new advance credit payments should be helpful for families with children but there is notelling if these short-term benefits will be around in the coming years. Feel free to contact us, ifyou’re interested in a consultation around how this tax-related change could affect your specificcircumstances.

Michael SouzaCEO

Giri Krishnan Senior Portfolio Manager

11260 El Camino Real, Unit 220, San Diego, CA 92130760-602-6920

info@koawealth.com

This material should not be considered a recommendation to buy or sell securities or a guarantee of future results. Koa Wealth Management, LLC is a registeredinvestment adviser. Registration does not imply a certain level of skill or training. More information about Koa Wealth Management, LLC can be found in ourForm ADV Part 2, which is available upon request or by visiting our website at www.koawealth.com/disclosure. Past performance is not a guarantee of futureresults. All investment strategies have the potential for profit or loss; changes in investment strategies, contributions, or withdrawals may materially alter theperformance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specificinvestment will be suitable or profitable for a client’s investment portfolio. If you have had any changes in your financial situation which may impact the wayin which we manage your account, please notify our office immediately. Additionally, if you would like to impose any restrictions on how we manage youraccount, please notify us in writing.

Chad Williamson CFP®CERTIFIED FINANCIAL

PLANNER™

As always, please feel free to reach out if you have any questions on any of the topics discussedabove.

Sources: [1]CNBC [2] JP Morgan