Economy and Markets. Retrospective and Perspective Summary. September 4, 2012

Transcription

1 Economy and Markets Retrospective and Perspective Summary September 4, 212

2 Retrospective and Perspective Review The economic and market news was mixed around the globe in August 212, just like it was in several prior months. This reflects the continued struggle to sustain some level of growth country by country and region by region. Select key results and conditions in the U.S., Europe, and China are touched on below. Starting with the United States, the S&P 5 Index return for August 212 was 2.25%. Just in case you had forgotten, a year ago from late July through the third week in August (7/22/11 8/19/11), the S&P 5 Index dropped over 16%, as the U.S. lost its vaunted AAA credit rating. Additionally, stock market volatility changed dramatically, as well. Last August, the VIX Index, a measure of equity markets volatility, peaked at 48, but at the end of this August it stood at just under 18. In the fixed income markets, U.S. Treasury yields continued to be range- bound. The yields on 1-year Treasury securities hit their high on August 16 at 1.84% and their low on August 2, at 1.48%. The total return for the month of August for the 1-year Treasury securities was -.2%. Total returns for other segments of the U.S. fixed income market included.2% for the Barclays Capital U.S. Corporate Index and 1.2% for the Barclays Capital U.S. High Yield Index. Some of the positives in the economic backdrop for these market results included: continued encouraging news from the U.S. housing segment via the S&P/Case-Shiller 2-City Home Price Index, an uptick in the Leading Economic Indicator Index, industrial production and chain store sales. But weakness continues to dampen manufacturing results, and employment conditions remain challenged, to say the least. In Europe, the contrast of this August versus last is powerful as well. A broad index of European stocks, the Stoxx Europe 6 Index, rose 2.2% in August 212. During the 7/22/11 8/19/11 period, the index plummeted almost 18%. Certainly the risks in Europe remain large, but the messages and the initiatives that are underway there are promising. However, there is no quick fix and no silver bullet. Some negatives remain, however, and they are quite obvious: Greece, Portugal, Spain, and Italy are not out of the woods, the yields on government debt in those countries are at threateningly high levels, and actions still lag words. However, Mario Draghi, the head of the European Central Bank (ECB), has outlined an ambitious set of steps and plans. He is working feverishly to gain EU-wide support, particularly from Germany. Effective involvement and intervention by the ECB with EU support is critical to economic and political progress. In the second quarter, the European Union saw its regional economy contract by -.2%, which includes Spain s pull back of -.4%. But importantly, the German economy, by far the largest in the EU, grew by.3% in the second quarter. It seems, with almost certainty, that the EU will end up in a recession. With any luck, it will be on the modest side. Meanwhile, China has a Goldilocks problem. It was too hot coming out of recession and posted double-digit economic growth, but with the cost of rising inflation. We now worry it is too cold. Economic growth has slowed; GDP growth for the second quarter came in at just 7.6%. The Chinese authorities have taken strong steps to limit the slow down, including lowering interest rates and bank reserve requirements, pushing new lending initiatives, and currency easing. Back home (on the range), the Jackson Hole Economic Summit closed out August, and Chairman Bernanke s statement was as expected: the recovery is weak; the Fed is watchful; the Fed has tools still to use and will act as circumstances warrant. He also pointed to the need for Congress and the Administration to tackle our fiscal issues. We expect the next few months will likely produce more turbulence in the markets, as if the last few years were not enough. The elections, plus the near and longer-term fiscal challenges, are clearly part of that turbulence. Hopefully, the window of will be the opportunity for Executive and Congressional branches of government to rise to the occasion and put us on a sound fiscal path. Economy and Markets September 4, 212 1

3 Cumulative Return (%) Spotlight: Dividend Chase Review With the economic uncertainty of the last few years, the yield on 1- year Treasury Notes has fallen to around 1.5%. As a result, investors have sought out dividend-paying stocks because of their more attractive yield strategies. Over 56% of companies in the S&P 5 Index currently pay dividends higher than the yield of the 1-year Treasury. Historically, the contribution of dividends to the total return of equities is meaningful. According to Standard & Poor s, dividends have contributed approximately one-third of the S&P 5 Index total return from We believe dividends possess a strong signaling tool for corporations whereby managers use dividends as a signal of confidence in their firm s future earnings prospects. In the 199 s, this message was overlooked by investors as they fixated on capital appreciation and more specifically the information technology sector that offered little in the way of dividends. Contrast this with today, as many of those same companies now pay above-average dividends and where that sector is now a leader for dividend growth. We examined the performance of both dividend yield and dividend growth since the onset of the financial crisis in 27. We chose this four-and-a-half year period because of the uncertain economic backdrop, falling Treasury yields, and volatile stock markets. The dividend theme has been strong the past few years, and there are sound reasons to believe it may persist. As the chart shows, the relationship between dividend growth and cumulative return is impressive, where the highest growers significantly outperformed companies that did not grow or worse, cut their dividend. It also shows that investors generally rewarded the higher yielding groups. We feel that dividend growers were rewarded due to investors interpreting the signaling effect mentioned previously. There are good prospects for the continuing appeal of high dividend payers and dividend growers due to strong investor demand related to the income needs of retiring baby boomers, economic uncertainty (e.g., fiscal cliff, uncertain U.S. election outcome, tax rates, Euro debt fears, China slowdown), high cash on corporate balance sheets, and record low payout ratios. Some caution is warranted, however, as valuations appear somewhat stretched for many high dividend stocks. These valuations may hold, though, as long as macro and policy related issues are unresolved Stocks in the S&P 5 Index (equal-w eighted) Jan 28 - July 212 Dividend Grow th Dividend Yield Q1 Q2 Q3 Q4 Q5 Highest Quintile Low est Quintile Sources: Factset, Wilshire Atlas, BMO Global Asset Management Note: Each quintile is created monthly. Non-dividend paying stocks fall in the lowest quintile. Economy and Markets September 4, 212 2

4 Jan 5 Apr 5 Jul 5 Oct 5 Jan 6 Apr 6 Jul 6 Oct 6 Jan 7 Apr 7 Jul 7 Oct 7 Jan 8 Apr 8 Jul 8 Oct 8 Jan 9 Apr 9 Jul 9 Oct 9 Jan 1 Apr 1 Jul 1 Oct 1 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Index Level Dec Dec 1 Dec 2 Dec 3 Dec 4 Dec 5 Dec 6 Dec 7 Dec 8 Dec 9 Dec 1 Dec 11 Jul 1 Sep 1 Nov 1 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Index Level % Change YoY % Change YoY Highlighted Charts As other housing pricing indicators have shown recent increases, in June the widely watched S&P/Case- Shiller Index eked out its first yearly increase in 21 months. Review 25 2 S&P/Case-Shiller Home Price Index S&P/Case-Shiller Home Price Index % Change YoY Index Level Source: Bloomberg L.P., BMO Global Asset Management Source: Bloomberg L.P., BMO Global Asset Management 24 U.S. Home Prices OFHEO House Price Index S&P/Case-Shiller Home Price Index Level Median Existing Home Sale Price Source: Bloomberg L.P., BMO Global Asset Management Economy and Markets September 4, 212 3

5 Market Performance Summary As of August 31, 212 Review EQUITIES (% Returns) 1-Mo 3-Mo 6-Mo 1-Yr 3-Yrs 5-Yrs 1-Yrs 1Q 212 2Q 212 YTD U.S. Large Cap Equities S&P 5 Index Dow Jones Industrial Average Index Russell 1 Index Russell 1 Grow th Index Russell 1 Value Index U.S. Mid Cap Equities Russell Midcap Index Russell Midcap Grow th Index Russell Midcap Value Index U.S. Small-Mid Cap Equities (SMID) Russell 25 Index U.S. Small Cap Equities Russell 2 Index Russell 2 Grow th Index Russell 2 Value Index International Equities MSCI ACWI ex USA Index (Devlp. & EM) MSCI EAFE Index (Developed Markets) MSCI European Monetary Union Index (in ) MSCI AC Asia Pacific Index MSCI Emerging Markets Index Technology and Grow th Stocks NASDAQ Composite Index ALTERNATIVES (% Returns) 1-Mo 3-Mo 6-Mo 1-Yr 3-Yrs 5-Yrs 1-Yrs 1Q 212 2Q 212 YTD DJ UBS Commodity Index MSCI ACWI Commodity Producers Index Wilshire U.S. REIT Index S&P Global REIT Index S&P Global Infrastructure Index Highlighted items represent either the best- or worst-performing equity sector for the period. Total returns for periods of one year or more are annualized. MSCI indices performance is net of foreign taxes on dividends. Economy and Markets September 4, 212 4

6 Market Performance Summary As of August 31, 212 Review U.S. FIXED INCOME (% Returns) 1-Mo 3-Mo 6-Mo 1-Yr 3-Yrs 5-Yrs 1-Yrs 1Q 212 2Q 212 YTD Barclays U.S. Aggregate Index Barclays U.S. Interm. Gov/Crd Index Barclays U.S. Corporate Index Barclays U.S. Treasury Index Barclays Securitized Index Barclays High Yield Index Merrill Lynch High Yield BB/B Constr. Index Barclays 1-1 yr Municipals Index Barclays Global Aggregate Bond Index Barclays Global Credit Index BOND YIELDS Aug 212 Jul 212 Jun 212 Mar 212 Dec 211 Aug 211 Fed Funds Rate (Effective Rate) month Treasury Bill year Treasury Note year Treasury Note year Treasury Note year Treasury Bond Barclays U.S. Aggregate Index Barclays Corporate Index Barclays High Yield Index Barclays Emerging Markets Index Barclays Emerging Markets Corporate Index INFLATION Aug 212 Jul 212 Jun 212 Mar 212 Dec 211 Aug 211 Headline CPI YoY NA Core CPI YoY NA Core PCE YoY NA OTHER MARKETS Aug 212 Jul 212 Jun 212 Mar 212 Dec 211 Aug 211 US$ / Euro WTI Crude Oil Price ($/barrel) Gold ($/troy oz) 1,692 1,614 1,597 1,668 1,564 1,826 Total returns for periods of one year or more are annualized. Sources: Barclays Capital, Bloomberg L.P., BMO Global Asset Management Economy and Markets September 4, 212 5

7 Dec 1 Dec 2 Dec 3 Dec 4 Dec 5 Dec 6 Dec 7 Dec 8 Dec 9 Dec 1 Dec 11 QoQ growth (%) GDP Level ($ bln) U.S. Economic Growth The U.S. economy grew modestly in the second quarter, with real GDP inching upwards by 1.7%. Despite a large contribution to GDP in the last quarter, net exports recorded a small drag on the economic growth on a year-over-year basis. Housing, however, added 1.9% to GDP over the last year. Economy Components of Nominal GDP Nominal GDP Annualized Percentage Grow th By Components As of 6/3/212 Housing 2.4% Net Exports Investment (ex. Housing) 11.% Housing Investment (ex. Housing) YoY 6/3/212 Consumption QoQ 6/3/212 Government Spending Consumption 7.4% U.S. GDP Grow th $625 bln of output lost 14, 13, , Government Spending 19.9% Recession Real GDP QoQ Real GDP Level $864 bln of output gained 12,5 12, 11,5 Net Exports -3.7% , Economy and Markets September 4, 212 6

8 Dec 6 Jun 7 Dec 7 Jun 8 Dec 8 Jun 9 Dec 9 Jun 1 Dec 1 Jun 11 Dec 11 Jun 12 Initial Claims (4 week avg, in thousands) Continuing Claims (thousands) Dec 6 Jun 7 Dec 7 Jun 8 Dec 8 Jun 9 Dec 9 Jun 1 Dec 1 Jun 11 Dec 11 Jun 12 Monthly (thousand jobs) Cumulative (mill jobs) U.S. Job Gains/Losses The economy added 163, jobs in July, above expectations, sending a wave of optimism across the financial markets. Cumulative job losses since the onset of the 28 recession stand at 4.6 million. Economy , Monthly Cumulative Job Gain/Losses Yr Payroll Change 1-Yr Payroll Change Payrolls Change by Industry As of 7/31/212-3% 1% 16% 6% 11% 2% 2% 2% % % % 3% Total Non-Farm Payrolls Mining Education and Health Services Leisure and Hospitality Utilities Professional and Business Services -1% % Govt Payrolls Jobless Claims Continuing Claims Initial Jobless Claims % -14% -2% -4% -5% -6% -7% -1% 1% 2% 1% 2% 1% 2% Other Services Transportation and Warehousing Retail Wholesale Finance, Insurance, and Real Estate Information Manufacturing -28% % Construction Economy and Markets September 4, 212 7

9 YoY GDP Growth (%) YoY GDP Growth (%) World Economic Growth and Inflation Several European economies have slipped into recession. Economic growth slowed in Brazil and India in the first quarter of 212. World inflation has been declining slightly since the end of 3Q 211. Economy Real GDP Grow th for Eurozone and PIIGS Countries Portugal Italy Ireland Greece Spain Eurozone Germany Real GDP Grow th for BRIC Countries Brazil Russia India China Developed Countries CPI (YoY %) World Europe G1 Countries U.S. Japan Emerging Markets CPI (YoY %) World BRIC U.S. China Economy and Markets September 4, 212 8

10 Small Index Level Mid Large Small Mid Index Level Large Investment Style Performance All equity styles and market caps posted positive returns YTD. Large cap stocks have outperformed the small cap stocks YTD, as investors de-risked their portfolios in light of renewed concerns regarding the Eurozone debt crisis. Stocks 8 75 Large Cap Stocks Total Returns (%) YTD 8/31/212 Value Blend Grow th 7 211:.8% TR YTD 212 : 13.4% TR Russell 1 Index 55 Dec 1 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun Small Cap Stocks Value Blend Grow th :.7% TR YTD 212 : 1.6% TR 7 65 Russell 2 Index 6 Dec 1 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun Total returns are based on Russell-style indices performance and include dividends. Graphs depict price levels only. Sources: Bloomberg L.P., BMO Global Asset Management. Economy and Markets September 4, 212 9

11 Small Cap PE / Large Cap PE Small Mid Large Small Mid Value PE / Growth PE Large Investment Style Valuations Current multiples of U.S. small cap companies are near their historical norms, but appear elevated relative to large cap companies P/Es. Growth stocks appear cheap across the market cap spectrum. Stocks 1.1x Value vs. Grow th Price to NTM Earnings P/E vs. Long Term Average* As of 8/31/212 1.x.9x.8x.7x.6x.5x.4x Value / Grow th Avg. since Jun '88 Russell 1 Value PE / Russell 1 Grow th PE Grow th Cheaper Value Cheaper C urrent P /E (A v g. P /E) Value Blend Grow th 11.4 (13.5) 12.5 (13.6) 12.8 (16.) 13.9 (15.5) 14.7 (19.9) 16. (19.6).3x Jun 88 Jun 9 Jun 92 Jun 94 Jun 96 Jun 98 Jun Jun 2 Jun 4 Jun 6 Jun 8 Jun 1 Jun (13.6) 14.1 (15.5) 15.5 (18.2) Sources: FactSet, BMO Global Asset Management 2.5x Small vs. Large Price to NTM Earnings C urrent P E as % o f A v g P E Value Blend Grow th 2.x 84.2% 8.1% 74.% 1.5x Large Cap Cheaper 1.x 91.7% 89.9% 81.7%.5x Small / Large Avg. since Jun '88 Small Cap Cheaper Russell 2 PE / Russell 1 PE.x Jun 88 Jun 9 Jun 92 Jun 94 Jun 96 Jun 98 Jun Jun 2 Jun 4 Jun 6 Jun 8 Jun 1 Jun 12 Sources: FactSet, BMO Global Asset Management 95.8% 91.2% 85.5% *Data begins in June Data based on Russellstyle indices. Earnings are estimated earnings for the next 12 months (NTM). Sources: Factset, BMO Global Asset Management. Economy and Markets September 4, 212 1

12 SMALL CAP EQUITIES LARGE CAP EQUITIES Sector Performance The Technology sector was the top performer in the large cap category and the Health Care sector was the leader in the small cap category through the end of August 212. The energy sector was the laggard in 212 through the end of August 212. Stocks As of 8/31/212 Russell Index Materials and Processing Utilities Consumer Staples Energy Producer Durables Health Care Consumer Discretionary Financials Technology YTD % 9.1% 9.9% 9.8% 3.3% 9.5% 14.8% 18.8% 17.3% 19.1% MTD 2.4% 3.1% -3.2% -.5% 2.2% 1.6% 1.5% 4.6% 2.8% 5.4% 211.8% -1.8% 3.5% 2.8% -1.2%.4% 2.9%.9% 2.% -1.2% YTD % 11.7% 4.3% 9.% -8.% 4.7% 2.7% 15.9% 15.1% 6.% MTD 3.3% 7.1% -.3% 2.3% 2.7% 2.3% 2.5% 4.9% 2.5% 4.7% 211.7% -1.4% 1.8% 2.2% -3.7%.%.7%.9% 3.2% -.5% Russell 1 Index Composition Materials and Processing Russell 2 Index Composition 17.3% 4.4% 6.2% 8.7% Utilities Consumer Staples Energy 14.6% 7.% 4.% 3.8% 6.4% 16.8% 1.2% Producer Durables Health Care 22.6% 13.2% 1.7% Consumer Discretionary 14.6% 11.% Financials Technology 15.2% 13.1%. Sector break-down based on Russell categories. Economy and Markets September 4,

13 Bonds Excess Returns vs. Treasuries With Similar Duration (bps) Bonds Total Returns (%) U.S. Bond Market Performance All bond sectors posted positive returns in 212. Despite renewed Eurozone fears, credit sectors posted strong returns and High Yield leads with 1.6% YTD. Bonds Treasuries U.S. Agg. Agencies ABS CMBS MBS Corporates Non-Corp HY Mo 3-Mo YTD (8/31/212) 1, NA Treasuries U.S. Agg. Agencies ABS CMBS MBS Corporates Non-Corp HY Sources: Barclays Capital, BMO Global Asset Management Economy and Markets September 4,

14 3 mo 6 mo 2 yr 5 yr 1 yr 2 yr 3 yr Yield (%) Dec 5 Jun 6 Dec 6 Jun 7 Dec 7 Jun 8 Dec 8 Jun 9 Dec 9 Jun 1 Dec 1 Jun 11 Dec 11 Jun 12 Jan 1 Mar 1 May 1 Jul 1 Sep 1 Nov 1 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Investment Grade OAS (bps) High Yield OAS (bps) U.S. Bonds In 212, yields have decreased modestly across the yield curve, reaching historical lows. Municipals bonds offer attractive yields relative to Treasury securities and have generally posted total returns comparable to their taxable counterparts through the end of August. Bonds 6. (%) 4.5 U.S. Treasury Yields Corporate Bonds OAS Level Mo T-Bill 2-Yr Tsy Note 1-Yr Tsy Note Corporates Financials HY Sources: Barclays Capital, BMO Global Asset Management 1. (%) Total Returns of the Taxable and Non-Taxable Bonds YTD (8/31/212) U.S. Aggregate Bond Index (Taxable) Municipals Index (Non-Taxable) AAA Municipals and Treasury Yield Curves Municipals Curve on 8/31/212 Treasury Curve on 8/31/212. Aaa Aa A Baa Sources: Barclays Capital, BMO Global Asset Management. Economy and Markets September 4,

15 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec Dec 1 Dec 2 Dec 3 Dec 4 Dec 5 Dec 6 Dec 7 Dec 8 Dec 9 Dec 1 Dec 11 Commodities Index Level Stock Index Level Commodities Commodities have seen increased correlation to equity prices since the onset of the last credit crisis, but a short-lived decoupling can be observed at the beginning of 212. Alternative Assets As of 8/31/212 DJ UBS Agriculture Index DJ UBS Livestock Index DJ UBS Grains Index DJ UBS Energy Index DJ UBS Precious Metals Index DJ UBS Industrial Metals Index DJ UBS Commodity Index S&P 5 Index MTD YTD Commodities and Stocks 2, ,5 1, 5 DJ UBS Commodity Index S&P 5 Index 5 Economy and Markets September 4,

16 Dec 99 Dec Dec 1 Dec 2 Dec 3 Dec 4 Dec 5 Dec 6 Dec 7 Dec 8 Dec 9 Dec 1 Dec 11 Dec-99 Dec- Dec-1 Dec-2 Dec-3 Dec-4 Dec-5 Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 REIT Index Leve Stock Index Level Infrastructure Index Level Stock Index Level Other Alternative Assets REITs have outperformed the large cap equities year to date. Alternative Assets 3 REITS and Stocks 2, 3,5 Global Infrastructure and Stocks 2, Wilshire U.S. REIT Index S&P 5 Index 1,5 1, 5 3, 2,5 2, 1,5 1, 5 S&P Global Infrastructure Index S&P 5 Index 1,5 1, 5 Alternatives Total Return (%) 1-Yr (8/31/12) Yr (8/31/12) YTD (8/31/12) Wilshire U.S. REIT Index S&P Global REIT Index S&P Global Infrastructure Index S&P 5 Index Economy and Markets September 4,

17 Investment Strategy Group Dan Sido Sandy Lincoln Bob Decker, CFA Irina Pacheco, CFA Chief Investment Strategist Chief Market Strategist Director, Quantitative Strategies Vice President, Quantitative Strategies Economy and Markets September 4,

18 Index Definitions Equity Indices S&P 5 Index S&P 5 Index is an unmanaged index of large-cap common stocks. Dow Jones Industrial Average The Dow Jones Industrial Average is a price-weighted average of 3 significant stocks traded on the New York Stock Exchange and the Nasdaq. Russell 1 Index Russell 1 Index consists of approximately 1, of the largest companies in the U.S. equity markets. Russell 1 Growth Index Russell 1 Growth Index measures the performance of those Russell 1 Companies with higher price-to-book ratios and higher forecasted growth values. Russell 1 Value Index Russell 1 Value Index measures the performance of those Russell 1 Companies with lower price-to-book ratios and lower forecasted growth values. Russell Midcap Index Russell Midcap Index measures the performance of the smallest 8 U.S. companies in the Russell 1 Index. Russell Midcap Growth Index Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. Russell Midcap Value Index Russell Midcap Value Index measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values. Russell 25 Index The Russell 25 TM Index measures the performance of the small to mid-cap segment of the U.S. equity universe. It is a subset of the Russell 3 Index. Russell 2 Index Russell 2 Index is an unmanaged index that measures the performance of the smallest 2 U.S. companies in the Russell 3 Index. Russell 2 Growth Index Russell 2 Growth Index measures the performance of those Russell 2 Companies with higher price-to-book ratios and higher forecasted growth values. Investments cannot be made in an index. Russell 2 Value Index Russell 2 Value Index measures the performance of those Russell 2 Companies with lower price-to-book ratios and lower forecasted growth values. MSCI ACWI ex USA Index The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. MSCI EAFE Index (Developed Markets) The MSCI EAFE Index Europe, Australasia, and Far East Index (EAFE) is a standard unmanaged foreign securities index representing major non-u.s. stock markets, as monitored by Morgan Stanley Capital International. MSCI European Monetary Union Index The MSCI EMU (European Economic and Monetary Union) Index is a free floatadjusted market capitalization weighted index that is designed to measure the equity market performance of countries within EMU. MSCI AC Asia Pacific Index The MSCI AC Asia Pacific Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia and Pacific region. MSCI Emerging Markets Index The MSCI Emerging Markets Index is a market capitalization weighted index comprised of over 8 companies representative of the market structure of the emerging countries in Europe, Latin America, Africa, Middle East and Asia. Prior to January 1, 22, the returns of the MSCI Emerging Markets Index were presented before application of withholding taxes. NASDAQ Composite Index The NASDAQ Composite Index is a market-cap weighted index of the more than 3, common equities listed on the Nasdaq stock exchange. STOXX Europe 6 Index The STOXX Europe Index represents 6 large, mid, and small capitalization companies across 18 countries of the European Region. Economy and Markets September 4,

19 Index Definitions Fixed Income Indices Barclays U.S. Aggregate Index Barclays Capital U.S. Aggregate Bond Index is an unmanaged index that covers the U.S. investment-grade fixed-rate bond market, including government and credit securities, agency mortgage pass-through securities, asset-backed securities and commercial mortgage-based securities. Barclays U.S. Interm. Gov/Crd Index Barclays Capital Intermediate U.S. Government/Credit Index (Barclays Capital Int Gov t/credit) is an unmanaged index comprised of government and corporate bonds rated BBB or higher with maturities between 1-1 years. Barclays U.S. Corporate Index The Barclays Capital U.S. Corporate Bond Index is designed to measure the performance of the U.S. corporate bond market. Barclays U.S. Treasury Index The Barclays Capital U.S. Treasury Index is an unmanaged index that includes a broad range of U.S. Treasury obligations and is considered representative of U.S. Treasury bond performance overall. Barclays Securitized Index The Barclays Capital U.S. Securitized Bond Index is an unmanaged index of assetbacked securities, collateralized mortgage-backed securities (ERISA-eligible), and fixed-rate mortgage-backed securities. Barclays High Yield Index The Barclays Capital U.S. Corporate High-Yield Bond Index is an unmanaged index that covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. BofA Merrill Lynch High Yield BB/B Constr. Index The BofA Merrill Lynch BB-B Global High Yield Index is a subset of The BofA Merrill Lynch Global High Yield Index including all securities rated BB1 through B3, inclusive. Barclays 1-1 yr Municipals Index The Barclays Capital 1-1 Year Municipal Blend Index is a market value-weighted index which covers the short and intermediate components of the Barclays Capital Municipal Bond Index an unmanaged, market value-weighted index which covers the U.S. investment-grade tax-exempt bond market. Barclays Global Aggregate Bond Index The Barclays Capital Global Aggregate Bond Index is an index of global government, government-related agencies, corporate and securitized fixed-income investments. Barclays Global Credit Index The Barclays Global Credit Index is the credit component of the Barclays Global Aggregate Index, an index of global government, government-related agencies, corporate and securitized fixed-income investments. Investments cannot be made in an index. Economy and Markets September 4,

20 Index Definitions Alternative Investments Indices DJ UBS Commodity Index The Dow Jones-UBS Commodity Index is composed of commodities traded on U.S. exchanges. MSCI ACWI Commodity Producers Index The MSCI ACWI Commodity Producers Index is a component of the broader MSCI Commodity Producers Indices and covers large, mid and small cap companies across 45 Developed and Emerging Markets. Wilshire US REIT Index The Wilshire US REIT Index measures U.S. publicly traded Real Estate Investment Trusts. It is a subset of the Wilshire US Real Estate Securities Index. S&P Global REIT Index The S&P Global REIT Index measures the performance of real estate investment trusts in both developed and emerging markets. S&P Global Infrastructure Index The S&P Global Infrastructure Index provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe including utilities, transportation and energy. Other Indices S&P/Case-Shiller 2-City Index The S&P/Case-Shiller 2-City Index is a composite index of the home price index for 2 major metropolitan statistical areas in the U.S. VIX Index The Chicago Board Options Exchange Market Volatility Index is a measure of implied volatility of S&P 5 index options, often referred to as the fear index. CPI Index The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Economic Cycle Research Institute (ECRI) Weekly Leading Index ECRI Index is released each Friday by the Economic Cycle Research Institute, and identifies turning points in the economic cycle that are indicated by pronounced changes in the index. The index contains money supply data, stock prices, an industrial markets price index developed by the organization, mortgage applications, bond quality spread, bond yields, and initial jobless claims. An advantage of the index is that it is very timely. ECRI is a New York-based independent forecasting group. Conference Board Leading Economic Index (LEI) for the U.S. The leading economic index is composite average of several individual leading indicators. It is constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component primarily because it smoothes out some of the volatility of individual components. Chicago Fed National Activity (CFNAI) Index The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure and it is a weighted average of 85 existing monthly indicators. A zero value indicates that the economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth. When the 3-month moving average moves below -.7 following a period of economic expansion, there is an increased likelihood that a recession has begun. When the 3-month moving average moves above +.7 more than two years into an economic expansion, there is an increased likelihood that a period of sustained increasing inflation has begun (source: Citigroup Economic Surprise Index The Citigroup Economic Surprise Index is a weighted historical standard deviations of data surprises (actual releases vs. Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have, on balance, been beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The index also employs a time decay function to replicate the limited memory of markets. Investments cannot be made in an index. Economy and Markets September 4,

21 Disclosures For further information, please visit our websites at BMO Funds BMO Asset Management Corp. This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested. Investments cannot be made in an index. Past performance is not necessarily a guide to future performance. BMO Global Asset Management comprises BMO Asset Management U.S., BMO Asset Management (Canada), and BMO's specialized investment boutiques: Monegy, Inc., Pyrford International Ltd, Lloyd George Management, and Taplin, Canida & Habacht, LLC. BMO Asset Management U.S. consists of BMO Asset Management Corp., BMO Asset Management Canada includes BMO Asset Management Inc. and Lloyd George Management consists of the subsidiaries of LGM (Bermuda) Limited. BMO Global Asset Management is part of the BMO Financial Group, a service mark of Bank of Montreal (BMO). M&I Investment Management Corp. merged into BMO Asset Management Corp. (formerly Harris Investment Management, Inc.) on June 1, 212. Indexes have no identifiable objectives, are not managed funds and cannot be purchased. They do not provide an indicator of how individual investments performed in the past or how they will perform in the future. Performance of indexes does not reflect the deduction of any fees and charges, and past performance of indexes does not guarantee future performance of any investment. Certain companies within BMO Global Asset Management offers a number of products and services designed specifically for various categories of investors in a number of different countries and regions. These products or services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Harris Financial Advisors, Inc. is a member FINRA/SIPC, SEC-registered investment adviser. BMO Harris Financial Advisors, Inc. is an affiliate of the companies within BMO Global Asset Management. 212 BMO Financial Corp. Investment products are: Not FDIC Insured No Bank Guarantee May Lose Value Economy and Markets September 4, 212 2