Market Pulse

Baker Tilly Wealth Management advisors summarize changes in the economy and lend insight into market behavior and outlook in our Market Pulse series.

November 2023

Authored by Jeremy Robert

Negative sentiment continued to weigh on the markets in October, driven by dramatically rising yields, persistently elevated inflation and heightened geopolitical risk. Despite continued fears of an economic slowdown, Q3 GDP rose 4.9%, thanks largely to a resilient consumer. This marked the biggest gain in GDP growth since Q4 of 2021. Against this mixed backdrop, investors continued to speculate when, or if, the consumer will crack as the tight labor market weighs on sentiment. Uncertainty sent markets into correction territory, with the S&P 500 and Nasdaq dropping 10% from their July highs. For the month, the S&P 500 fell 2.1% and the Nasdaq fell 2.8%. Fixed income investors also felt the pain as yields on the long end of the curve increased meaningfully causing the U.S. Aggregate Bond Index to fall 1.6% for the month. Furthermore, the better-than-expected growth of the economy has investors worried the Federal Reserve will have to keep rates even higher for longer to slow growth to tame inflation.

Inflation rose slightly more than forecasted in September, as the consumer price index (CPI) increased 0.4% on the month and 3.7% from a year ago. We continue to see shelter costs as the main factor driving inflation. Shelter, which makes up one-third of the CPI index rose by 0.6% in September, and 7.2% from a year ago. For the month, shelter accounted for more than half of the increase in CPI according to the Labor department. Energy costs rose 1.5%, down 0.5% on a 12-month basis, while food was up 0.2% for the month and 3.7% higher on an annual basis. The increase in CPI meant wages for workers decreased in real terms with real average hourly earnings dropping 0.2% for the month, and up 0.5% on a yearly basis. As wage increases are moderating, inflation continues to be a headwind for the consumer. Investors remain focused on the health of the consumer which drives the economy, as we have started to see credit card debt and defaults rise.

Third quarter earnings season is in full swing as 49% of the companies in the S&P 500 reported results. According to FactSet, 78% of the S&P 500 companies have reported a positive EPS surprise and 62% have reported a positive revenue surprise. The blended earnings growth rate for the S&P 500 is 2.7%, which would mark first quarter of year-over year earnings growth reported by the index since Q3 of last year. However, the market is forward looking, and investors have been focused on earnings guidance which has been skewed negative. For Q4 2023, 28 S&P 500 companies have issued negative EPS guidance while 14 companies have issued positive EPS guidance. We have seen a decrease in stock prices lately; the 12-month forward P/E ratio for the S&P 500 is 17.1, which is below both the five-year average of 18.7 and the 10-year average of 17.5.

With a cloudy economic outlook, and further uncertainty, investors will benefit from remaining calm. This is not the time to hypothesize where markets are heading. We expect volatility to remain given the mixed economic data and geopolitical events happening across the globe. Moreover, the Federal Reserve is determined to get inflation down to their 2% target, so we expect rates to remain higher until this is accomplished. However, although painful, investors will benefit from remaining invested through market movements. Historical data tells us that missing even a handful of the best days in the market dramatically decreases returns over the long term.

Source: Earnings Insight, FactSet, Oct. 27, 2023

"The Market Pulse summarizes the notable happenings in the global economy and seeks to lend insight into market behavior and expectations."
Melissa Santas Peterson, CFA, Executive Managing Director, Baker Tilly Wealth Management
Melissa Santas Peterson

Market Pulse archive

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Authored by Jeremy Robert

Investors continued to shy away from risk in September as rising bond yields, increased volatility and stubborn inflation lessened the probability of the Federal Reserve (the Fed) achieving a soft landing. This challenging market environment contrasted with the economy’s continued strength as evidenced by a reported 2.1% annualized growth rate in the second quarter and a persistent low unemployment rate of 3.8%. Recent market movements reflect investors grappling with how much more the Fed will have to do to tame inflation in the face of sturdy economic data and a resilient consumer. The case for rates to stay higher for longer sent stocks and bonds lower for the month. In September, the S&P 500 dropped 4.9%, and the technology-heavy Nasdaq declined 5.8%. Bonds continued to sell off as rates rose with the long end of the curve taking the brunt of the selling pressure, causing the 10-year treasury to reach new highs that have not been seen since 2007.  

Although inflation has been trending down over the past several months, we saw it rise in August with the consumer price index rising 0.6% on a seasonally adjusted basis. This was the biggest monthly gain of 2023, bringing the year-over-year inflation rate to 3.7%. Energy prices contributed to the uptick in inflation, rising 5.6%, including a 10.6% increase in gasoline prices for the month. Moreover, the Fed tends to focus on Core Consumer Price Index (CPI) which excludes volatile food and energy. The Core CPI index rose 0.3% in August and 4.3% from a year ago, with shelter rising 0.3% for the month. Against this backdrop, the Fed voted to leave the Fed funds rate unchanged at a range of 5.25%-5.5%. They did update the “dot plot” with the median Fed member expecting only two rate cuts in 2024 forcing the market to price in an even “higher for even longer” rate picture.  

The Q3 earnings season is right around the corner, and forward guidance offered by corporations will be just as important as the earnings results. This will also provide additional insight into the health of the consumer who has shown resiliency this year but is now starting to show signs of weakness. According to FactSet, the estimated earnings decline for the quarter is -0.1%, which would mark the fourth consecutive quarter of declines year-over-year reported by the S&P index. Earnings revisions have increased as investors were expecting -0.4% earnings decline for Q3 back on June 30. For Q3 2023, 74 S&P 500 companies have issued negative earnings per share (EPS) guidance, and 42 companies have issued positive EPS guidance. The forward 12-month price earnings ratio (P/E) ratio for the S&P is 17.9, which is now below the five-year average of 18.7, but above the 10-year average of 17.5.  

The dominance of mega cap technology stocks, mainly the “magnificent seven,” continues to distort how well the market has performed in 2023. To clearly see the dichotomy in returns, we can simply look at the spread between the market cap weighted S&P 500 (where the biggest companies garner the largest weights) and the equal weighted S&P 500 (equally weighted across the 500 companies). Year-to-date, the market cap weighted S&P 500 is up 13.1% compared to the equal weighted index return of 1.7%. In a narrowly led market such as this one, investors may question whether to diverge from their strategic approach to follow the trend and focus on technology stocks or stay true to their diversified portfolio. This feeling may be further exacerbated by market reactions that do not seem to make sense - a healthy economy and consumer would typically be celebrated by the market, but we’re living in a time where good news is bad news, and bad news is good news. As we enter the last quarter, we remain confident that investing in fundamentally sound companies across sectors, capitalizations and regions will prove advantageous in navigating this increasingly perplexing market.  

Source: Earnings Insight, FactSet, Sept. 29, 2023

Authored by Jeremy Robert

Investors were optimistic going into August, seeming more confident that the data supported the potential for the Federal Reserve to maneuver a soft landing of the economy. This was further supported by higher-than-expected GDP forecasts and a low unemployment rate of 3.8%. However, markets eventually pulled back, as volatility increased due to a downgrade of U.S. government debt, rising bond yields and the continued weakness of investor sentiment in China. Performance was negative across asset classes, with the U.S. markets down 1.6%, but outperforming international-developed markets which were down 2.8%. Given the continued weakness out of China, emerging markets were the worst performing asset class in August, posting a -6.1% return. The heightened volatility and negative performance in August have investors concerned about the long and variable lags from the interest rates hikes.

The consumer price index (CPI) increased by 0.2% on a seasonally adjusted basis in July, bringing the year-over-year inflation rate to 3.2%. This was slightly higher than the 3% annual increase for the 12 months ending in June. The largest contributor to the CPI index increase came from shelter, which rose 0.4% in July, up 7.7% from a year ago. Shelter accounted for roughly 90% of the monthly increase and remains the focus of investors trying to gauge the path of inflation. Economists are trying to analyze the effect of accelerating energy prices, as well as the scheduled start of student debt repayments in October. While there has been significant progress on the inflation front, the Federal Reserve remains focused on their 2% target. According to the CME FedWatch tool, the market is pricing in a less than 10% probability of a rate hike in September, and a greater than 35% chance of a rate hike in November.

The second quarter’s earnings season has wrapped up with over 99% of S&P 500 companies having reported actual results. For Q2 2023, 79% of the companies in the S&P 500 reported a positive earnings surprise, while 64% reported a positive revenue surprise. This compared to expectations for earnings to decline by 7%. The actual blended year-over-year earnings decline for the S&P 500 for Q2 was -4.1%. This is the third consecutive quarter of earnings decline reported by the index. Guidance for third quarter earnings has been mixed as 73 S&P 500 companies issued negative earnings per share (EPS) guidance and 42 companies issued positive EPS guidance. The forward 12-month price earnings ratio (P/E) is 18.8, higher than both the five-year average of 18.7 and the 10-year average of 17.5.

While the market lost some steam in August, the S&P 500 remains up 18.7% on the back of strong performance from U.S. mega cap technology stocks. There is always a list of reasons to not be invested, but this year has shown that investors benefit from “time in the market, not timing the market”. It is difficult to predict how the rest of the year will play out, but opportunities remain for those who can look beyond the next six to 12 months. The Federal Reserve continues to be data dependent, and this will continue to add volatility to the market as investors weigh the potential outcomes from their policy decisions. China’s economic struggles and faltering property sector remain in focus, since the health of the second largest economy has ramifications for the rest of the world. Fixed income remains attractive. At yields higher than they have been in over 15 years, this allows investors to lock in and generate much higher levels of income for the longer term. As the path forward remains uncertain, focusing on fundamentals and staying true to an investment approach should reward investors.


Earnings Insight, FactSet, Sept. 1, 2023

CME Group, CME FedWatch Tool, Sept. 2023

Bureau of Labor Statistics, News Release, Consumer Price Index, July 2023

Authored by Jeremy Robert

The markets continued to march higher in July, supported by strong economic growth, improving consumer sentiment and a drop in inflation. This has many investors hoping the Fed may be able to achieve a soft landing. Against this backdrop, investors started to look at areas outside of large cap technology stocks, lending a boost to asset classes like emerging markets, which were up 6.3% and small caps which posted a 4.9% gain for the month. Growth stocks, still led by the technology sector, were up 2.9%. Fixed income, as represented by the Global Aggregate Bond Index, was also positive, up .7%.

We are now at the mid-point of Q2 earnings season for the S&P 500, with 51% of the companies having reported. Of these companies, 80% have reported earnings per share (EPS) above estimates, above the five-year average of 77% and above the 10-year average of 73% according to FactSet. However, for Q2 2023, the blended earnings decline for the S&P 500 is -7.3%, which marks the largest earnings decline for the index since Q2 2020. Amidst this conflicting economic backdrop, investors have focused on earnings guidance, which has been skewed to the downside thus far. For Q3, 27 S&P 500 companies have issued negative EPS guidance, and 18 companies have issued positive EPS guidance. Looking forward, analysts are expecting earnings growth for Q3 of .2% and Q4 of 7.5%. The forward price earnings ratio (P/E) for the S&P 500 is now 19.4, which is up from last month’s 18.9 and higher than the five-year average of 18.6.

Inflation continued to show progress in June, as the Consumer Price Index (CPI) rose .2% for the month and 3% from a year ago, which is the lowest level since March 2021. The Federal Reserve has focused on core CPI, which strips out volatile food and energy prices. The core CPI also rose .2% in June, and 4.8% on an annual basis, which was below expectations, but above the Fed’s 2% target. Shelter continues to be stubborn, rising .4% in June and up 7.8% from last year. Shelter accounted for 70% of the increase in headline CPI according to the Bureau of Labor Statistics. Even with the progress shown by the June inflation report, the Federal Reserve hiked interest rates by 25 basis points (bps), which was expected by market participants.

While the positive momentum this year feels like a relief after a challenging 2022, investors should not look to stray from their strategic investment approach. Fear of missing out can cause investors to make bets within their portfolios at inopportune times or to the detriment of their long-term goals. Given that large-cap technology stocks have been primarily responsible for driving markets higher this year, we are encouraged to see that more recently, other asset classes have started to participate in this upward trend. The broadening out in market performance may be attributable to investors focusing on company fundamentals, the possible avoidance of a recession or the unexpected resiliency of the global economy. Whatever the underlying cause, attempting to make predictions about how the economy will perform going forward is difficult. Therefore, we believe that maintaining a well-diversified portfolio will continue to enable investors to navigate all types of market scenarios.


Earnings Insight, FactSet, July 28, 2023

Monthly Market Review, JP Morgan, July 2023

Inflation rose just 0.2% in June, less than expected as consumers get a break from price increases, CNBC, July 12, 2023

Authored by Jeremy Robert

Despite recession fears, resilient economic data and stronger than expected profit margins drove both stocks and bonds higher for the first half of 2023. U.S. large cap stocks were the best performing asset class, finishing up 15.5% in the first half. However, returns were concentrated with 95% of the S&P 500’s performance was driven by ten companies. International markets also continued their recovery, with developed markets up 11.2% and emerging markets up 4.8% as a weaker dollar and stronger than expected economic data were tailwinds for returns. Going into the next quarter, investors remain focused on the weak economic data coming from China, which will impact economies and markets across the globe. U.S. fixed income rose 1.8% in the first half resulting from a stabilization in interest rates and higher beginning yields for investors.

After a stronger than expected earnings cycle in Q1 2023, investors will be paying close attention to earnings reports in the coming weeks. For Q2 2023, the estimated earnings decline for the S&P 500 is 6.8%, which would be the largest earnings decline since Q2 of 2020. For the coming quarter, 67 S&P 500 companies have issued negative earnings per share (EPS) guidance, and 46 have issued positive EPS guidance. Investors will be anticipating strong earnings from the large cap technology stocks that have seen their stock prices rise on the potential benefit from artificial intelligence. After the strong rally in stock prices year to date, the forward 12-month price-earnings ratio for the S&P 500 is 18.9. This is above the five-year average of 18.6 and above the ten-year average of 17.5.

Inflation continues to be stubbornly high, especially the Core Consumer Price Index (CPI), which strips out volatile food and energy. Although the CPI rose at 4% annual pace in May, the Core CPI rose .4% in May, and 5.4% on an annual basis. As has been the trend, shelter costs were the largest contributor to the Core CPI, up .6% in May and up 8% over the past year. Economists do expect housing prices to start falling in the second half of the year, but we have started to see a revival in the housing sector over the past month. After announcing no change to the federal funds rate at the June Federal Reserve meeting, Federal Reserve Chair, Jerome Powell, signaled that the committee expects to continue raising rates to cool demand and loosen a very tight labor market.

We have yet to see the full impact of the 500 bps of hikes from the Federal Reserve over the past year, but as we have seen in past cycles, Fed policy tends to have a lagged effect. However, there are certain segments of the market that have begun to feel the impact, such as manufacturing and commercial real estate. The mix of economic data has many economists and strategists trying to figure out where we go from here. History has shown that we have had tremendous rallies before heading into some of the worst downturns, which means we may not be out of the woods just yet. On the flip side, consumers and companies have been preparing for the “impending recession” for over 12 months. This kind of preparation should help dampen the potential slowdown of the economy.

Source: Earnings Insight, FactSet, June 30, 2023

Authored by Jeremy Robert

The economy continues to send investors mixed messages, as growth proved more resilient than expected. Service industries continue their rebound towards pre-pandemic levels as the consumer still feels comfortable, spending on experiences like travel and dining out, despite higher inflation and recessionary warnings. Furthermore, investors were relieved when Washington finally reached a deal, albeit at the last minute, to raise the debt ceiling. On a more cautious note, the economy has yet to feel the full effects of the Federal Reserve tightening cycle or the more restrictive lending standards to result from the regional bank failures. This adds to the number of potential outcomes for the economy as we look ahead. In the meantime, the market continues to interpret every data point trying to find clues regarding the path forward.

We continued to see very narrow market leadership in the U.S. as the largest ten stocks in the S&P 500 have accounted for almost all of the index’s year to date returns. The market cap-weighted S&P 500 has outperformed the equal weighted S&P 500 by nearly 10% in 2023, the biggest margin year-to-date performance on record, according to Dow Jones Market Data. This difference in performance was driven primarily by the outperformance of large cap tech companies relative to the broader market as they posted better than expected earnings and are the biggest beneficiaries from the future evolution of artificial intelligence.

Earnings for Q1 2023 have just about wrapped up, with 99% of the S&P 500 companies having reported results. 78% of S&P 500 companies reported a positive earnings per share surprise, and 75% have reported a positive revenue surprise. The blended earnings decline for the S&P 500 is -2.1%. These results are stronger than anticipated with the analysts expecting earnings to decline -6.7% back on March 31st. The forward price-to-earnings ratio for the S&P 500 is 18.0, above the ten-year average of 17.3 but below the five-year average of 18.6.

U.S. Inflation has proven to be sticky, as the Consumer Price Index (CPI) rose .4% month-on-month in April, which was in line with expectations. This brings the year-over-year inflation to 5.0%, not much changed from the previous month, but much lower than last year’s peak of 8.9%. The April increase was driven by higher gas prices, used vehicles sales and rising shelter costs. Shelter costs increased another .4% for the month of April and 8.1% from a year ago. This was a smaller increase from the previous month’s increases but still shows shelter is a key component of the CPI data, evidenced by the continued stickiness of inflation. With inflation still elevated, stronger than expected economic growth and a tight labor market, the hiking cycle may not be over yet.

While the economy and the consumer have proven durable, the impacts of the extreme hiking cycle by the Federal Reserve combined with more retrained spending by consumers will likely take a bite out of gross domestic product growth. However, companies and consumers have had a head start on preparing for a potential recession, so it remains challenging to make predictions. During times of uncertainty, knowing what you own, remaining well diversified and positing your portfolio appropriately for your individual time horizon is prudent.

Source: Earnings Insight, FactSet, June 1, 2023

Authored by Jeremy Robert

Mixed signals continue to keep investors guessing as to what the coming months will bring. Various aspects of the economy are still showing signs of resilience as reflected by strong employment readings, better than expected corporate earnings and sustained consumer spending. However, we have begun to see weakening economic growth, increased stress in the regional banks and uncertainty around the U.S. debt ceiling, which increases the risk to the downside.

Earnings for the first quarter have come in better than expected. With 53% of S&P companies reporting results, 79% have reported a positive earnings per share (EPS) surprise and 74% have reported a positive revenue surprise. However, expectations had been revised lower coming into the year, and the blended earnings decline for the S&P companies that have reported is -3.7%, and if this trend persists, it will be the second straight quarter the S&P has reported a decline in earnings. We have begun to see companies taking steps to cut costs against an uncertain economic backdrop, while hesitating to give clear guidance on their earnings outlook.

While inflation remains well above the Federal Reserve’s target of 2%, we continue to see signs of deceleration. The March CPI report rose .1%, below estimates after increasing .4% in February, bringing the year-over-year inflation rate to 5%.  Energy prices fell by 3.5%, while the food index was unchanged. Shelter, which makes up roughly 1/3 of the CPI index, increased .6%, which was the smallest gain since November 2022 but still 8.2% higher than this time last year. The market expects another interest rate hike of 25bps, bringing the Federal funds rate to 5.25%, as the Fed continues to focus on combatting inflation. Most economists anticipate the Fed will pause after the May hike, with the belief that they will continue to evaluate the data and allow the previous interest rate hikes to permeate through the economy.

Investors will continue to look for more clarity around economic and inflation data, as well as the state of the consumer. GDP for the first quarter rose 1.1%, below the 2% estimate, while inflation remains elevated. Consumer spending accounts for roughly 70% of the U.S. economy, and although the consumer has proven to be resilient, the impact of higher prices and continued talk of a potential recession could curtail spending and slow growth.

It is a challenging time to be an investor given the conflicting narratives regarding the economy. However, this is one of the most telegraphed economic slowdowns we have seen, and management teams and consumers have had time to prepare for what may come. During these times, it is important to maintain a diversified portfolio and focus on the fundamentals, while keeping a long-term perspective.

Source: Earnings Insight, FactSet, April 28, 2023

Authored by Jeremy Robert

Following a tumultuous 2022, markets closed the first three months of this year with single digit gains. However, the path upward was not linear. Equity investors enjoyed positive momentum in January, only to be followed by a turbulent February and volatile March, before closing out the quarter in the black. Last year, investors preferred riding out the uncertainty in defensive sectors due to rising interest rates. Investors drove broad markets higher by snapping up technology growth stocks which benefit from falling yields and strong fundamentals. International stocks also found a bid with attractive relative valuations, stronger than expected economic data and the expectation that the dollar strength was near its peak. Bond investors saw strong returns in Q1, with the strongest performance coming from longer duration strategies. All this, amidst still persistent geopolitical ambiguity, stubbornly high inflation and mixed economic data. 

Furthermore, keeping in line with their assurance to be data dependent, the Federal Reserve hiked rates in February by 25bps, and again by 25bps in March, bringing the Federal funds rate to 5.0%. The markets are anticipating another small rate increase in May, which will likely come to fruition if there aren’t meaningful signs of cooling in the labor market and inflation. The recent collapse of SVB, Signature Bank and Credit Suisse caused waves of fear to ripple through the market. As events unfolded, it became apparent that the issues faced by the banks were more specific to business models rather than a bigger systemic issue like 2008-2009. Nevertheless, confidence in the financial system is paramount and will remain the focus of regulators and the Fed. The effects of tighter lending standards and potential regulation will continue to have an impact on the Fed’s interest rate policy and on the economy for years to come.  

Looking ahead, investors will be keeping a close eye on economic and inflation data as well as the first quarter earnings which kick off the second week of April. Recent economic data has shown an economy that is clearly slowing due to the impact of higher rates, tightening financial conditions and consumers feeling the impact of sticky inflation. Earnings are expected to decline, with estimated earnings for the S&P 500 expected to decline by more than 6.5%, which would mark the largest earnings decline since Q2 2020. The forward 12-month P/E ratio for the S&P 500 is 17.8, which is below the five-year average (18.5) but above the 10-year average (17.3). 

Due to the uncertainty of the economy, we believe companies with strong fundamentals and management teams will be rewarded. We continue to remind investors that the market is not the economy and trying to pick the bottom or top is nearly impossible. At times like this, it is important to remember that time in the market, not timing the market, is the best way to capitalize on gains.  

Source: Earnings Insight, FactSet, March 31, 2023

Markets started the year off strong as inflation was trending lower and a pause in interest rate hikes was expected. However, January’s inflation came in higher than expected and economic indicators reflected a more resilient economy. Data revealed a still tight labor market, and strong retail sales showed consumers are still spending. With the expectation that more interest rate hikes were likely needed to combat stickier inflation and stronger than expected demand, global markets declined.

2023 started off with a resurgence of optimism from investors. Both stocks and bonds rallied in January on the premise that the Federal Reserve is nearing the end of their rate hiking cycle, with many market participants forecasting cuts in the late half of the year. However, the Federal Reserve remains focused on keeping interest rates higher for longer to regain price stability. Will the aggressive interest rate hikes from last year push the economy into a recession? If so, how deep will the potential recession be?

2022 proved to be a challenging year for markets, as both equities and fixed income were negatively impacted by the Federal Reserve's effort to combat the worst inflation seen since the 1970s. The question for investors in 2023 now remains: How deep will a potential recession be and how much has the market already priced in?

The market rallied in November amid hopes that inflation in the U.S. may have peaked, paving the way for the Federal Reserve to slow the pace of their interest rate hikes. In addition, other positive support came from China announcing that they will loosen their strict zero Covid policy, which has weighed on the global economy.

When it comes to the markets in the short term, it is very difficult to predict what will happen day-to-day or week-to-week. For example, the S&P 500 was up 7.99% in October and down 18.76% year-to-date. Many people likely did not expect such a strong October, which is why looking at history over the longer term provides more certainty when making financial planning decisions.

Market volatility remains heightened due to the Federal Reserves “higher for longer” monetary policy. And, the market continues to struggle to price in the impact that higher interest rates will have on valuations and the growth of the economy.

2022 continues to present investors with challenges, including a positive correlation between stocks and bonds, which has made markets difficult to navigate. And, the market remains concerned about heightened inflation and slowing growth as interest rates are expected to rise.  

This information does not constitute investment advice and is not an offer to buy or sell a security. The material is provided for general information and educational purposes and is based on information provided to us by sources deemed to be reliable. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Past performance is no guarantee of future results and asset values will fluctuate with changing market conditions. All investments are uninsured and can lose value. Please review the underlying assumptions in this report carefully. 

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