As we enter 2014, global economic growth seems to be on stronger footing across the world as the U.S. Fed is poised to begin

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1 2014 Outlook Amid significant headwinds in 2013 the fiscal cliff, continued economic uncertainty, geopolitical issues and the partial government shutdown U.S. economic expansion remained subdued relative to historical trends. However, performance of U.S. equities was remarkably strong, broad based and resilient. Insights into what may be in store for the coming year are provided by our investment strategists on the following pages. In 2013, the Federal Reserve (Fed) dominated the headlines as they worked to communicate the end game for quantitative easing (QE). U.S. equity markets rallied strongly despite the threat to the conclusion of easy monetary policy as economic growth accelerated over the course of the year. Fixed income investments generally underperformed equities as markets adjusted interest rates higher in anticipation of the end to QE. Commodities and real estate, except residential housing, also struggled in the face of rising real interest rates. As we enter 2014, global economic growth seems to be on stronger footing across the world as the U.S. Fed is poised to begin tapering QE. We believe the U.S. economy will likely see average growth improve to 3 percent in 2014, while Japan and Europe will improve to around 2 percent and 1 percent respectively. The slowing in emerging market economies will likely draw to a close this year with merely modest improvements to growth achieved as these economies continue to struggle with relatively high inflation and tight labor markets. In our view, improving growth should leave equity and cyclical commodity markets on stronger footing. U.S. equity growth will likely be driven by earnings this year rather than expanding price-to-earnings (P/E) multiples. Equity markets outside the United States may see better returns in 2014 as P/E multiples are relatively low and any improvement in economic growth should benefit these markets. Fixed income markets will likely perform better than in 2013 as interest rate increases will likely be more modest. Credit-oriented strategies, such as high yield bonds, may benefit from the stronger economic climate. NOT A DEPOSIT NOT FDIC INSURED MAY LOSE VALUE NOT BANK GUARANTEED NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY [1] Please refer to important disclosures on page 8.

2 Global Economic Views Global growth seems to be improving as we enter The U.S. economy seems to be much stronger and Europe may be growing, but modestly. Quantitative easing in Japan is likely to aid growth and inflation during the year. On average, growth in emerging markets seems likely to stabilize and improve in In China, the transition toward consumption from export-driven growth will leave us with similar year-over-year growth, as compared to Other Asian economies, such as Taiwan and Korea, may benefit from improving growth in major developed economies. Emerging market commodity-producing economies will likely struggle early in the year as they adjust to lower commodity prices, but improving global growth and demand may help late in In the United States, first quarter political threats to economic activity will likely be averted. We believe we will see almost no drag from government austerity on the economy or markets as politicians focus on November midterm elections. Continuing strength in the private economy leads us to believe U.S. growth is likely to expand by around 3 percent in Consumption should be stable, supported by improving job growth and a stronger housing market. The unemployment rate is likely to drop below the Fed s threshold of 6.5 percent sometime in the second half of the year. Business investment has the potential to provide an upside surprise to our forecast should cash be deployed toward capital Robert L. Haworth, CFA investment, consistent with jobs growth, Senior Investment Strategist rather than increasing dividends, stock buybacks or merger activity. Developed market economies will likely see some uptick in inflation in 2014 in view of improving economic growth. However, inflation is likely to remain below central bank targets in the United States, Europe and Japan because of pressure from debt deleveraging. Emerging market economies will continue to struggle with inflation pressures as a result of tight labor markets although pressures may abate somewhat in 2014 as speculative foreign capital flows have declined due to the expected conclusion of the Fed s QE program. This will be a year when we see less dispersion in economic performance between the United States and the rest of the world, according to Rob Haworth, senior investment strategist. Europe should see improvement this year coming out of a recession, but it still lags the rate of growth in the United States. Emerging markets struggled in 2013, and Rob believes this situation may only improve modestly. We might see some stabilization in emerging markets in 2014, but not any significant acceleration in economic growth yet. Two major factors that may affect the level of economic growth in 2014 are interest rate policies and capital spending by businesses. If interest rates rise quickly, it could slow future growth, not just here, but overseas as well, says Rob. If companies start deploying cash to boost capital spending, which they have been reluctant to do, that would help bolster economic growth. [2] Please refer to important disclosures on page 8.

3 Equity Market Views U.S. equities seem well positioned for favorable performance in 2014, according to Terry Sandven, chief equity strategist. The global economy appears to be in slow growth mode, interest rates are low, inflation is contained and earnings are rising. That typically presents an environment for equities to trend higher. Our bias is for cyclical sectors and companies that have an international footprint and tend to do well in a slow growth, low interest rate, low inflationary economy such as industrials, technology, financials and select healthcare companies. We also have a preference for companies with increasing cash levels, affording investors with both dividend growth and price appreciation potential. Terry D. Sandven Chief Equity Strategist We expect equities to trend higher in In the United States, we expect equities to advance, albeit at more moderate levels than what was experienced in In our view, 2014 is likely to be a transition year driven more by earnings and earnings growth than by Fed-driven liquidity and P/E multiple expansion. Our current 2014 price target for the S&P 500 is 1,960 based on a P/E of 16.5 times our 2014 earnings estimate of $119. Among international markets, the fundamental backdrop appears favorable for improved performance over 2013 levels. Overall, consensus global economic growth for 2014 is projected at a rate of 3 percent. The euro area appears to be recovering from its recession and valuation levels for both international developed and emerging markets appear to be more favorable than for U.S. equities. an earnings boost for U.S. companies with an international footprint. U.S. household balance sheets are strengthening, partly the result of higher home and stock prices. And corporate balance sheets continue to reflect mounting cash levels, increasing the prospects for acquisitions, share buybacks and dividend increases. For the S&P 500, we are currently forecasting earnings growth in the 8 percent to 10 percent range, roughly in line with what was experienced in Beyond earnings, key drivers warranting higher equity prices remain in place. For U.S. equities, valuation, while elevated, remains fair and not at extremes. Sentiment is generally favorable, driven by the wealth effect associated with higher stock values, increasing home prices, lower gasoline prices and slowly improving employment trends. And, importantly, inflation is low, justifying P/E ratios at or near current levels. Outside the United In our view, providing optimism for earnings growth in 2014 are market internals. The global economy appears to be slowly improving, potentially providing States, in addition to favorable valuations, global economic growth should improve throughout the year, but not enough to put pressure on inflation. [3] Please refer to important disclosures on page 8.

4 Fixed income Market Views In our view, the scope for Treasury yields to rise significantly higher appears limited. We anticipate that the 10-year Treasury will likely end 2014 between 3.4 percent and 3.5 percent. In addition, it is our belief the yield curve will modestly steepen and interest rates will rise gradually as the economy continues to strengthen. We do not believe In this environment of modest economic growth and low inflation, high yield bonds typically outperform other fixed income sectors. In addition, default rates are expected to remain muted as the low interest rate environment has enabled corporations to reduce their interest expense, We anticipate that the first fed funds rate increase will not occur until mid 2015 at the earliest, according to Jennifer Vail, head of fixed income strategy. The commitment by the Federal Open Market Committee (FOMC) to keep the policy rate on hold should keep the short end of the yield rates will sell off aggressively from current levels for multiple reasons, including: Rates have already moved up significantly in anticipation of tapering The Fed will continue to hold a substantial book of assets on their balance sheet improving balance sheets. Municipal bonds should benefit from the diminished chance that Congress will successfully implement a far-reaching tax code overhaul. Headline risk from municipalities such as Puerto Rico and Jennifer L. Vail Head of Fixed Income Research curve anchored at very low levels, says Jennifer. This should cause the yield curve to modestly steepen by year-end. A steepening of the yield curve occurs when longer-dated maturities rise at a faster rate than shorter-dated securities. The backdrop of extremely low levels of inflation puts downward pressure on rates We anticipate increased interest rate volatility in 2014 as the Fed reduces accommodation. QE narrows the range of possible yields, which compresses potential yield outcomes on the upside as well as the downside. As QE is reduced, the range of possible yield outcomes becomes larger. Over the longer term, we expect volatility to continue to normalize as the Fed begins to taper their Detroit has put price pressure on municipal bonds, keeping valuations low relative to other high-quality debt. This may present opportunities to add to positions at attractive levels in We are cautious on international debt as continued U.S. dollar strength may be a drag on returns in Where appropriate, we encourage clients to focus on dollardenominated strategies for exposure to this asset class. Jennifer believes one of the best opportunities in fixed income will reside in high yield bonds. This may be the most attractive sector in 2014, predicts Jennifer. High yield bonds typically retain their value better than other fixed income assets in a rising rate environment. The higher coupons paid by these securities results in less price sensitivity to any potential rise in interest rates. purchase program. [4] Please refer to important disclosures on page 8.

5 Real estate Market Views Higher mortgage rates during the second half of 2013 took a toll on the housing market activity. Our forecast is for rates to modestly increase in 2014, says Ed Cowling, director of Specialty Assets. This may cause some slowdown in the housing market a slowdown, not a reversal or retreat as rates will still be under the long-term average. Ed believes increasing rates will have some impact on commercial real estate as well. Rate increases will likely force commercial real estate investors to be more focused on the cash flow of a property and finding value through rent growth, reducing vacancies, possible re-positioning or re-purposing a property and driving out operational efficiencies. As rising rates signify an improving economy, the headwind of increased borrowing costs should be offset by improving occupancy and increasing rental rates. Edgar W. Cowling, Jr., CCIM Director of Specialty Assets The housing recovery of the past few years accelerated and continued in earnest during We see the housing market recovery continuing, albeit at a slower pace. Median home price increases in the double-digit range year over year during 2013 will likely modify into the single-digit range this year. The number of new home starts has been advancing since 2011, but at the same time, has not kept up with demand. We envision increased housing starts as the housing recovery continues. Existing home inventory has also been low by historical standards. However, as prices have advanced, fewer owners are underwater on their mortgage, and with advancing prices more sellers are entering the market and thus providing needed supply. The recovery in U. S. commercial real estate should continue in Job gains, especially in areas such as healthcare, technology and energy, along with corporate profits and the housing market recovery are the leading fundamentals for commercial recovery. The valuations will not be inspired by the capital markets influences of low interest rates and declining cap rates, but rather we should see a return to fundamentals driving the market. As the economy continues to improve, secondary markets are likely to gain momentum. Just as housing picked up dramatically in high tech markets, demand is also increasing for high tech commercial space. Generally, we believe vacancy will trend downward over the coming years. Improving growth in European and Asia-Pacific economies is likely to underpin a recovery in commercial real estate in these regions. Demand is growing as the economies improve and increases in supply remain constrained. Competition for prime office and retail properties is strong in many markets, which means global market investors are beginning to consider secondary markets just as investors are doing in the United States. [5] Please refer to important disclosures on page 8.

6 Commodities Market Views In 2013, the story for commodities was one of supply growth. Prices in 2014 may be more impacted by changing demand growth trends. Supply growth of oil, industrial metals and grains accelerated in 2013, but the pace is likely to slow in The rising tide of global economic growth will renew an inventory recovery for non-u.s. economies. Gold and agricultural commodities are likely to struggle the first due to stabilizing global growth and the second due to a strong U.S. crop. Gold prices are also likely to struggle as the Fed concludes their QE program, likely by the fourth quarter. The price declines we witnessed nearly across the board in the commodities sector in 2013 was a case of supply growing while demand moderated, says Rob Haworth, senior investment strategist. Oil production was strong, there was more mining demand growth. The net of supply and demand growth will likely lead to a modest rise in price trends, although this transition may be accompanied by potential volatility. Potential issues for the broad commodity markets include strikes and strife in the Middle East, such as strikes in Libya, the civil war in Syria, civil unrest in Iraq, Iran s nuclear ambitions, changing global weather patterns and import tariffs and restrictions on physical gold sales in India. We believe improving demand dynamics will be most impactful in cyclical commodities such as oil and copper. Oil We believe commodities can offer a hedge against unexpected inflation, particularly food and energy. The universe of commodity investments is broad from oil and natural gas to sugar and cotton. Equally diverse are the supply and demand conditions and drivers. When appropriate, investors may consider actively managed commodity opportunities to provide the potential for investment value to be created within this dynamic asset class. Robert L. Haworth, CFA Senior Investment Strategist activity for precious metals and growing conditions were favorable for most agricultural products. Demand did not measure up to these supply trends. Rob expects a different environment in It is reasonable to anticipate that supplies will generally remain strong, but demand should rise for most key commodities given the expectation we have for general economic improvement across the globe. Rob believes that will help bolster commodity prices in markets will likely rise modestly as rising U.S. production is mitigated by demand from improving economic activity and [6] Please refer to important disclosures on page 8.

7 Potential 2014 Forecast Surprises In forecasting, we always work with the information we have to create accurate projections of outcomes in markets and economies. As with all human endeavors, surprises can often be the rule rather than the exception. Below, we have tried to give some voice to potential surprises relative to our current outlook, including how these scenarios may impact certain markets and economies. We include these to provide some sense of the total range of potential outcomes in Despite Federal Reserve tapering of bond purchases, long-term U.S. interest rates fail to rise and even slide lower over the course of the year. U.S. economic activity expands at a lackluster pace as tepid business capital spending fails to materialize and includes weaker employment growth and/or eroding consumer confidence. Investors seek the relative safety of bonds, rapidly escaping the stock market as fears of another bear equity market rise. Europe slips back into recession, led by additional austerity in France and further deleveraging in the banking system. International equity markets suffer as slower growth fears spread around the world. Global central banks are forced toward further monetary accommodation, although emerging market central banks remain on the sidelines as they continue to struggle with inflation pressures. China s adjustment toward consumption leads toward much slower growth in 2014 as declining investment is not met by sufficient growth in consumption. With China slipping, regional economic growth suffers and equity markets decline. The multiplier effects of the recent improvements in employment and a lack of political wrangling lead to rising business optimism and investment. A rapidly improving employment market and expanding loan demand lead to a surprise spike in economic growth. Federal Reserve policy is much too accommodative and we exit the year with accelerating inflation after another year of 30 percent equity market gains. [7] Please refer to important disclosures on page 8.

8 2014 Outlook If you have questions regarding this information or wish to receive definitions of any of the terms used in this commentary, please contact your Wealth Management Advisor or Portfolio Manager. NOT A DEPOSIT NOT FDIC INSURED MAY LOSE VALUE NOT BANK GUARANTEED NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY These views are as of January 9, This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any securities. Investors should consult with their investment professional for advice and information concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. These views are subject to change at any time based upon market or other conditions and are current as of the date indicated on these materials. U.S. Bank is not responsible for and does not guarantee the products, services or performance of its affiliates or third-party providers. Any organizations mentioned in this publication are not affiliates of or associated with U.S. Bank in any way. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes mentioned are unmanaged and are not available for investment. 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 U.S. stock market in general. Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. The value of large-cap stocks will rise and fall in response to the activities of the company that issued them, general market conditions, and/or economic conditions. Stocks of small-capitalization companies involve substantial risk. These stocks historically have experienced greater price volatility than stocks or larger companies and may be expected to do so in the future. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income 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. The 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 high-yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer s ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. 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. 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) U.S. Bank N.A. (1/14) reserve.usbank.com [8]