Market Update Call Audio Transcript June 23, 2015

Transcription

1 Market Update Call Audio Transcript June 23, 2015 Speakers: William Northey, CFA Chief Investment Officer, The Private Client Group of U.S. Bank Robert L. Haworth, CFA Senior Investment Strategist, U.S. Bank Wealth Management Terry D. Sandven Chief Equity Strategist, U.S. Bank Wealth Management Jennifer L. Vail Head of Fixed Income Research, U.S. Bank Wealth Management Edgar W. Cowling, Jr., CCIM Director of Specialty Assets, U.S. Bank Wealth Management Opening: This is a recording of the U.S. Bank Wealth Management Market Update Call held on June 23, The discussion provided highlights from the first half of 2015 and insight into where there may be potential opportunities and challenges for the remainder of Welcome to our midyear update and outlook call, which is hosted by U.S. Bank Wealth Management. I m Bill Northey, Chief Investment Officer for the Private Client Group. I ll be serving as moderator for today s call. Joining me on the call today are several of our wealth management investment strategists including Ed Cowling, director of specialty assets and lead real estate market strategist; Rob Haworth, senior investment strategist who covers the global economy and commodities markets; Terry Sandven, our chief equity strategist; and Jennifer Vail, head of fixed income research. The focus of today s discussion will be on providing highlights from the first half of 2015, but more importantly, providing insight into where our teams see potential opportunities and challenges for the remainder of As moderator, I ll be guiding the discussion as our presenters share their expertise about the global economy and capital markets. With that, let s get started. Rob, I d like to begin today s conversation by asking you to share some views on the global economy. Specifically, Greece is a small country with an economy slightly larger than the State of Oregon but has garnered large headlines while it flirts with default on its debt. Is Greece the canary in the coal mine? And is the global economy likely to slow later this year? Investment Products and Services are: Important disclosures provided on page 14 and 15.

2 Rob Haworth: Thank you, Bill. Yes. Greece has been a big issue for this year. And the issue is no bigger - it is very large within Greece itself. But I would say the impact of Greece gets smaller the farther away you get. Greece was starting to grow after being in recession for several quarters at the end of And with this current debt environment and the end of austerity, it s heading back into recession. While I think that this does have an impact that kind of keeps the potential for global growth a little lower, the impact of Greece in it of itself and any potential default or exit from the eurozone is relatively small as you get further and further away, say, outside of Europe. Economic growth, in our view, within Europe is likely to stay somewhat low. In the 1 percent to 2 percent range, probably not even exceeding 2 percent. And they have other issues of their own to deal with including deleveraging other banking systems and demographic issues. Lastly, the other thing that probably keeps Europe in a positive zone for the next couple of years is quantitative easing. European Central Bank is finally engaging in a quantitative easing program to stimulate their economy and that should provide a little more lift. So Greece is clearly a risk but from a total global economic perspective, as you know, Greece is quite small. And so the total impact will be small and mostly felt in terms of confidence, if anything else. Great. Well let s talk about another risk to the global economy which is China as the second-largest single economy in the world. China has been slowing economic growth for a number of years, growing just about 7 percent for the year ending in March, which is still enviable by developed economy standards but represents a rather significant slowdown from the double-digit expansion we ve seen over the past few decades. Additionally, if you look at the local stock market, it s nearly doubled over the past year. Can you talk about some of the prospects and the risks for China over the next year? Rob Haworth: Yes. It s a great point, Bill. China has been growing rapidly. I mean their economy is now near the size of most of the other major economies in the world. They d certainly be in the top five. And now they re slowing. Some of it is because they ve had an excess of investment that they re not supporting anymore. Some of it is definitely demographics as they head into an aging population. In response, they ve started to try and ease monetary policy while still trying to hold down investment and, say, the real estate sector where they ve had excessive investment. And now you ve got a lot of money, especially from monetary easing flowing into the equity market. Important disclosures provided on pages 14 and 15. 2

3 I think, in terms of the near-term, we would expect China to continue to slow. So more monetary easing to account for some flight of foreign capital from the region and to try and soften the blow of slower growth in a transition from an investment-driven growth model to one more balanced with internal consumption. But I think, for now, China looks to be slower but perhaps not a hard landing. If our view goes out much longer which is, you know, well beyond the end of this year, it s probably a more positive story, that we see in liberalization in certain policies within China, which could include, for example, there s some chance, that the currency could become a member of the IMF s (International Monetary Fund) special reserve currency class by year-end, which would start to speak with more normalization of policies in China, which can be positive in the longer run. But in the near-term, I think growth remains slow. There are some risks from this rapidly accelerating stock market in the nearterm. And, in the meantime, policy makers are faced with how do we offer some stimulus to the economy but not completely inflate a bubble. I think it s going to be a hard dance but one that they d probably do okay with. And growth will be not faster, not a lot slower, but about the same through the rest of the year. Great. Let s move our discussion home where it s near and dear to the participants on the line. The U.S. economy contracted in the first quarter of this year and it s not the first time that s occurred. In fact, it s the third year out of the last five that that has occurred ended with such a strong note and we had expectations at the beginning of this year that we would see approximately 3 percent growth for the entirety of Does the first-quarter decline this year give you concern that we re reaching the end of this economic expansion? Rob Haworth: It s a great question, Bill. As we published our outlook to start this year, we expected growth to be pretty robust through the year, averaging something, as you noted, along the lines of 3 percent. I think, with the first-quarter slowdown. And we didn t just see it in GDP (Gross Domestic Product) data. We saw it in other data as well. We saw it in employment data. We ve seen it in industrial production data. So we did experience somewhat of a slowdown in the first quarter. It s going to be hard for us to reach that pace through the rest of the year, so we re revising our expectations for this year to be growth closer to an average of 2 and a half percent for this year, which still means we get some improvement in the economic activity second quarter, third quarter, fourth quarter. Important disclosures provided on pages 14 and 15. 3

4 So I don t think we re seeing the end of this economic expansion yet. Many of the signs we would want to see, to think about a recession just aren t there. We don t have an excess of jobs. We ve got plenty of unemployed at this point. And we need to see more growth in employment and that s actually one of the healthier aspects we re seeing in the economy. We don t see an excess of inventories. We don t see an excess of government spending. As a matter of fact, the government is just now moving from austerity back to more neutral-spending policies, which should actually help the economy. As we look across the big factors that might lead us to recession, we re just not seeing problems. So it looks like we re in for kind of a bit of a Goldilocks scenario for the next year where there are some external risks we can point to; a stronger U.S. dollar; what happens if China falls apart? But for now, the U.S. economy itself is really fairly healthy with unemployment now at 5 and a half percent, with average non-farm payroll increases of about 250,000 for the last year or so. Wage growth is starting to take up. And the Fed (Federal Reserve) is getting confident enough to think about changing interest rate policy. So we really think that the economy does okay through the rest of this year and into next year and we don t see a lot of signs of recession at this point, so the expansion continues. Great, Rob. I very much appreciate your comments there. Let s go ahead and take it down from the macroeconomic level and talk a little bit about portfolio implementation. And to that end, let s bring in Terry Sandven, our chief equity strategist. Terry, it seems like investors have been on the edge and in disbelief, somewhat lacking conviction as to what the most prudent near-term course of action is in the equity market. What is your assessment as we approach midyear? Terry Sandven: Well thank you, Bill. Equities largely have been a split personality market during the first half of 2015 with sentiment shifting from optimism to concern, often based on the economic statistic du jour. At present, yes, I agree. I think investor nervousness and concern are on the rise and for good reason. Year-to-date performance has been generally lackluster. Sentiment is being impacted by several items, such as near-term uncertainty surrounding Greece, as Rob mentioned, a likely increase in interest rates by the Fed in upcoming second-quarter earnings season and, of course, seasonal tendencies for a lackluster performance as we move closer to the summer months. I should add to that, a consensus outlook for the year-end remains mixed. So, at the moment, investors seem to be in somewhat of a wait-and-see mode. Important disclosures provided on pages 14 and 15. 4

5 Terry Sandven: Great. Let s take a few minutes and just dig into some of the points that you made there, Terry. First, take a look at performance. What s your assessment of equity market performance thus far in 2015? Well equity performance through the first half of the year, in aggregate, is tracking below historical levels. In fact, I would note three items. First is on balance, international is outpacing the U.S. stocks. The international developed MSCI EAFE Index as the best-performing broad market index, year-to-date. In fact, it s up 10.6 percent as of yesterday s close. Secondly, small companies are outperforming large caps. The small caporiented Russell 2000 is up 7.3 percent, year-to-date. And, in comparison, the S&P 500 is up a more modest 3.1 percent with the Dow (Dow Jones Industrial Average) being up 1.7 percent. So the outperformance of small caps actually is an encouraging trend or at least can be an encouraging trend. We typically see small cap outperformance, indicating an improving economy, which could bode well for equity performance as we progress further into the second half of the year. And the third point that I would note is performance leadership between cyclical and defensive sectors is inconclusive. Healthcare and consumer discretionary sectors are clearly the best-performing year-to-date. In fact, they re up 11.4 percent for healthcare and 8 percent for consumer discretionary. On the flipside, utilities and energy are the worst performing sectors, year-todate, posting negative returns of 9.5 percent for utilities and negative 3.9 percent for energy. And I should note too on utilities, it s not completely surprising that utilities is off some year-to-date. Obviously, it was one of the better-performing sectors last year. But also utilities are bond-like and as such, it s hard to envision utilities outperforming when the Fed is moving closer to a rate move. You know, Terry, Rob referenced the Goldilocks scenario in his opening comments on the macroeconomy, particularly as it relates to the United States. It always begs the question, is it going to bring the Three Bears or at least a bear market? So, as you think about where we started the year which was generally a favorable outlook for both the U.S. and the international equity market, what are you looking for near year-end and into 2016? And if you could add to that, perhaps, if you have some favored sectors or even a price target for the S&P 500. Terry Sandven: Well certainly those are good questions. I would say, right at the top, we continue to maintain our constructive outlook for equities during the second half of the year and even into Important disclosures provided on pages 14 and 15. 5

6 We also expect volatility to increase as we begin the second half. And Bill, let me answer your questions really in three parts the fundamental backdrop, near-term issues and the outlook for year-end. The macro and fundamental backdrop is partly what Rob discussed and in our view seem supportive of equity prices. On average, inflation remains contained. Interest rates are low. Valuations, while being at the high side of fair, are still short of extremes. And the list of attractive alternatives appears limited. In fact, on that note, as of this morning, 30 percent of the S&P 500 companies have dividends yielding above the 10-year Treasury yield of 2.4 percent. So, clearly, equities can potentially provide income and appreciation for investors. And I would also add that the dividend profile should help provide some support to equity prices in general. As for near-term issues, the wall of uncertainty, if you will, seems to be increasing, which, in our view, warrants a near-term bias for caution. Again, among the items that give us a reason for pause include uncertainties surrounding Greece, the Fed move in September, lack of visibility into second-quarter earnings and company outlooks beginning in mid-july and seasonal tendencies for lackluster performance during the summer months. In fact, Rob mentioned that Greece remains a work in progress. I think, as it pertains to equities, the equity market seems to be pricing in expectations that rational minds will come together to reach some sort of agreement. Should the eventual Greek outcome escalate in some form or fashion, this would likely weigh in the pace of global growth and obviously negatively impact equity prices. And if you look at seasonality, seasonality tendencies tend to point toward lackluster performance during the summer months. In fact, June, July and August, and even September are historically among the worst-performing sectors of the year. Conversely, November and December are among the best. As we look beyond the near-term and look further into the year, our favorable bias for equities remains intact, partly because the classic signs of a frothy market leading to a pullback or certainly a correction, in our view, just doesn t seem evident. And to give a little color on that, valuations while stretched are not at extremes. Investor extreme optimism is lacking. Inflation while beginning to surface is still short of extreme levels or certainly not at levels experienced during an overheating economy. We haven t seen fund flows en mass from bonds to stocks. And so there are several reasons in our mind that the frothy market is not here. And again, in the absence of an unexpected outcome, we view any potential decline in the Important disclosures provided on pages 14 and 15. 6

7 equity prices over the next couple of months being more of a buy-the-dips opportunity than the start of a prolonged bear market. Thank you for your insightful comments, specifically around the domestic equity market. I should note that we at the firm remain favorably disposed in varying degrees to both developed and emerging market international equities as well. But with that, let s now turn it to the fixed income markets and bring in Jennifer Vail. Jennifer, thanks for being with us today. One of the more heavily reported and discussed topics of the past several years has been the action or inaction of the Federal Reserve. And as we all know, the Federal Reserve is charged by Congress with this so-called dual mandate, which is one, to create the condition of full employment; and two, maintain price stability. Our prior speakers touched on both the domestic economic outlook and the outlook for inflation. But the question on everybody s mind is when and by how much will the Fed raise rates? So I would ask you to share your perspective and expectations around current and future monetary policy actions. Jennifer Vail: Well Bill, we certainly didn t expect the first quarter to contract nearly as much as it did. So, as a result, we have to delay our June monetary policy liftoff date forecast to September. We believe that bar for Fed lift-off in September to be quite low. As long as the labor markets continue to improve, inflation does not retrace and wage growth shows some signs of life, then the Fed will begin to normalize policy at the September meeting. Even many of the more dovish members of the Federal Open Market Committee have been quoted in the press recently about the need to normalize the policy rate in The Fed has become increasingly concerned with leaving the zero interest-rate policy or ZIRP in place for too long as this may cause bubbles to form. If we evaluate the current levels of labor market strength, inflation and wage growth, it definitely justifies some level of accommodation but certainly not in an emergency ZIRP level. Remember that the Fed s balance sheet remains four times larger than it was pre-crisis. So despite the beginning of monetary policy normalization, the sheer size of the Fed s balance sheet remains highly accommodative. I d also like to stress that that lift-off itself is not nearly as important as the pace of normalization as telegraphed by the Fed. We believe that unlike previous Fed rate hike cycles, which were late to the game and they executed rapid increases in the policy rate. This time we will experience a normalization path that will be a bit early to the game, with a moderate and gradual glide path on increases in the policy rate. Important disclosures provided on pages 14 and 15. 7

8 Our current forecast expects to see two 25 basis-point hikes in 2015 and anywhere from three to five 25 basis-point hikes in Of course, depending on the relative strength or weakness of the economic data releases. Jennifer Vail: Great. Thanks, Jen. Well, as we know, traditional monetary policy actions that you referenced primarily are going to affect the short end of the yield curve or short-term interest rate. How are we expecting the changes you describe to manifest in the intermediate to longer-dated maturities? Well, you know, that upward pressure on the long end of the curve is not going to be nearly as significant as the short end of the curve that you mentioned. There are a lot of factors that are actually putting downward pressure on the longest end of the curve right now. First, you have the yield dynamics of global diverging central bank policies, with the United States entering a tightening phase, while the Bank of Japan and the European Central Bank remain firmly and highly accommodative quantitative easing cycles. Now, as a result of this, yields will be higher domestically, causing greater inflows of foreign money into our bond market. Next, you have a demographic issue here in the United States with the baby boomers moving into retirement. This traditionally leads to those newly minted retirees, reducing their risk-based assets such as equities and allocating those dollars to higher-quality, long-term bonds to provide a secure income in retirement. And then, lastly, we have had multiple years of positive equity performance, which has led corporate pension plans to higher levels of funding status. Now, once a corporate pension gets close to 100 percent funded, the plan administrators typically de-risk the portfolio. Meaning they eliminate their equity positions and purchase long-term bonds to match the liability of the pension beneficiary s future income projections. Now, at the end of the day, the only items that are putting upward pressure on the long end of the curve are inflation and economic growth. Both of which appear to be on a very moderate path to improvement. Thus, it s putting very little upward pressure on long-term rates. Now, although we expect to see some upward pressure in the intermediate part of the curve, it again will not be substantial to short end. As the Fed begins to normalize policy, this, of course, puts that greatest amount of pressure on the short end of the curve. So our forecast for the 10-year Treasury is to be around 2.5 percent to 2.75 percent by the end of Now since the glide path of future increases in the policy rate is expected to be much shallower than the previous Fed tightening, this creates an unusual situation where clients may not have the ability to reinvest their short-term bond proceeds into substantially higher coupon bonds. So we are encouraging Important disclosures provided on pages 14 and 15. 8

9 our clients to avoid that short end of the curve in favor of the intermediate to long end of the curve. Jennifer Vail: Thanks for your commentary, Jen. Changes in the capital market segment can create both risks and opportunities. And I would ask you to cast your gaze a bit wider and maybe pick one or two market segments or sectors or strategies that might benefit from the expected conditions you described. Absolutely. So we believe that high-yield and dollar-denominated emerging market debt will outperform the other sectors of the fixed income market. Now, as a result of this extended period of very low interest rates, high-yield corporations have been able to refinance much of their debt, thereby reducing their interest coverage expense and resulting in much stronger balance sheets. This has enabled default rates to remain near record lows. And we don t see a material increase in default rates for at least another year, the current spread levels and high yield remain attractive relative to this low default rate environment, leading us to see a greater opportunity for spread compression in this sector. Also, you know, at the end of the day, in an environment of policy normalization, high yield tends to retain its value better than the lower-risk fixed income sectors. We also continue to see opportunities for spread compression in emerging market debt. The credit quality of many of these foreign countries continues to improve while the developed nations are struggling to retain their credit ratings. Currency reserves in these countries continue to run above their long-term averages despite the recent drawdowns in emerging sovereignties. And the spread levels of emerging debt are very attractive relative to most of the domestic fixed income sectors. Now, since we believe the dollar to be on a modest upward trajectory due to an improving economic picture, we would encourage our clients to avoid local currency options altogether and focus solely on dollar-denominated emerging market debt. Whereas the high-yield emerging debt and the lower credit quality municipals provide the greater benefit in that steeper part of the intermediate yield curve, clients should probably exercise a preference for the safety of high-quality investment grade corporate municipals and possibly even treasuries for that longest end of the curve. Thanks, Jennifer. I sure appreciate your commentary there. Let s go on and move to real estate and bring in Ed Cowling, the director of our Specialty Assets Group. Important disclosures provided on pages 14 and 15. 9

10 Ed, one of the topics on many people s mind is housing. And housing seems to have had an erratic or a slow and uneven recovery in the last several years. What s going on currently in housing and what is your outlook? Ed Cowling: Thanks, Bill. And yes, you re right. Housing has been a little erratic. We ve seen new home sales and sales of existing homes that are still searching for that consistent traction. With winter s grip, I think it impacted many areas of the country, even again this year. Yet, we believe that with the improvements in the overall economy, many much of which are even talked about today, there will be improvements in housing over the course of this year and going forward. Why is that and what s currently happening? Well yesterday s release of information regarding existing home sales, for the month of May, indicated that the monthly increase was 5.1 percent, to a seasonally adjusted level of 5.35 million homes. Now this is about 9 percent higher than a year ago. And it s the highest level since late And it s quite a gain even from the mid 2010 levels when only 3.5 million were sold. So we re up to 5.35 million sales annualized now in May. There is also some good news in the first-time home buyers. There was a slight rise in the number that were participating and bought homes last month. So that too is good news and an indication of some relaxation in the credit requirements. I d say another positive side that we re seeing is the number of pending sales. These are homes that were put under contract and are set to close in the next month or so. Well this forward-looking gauge of housing activity actually rose for the fourth consecutive month this year. And it reached the highest level in nine years, so good news there on the existing homes. Now turning to new homes for a moment. New home sales have also had their ups and downs this year. But news released just this morning is that new home sales rose to a seven-year high in May to a seasonally-adjusted annual rate of 546,000 homes. Now while this is still well below the glory years before the recession, new home sales were almost 20 percent higher than they were a year ago. They are trending in that plus direction and there are certainly positive signals around housing and new homes such as the latest homebuilder survey, which noted increased buyer traffic. And the builders themselves expressed more confidence, as well as a positive outlook for new home sales in the coming months. Another positive signal is that we see increasing permits and construction starts going up. Permits for single-family and for multi-family units have Important disclosures provided on pages 14 and

11 increased from a level that was around a million units a year ago in May to 1,275,000 this month. Now are there headwinds for housing? Yes. Obviously, of course, there are. Mortgage rates correlate to the rise in 10-year Treasury. So we ve seen mortgage rates presently around 4 percent. And they may be moving into the neighborhood of 5 percent or so by the end of the year. But we don t see that as a derailer in and of itself. There are other headwinds in the form of increased prices and thus affordability of homes; lowered home ownership rates as people rent versus buy; demographic shifts, as well as low in tightening inventory of available new and existing homes. But we think there are tailwinds as well. Now those include a increasing number of household formations as people move out on their own, the overall improving economy that we talked about here and wage growth as well. All are those are flowing in and through to housing. So there are some positive patterns in these areas currently. And I believe that all this translates into a better outlook for housing and its advancing recovery. So we believe that firming demand for housing will continue as the economy improves. And then, Bill, finally, as it relates to housing, there remains strong demand for apartments. And with about a 95 percent occupancy rate, apartments continue to move forward. There are still a lot of apartments being built, the value of starts hitting $36 billion, which is near the previous peak of back in Yet, at the same time, demand and occupancy has not waned and I think that translates overall into the investment side where, last year, buyers purchased over a $100 billion of multi-family properties. And that s an all-time high and is 10 percent higher than even the year before. Ed Cowling: Great, Ed. I appreciate that. So you ve mentioned housing, let s transition over to the commercial real estate side and there s been a little bit of a commercial real estate recovery under way. What are some of the drivers behind that? And think about that also from the investible universe, specifically as it relates to real estate investment trusts or REITs. Sure, Bill. The drivers of commercial real estate are job growth, advancing wages, household formation those all point to an improving demand for apartments but also for office, retail and industrial properties. You couple that with a strong investor appetite. We saw transaction volumes increase 47 percent in the first quarter this year over last year and about 20 percent of that is coming from a foreign investor. Important disclosures provided on pages 14 and

12 So, from a REITs standpoint, U.S. REITs continue taking advantage of the improving economy and relatively low interest rate. Yet, it looks like rising rates took some of the wind out of the sales in the first quarter. However, operating fundamentals are key and occupancy levels are improving across the market. All this means that it allows landlords some pricing power to push the rents. And for global REITs, I d say, along with the real estate fundamentals, global REITs may be influenced by external factors going forward such as qualitative easing, debt concerns, renegotiations and, just basically, the overall level of economic growth in that particular market. Rob Haworth: Great. Thank you, Ed. Rob, I d like to turn back to you and talk about one of our other asset classes and specifically commodities. The broad commodity complex is trading near the lowest levels since the financial crisis. What are some of the factors that are likely to influence the returns of the complex through the balance of this year? Yes. Thanks, Bill. So really, I think about three things when I m analyzing commodities. One, I think about the trend of the U.S. dollar relative to other currencies, which speaks a lot to the ability of foreign nations to buy goods in dollar terms or how cheap are things for us in dollar terms. A second factor would be global growth. The faster global growth is, the more we tend to consume of food and energy. The slower global growth is, the less and the less we ll see demand grow. And the last factor I think about is geopolitical risk. Particularly, given the Middle East but you could also argue about drought or storm conditions in parts of the world. Geopolitical risks have a big influence on commodity prices. So, dollar trend, we expect the U.S. dollar to be stronger, especially if, as Jennifer has pointed out, abandon the zero interest rate policy in September and start to raise interest rates. With a stronger U.S. dollar that tends to hold down the broad commodity complex. We ve seen that over the last year or so in gold and now in oil. And that dollar trend will play a big factor in the gold price; a small factor in the oil price. In oil prices, the big factor is global growth. We ve got a fairly modest outlook for global growth which means probably not a lot of lift to global oil prices and supplies the other big factor there with U.S. production, essentially doubling in the past year. We have OPEC (Organization of Petroleum Exporting Countries) holding steady at 30 million barrels a day in their oil production. And if there s ever a deal with Iran over their nuclear ambition, we ll get more oil out of Iran, and Iraq would like to start producing more. Important disclosures provided on pages 14 and

13 We are literally a wash in oil at this point and you need global growth to rally to start to consume some of that extra oil. But, for now, we think that means some list the prices by year-end but not a lot when it comes to oil. Last factor is geopolitical risk. This is a lot of stuff we can t predict. We can t predict storms. And weatherman can t predict weather for this weekend. So we don t spend too much time here. Right now it looks like, in terms of geopolitical risks, we re not at a high level. Drought seems to be imbalanced. We have to watch out for some weather patterns out of the Pacific. But otherwise, production for grains, in particular, looks fairly solid. So, in general, we have a fairly benign view on the commodities as we move through the year. That geopolitical risk factor is the one we really have to look for that is tougher to anticipate and why we stay underweight rather than zeroweight. Just trying to be able to hedge some of the risks that may arise in the world from conflict or other factors. Thanks, Rob. Some of our views are guided by what we believe to be our best available information and our judgment about how those will play out for investors going forward. But obviously, unexpected developments as your reference lead to unpredictable results. And for this reason, in our most recent outlook, we have included some of the forecast surprises. I d like to specifically bring back Terry. Terry, you laid out a detailed case for equities during your commentary. Is there anything additional that you d like to add that is not part of your base case scenario? Terry Sandven: Certainly, Bill. I would watch inflation as a surprise factor. At present, if inflation ramps up, I think it would have a negative impact on valuation, put pressure on earnings and eventually pressure on price targets as well. As inflation increases, price earnings multiples are likely to decrease in a present, on current year numbers, the S&P 500 is trading about 18 times 2015 estimates, which is, as I would say, toward the high side of fair but not at extremes. And if you have inflation in the marketplace, Bill, that typically means you ve got interest expense that s likely to increase as well. And you also probably have wage increases, which implies that you ve got some margin pressure, which again is likely to weigh on earnings, which, without earnings, then you ve got issues with price targets. And so, on that note, I would just note at present our price target for the S&P 500 for 2015 is 2,000 or 2,225 and that s roughly about 5 percent above current levels. And as you look through the second half of the year and into Important disclosures provided on pages 14 and

14 2016 as well, we re still maintaining a cyclical bias favoring sectors and companies that tend to perform well in an improving, slow growth but low inflationary environment. And that takes us to sectors such as information technology, industrials, financials and, to a lesser degree because of the recent strength in the sectors healthcare and consumer discretionary. So, on average, watching inflation, still like information technology, financials and industrials for the remainder of the year. Price target for the S&P 500 is 2,225, roughly 5 percent above the current levels. Excellent. I appreciate that, Terry. I want to thank all of our speakers today -- Ed, Rob, Terry and Jennifer for providing their insightful views with respect to the global economy and the capital markets. Risks and opportunities exist within the global economy and the capital markets that always warrant attentive and prudent management of our client portfolios, to address their unique goals and objectives. We ve published our new midyear outlook commentary that highlights the views shared here today. Please contact your U.S. Bank adviser to receive a copy of this outlook or visit our website. To wrap up our conversation, I want to thank you for attending the call and let you know that we truly appreciate your relationship with U.S. Bank. If you d like to discuss any of the information shared during this call, please contact your U.S. Bank adviser. Have a wonderful day. Thank you and goodbye. Closing: Thank you for listening. We invite you to join us for future calls. Details can be obtained from your U.S. Bank representative. Website: reserve.usbank.com The information represents the opinion of U.S. Bank Wealth Management and does not constitute investment advice and is issued without regard to specific investment objectives or the financial situation of any particular individual. Since economic and market conditions change frequently, there can be no assurance that the trends described will continue or that the forecasts will come to pass. These views were presented on June 23, 2015 and are subject to change at any time based upon market or other conditions. The information presented is for discussion purposes only and is not intended to serve as a recommendation or solicitation for the purchase or sale of any type of security. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Data and research information and statistics have been gathered from a variety of sources. Important disclosures provided on pages 14 and

15 Past performance is no guarantee of future results. Indexes mentioned are unmanaged and are not available for investment. The MSCI EAFE Index is an unmanaged index that includes approximately 1,000 companies representing the stock markets of 21 countries in Europe, Australasia and the Far East (EAFE). The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 widely traded stocks that are considered to represent the performance of the stock market in general. The Dow Jones Industrial Average (DJIA) is the price-weighted average of 30 actively traded blue chip stocks. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes, and the impact of adverse political or financial factors. Investing in fixed income securities (debt securities) are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer term debt securities. Investments in lower rated and non rated securities present a greater risk of loss to principal and interest than higher rated securities. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties (such as rental defaults). Important disclosures provided on pages 14 and