Introduction: The Road Ahead is online! THE ROAD AHEAD Visit: plantemoran.com/roadahead

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1 Introduction: THE ROAD AHEAD 2019 As the end of the year rapidly approaches and we turn our attention to 2019, we re mindful of what the past year has brought and what the future may bring. In a number of ways, we look at the current situation and see many similarities to this time last year: The U.S. economy continues to grow at an above-trend pace. The Federal Reserve (the Fed) remains on its tightening course, raising short-term interest rates and managing a measured, gradual reduction in the size of its balance sheet. Uncertainty around trade persists, particularly relative to the United States and China. We see some key differences as well: Capital market volatility returned, providing a stark contrast to the historically low volatility of Equity valuations improved, as strong earnings growth easily outstripped flat to negative returns across global equities. Outside the United States, growth slowed across much of the developed and emerging world. The Road Ahead is online! Visit: plantemoran.com/roadahead For detailed insights from Plante Moran experts So, where does that leave investors today? In the pages that follow, we ll discuss the outlook for the economy, Fed policy, fixed-income conditions, and the global equity market environment. Welcome to The Road Ahead 2019.

2 The economy: GROWTH LIKELY TO EBB, BUT EXPANSION STILL POISED TO BECOME THE LONGEST IN U.S. HISTORY The economy accelerated in early 2018, boosted by the stimulative effects of individual income tax cuts. Growth likely peaked mid-year, but tariff-related distortions in inventories, imports, and exports numbers muddied GDP numbers for Q2 and Q3. Despite indications that the economy slowed in the latter half, the economy appears poised to grow by about 3% for Looking to 2019, growth is projected to moderate to about 2.6%, but that would still exceed economists estimates for the longer-term trend. Now in its 10th year, the expansion is poised to become the longest in U.S. history if growth persists into the summer. Given the general strength on a number of fronts, that appears likely. While a slowdown is apparent, most data on the economy is still positive, including: Purchasing manager indexes for both the services and manufacturing sectors remain solidly in expansionary territory. Employment conditions remain solid, with the unemployment rate down to 3.7%, job creation still surprisingly robust, and wage growth showing signs of picking up. A highly confident consumer sector is supported by low unemployment, job creation, and rising income. Despite edging higher in recent years, inflation is still around 2%, and inflation expectations remain well in check. Source: PMFA, Bloomberg 2018 and 2019 growth numbers are estimates per Bloomberg Clearly, there are risks, which include: The recent slowdown in the housing sector, as rising interest rates have started to bite, and affordability has diminished. Trade tensions and the direct and indirect impact of tariffs, which remain a wild card. The likelihood that job creation will moderate as employers find it increasingly difficult to fill openings, which will create an additional headwind to growth. The potential for inflation to heat up as a byproduct of tight job market conditions, rising labor costs, the disruptive effect of tariffs on trade, and rising input costs. Despite growing headwinds and a probable slowdown in growth, the typical imbalances that presage a recession aren t readily apparent today. There are

3 downside risks, but there is also a great deal of positive momentum in the economy. As such, recession risks appear quite low. The bottom line: The economy appears well positioned for the expansion to continue into Fed policy: HOW MUCH FURTHER WILL THE FED TIGHTEN? With three hikes already completed this year, the Federal Open Market Committee (FOMC) is widely expected to raise short-term rates by another quarter point in December to lift the funds rate to a range of %, its highest point since early While some might argue to the contrary, a strong case can be made that the Fed has done a solid job in gradually raising rates and reducing its balance sheet while remaining attentive to its dual mandate. At a jobless rate of 3.7%, the economy is at or below full employment, and inflation has edged back up to around 2%, in line with the Fed s target. The question, of course, is how much further and how quickly will the Fed go? According to central bank projections released in September, FOMC members hold a range of views about the near-term rate path from a low of to % to end The central bank s baseline forecast suggests another three hikes to take the funds rate to % to close out Source: PMFA, Bloomberg, Federal Reserve Economic Data (FRED) As of 12/11/18 Illustrating investor skepticism, the futures market is currently pricing in a 95% probability that the Fed will not raise rates as much as forecast, holding the benchmark rate at 3.0% or less. Those doubts largely stem from the recent slowdown in global growth, resurgent equity market volatility, persistent uncertainty around trade policy, and the apparent impact of prior rate hikes. The Fed has been slowly reducing its balance sheet for the past 15 months. That, coupled with gradual, measured rate increases, appears to be having the desired effect. How much more is necessary to normalize policy and execute a soft landing for the economy? That is the question. The Fed has to carefully thread the needle between acting too slowly (and risking falling behind the curve on inflation) or being too aggressive and snuffing out growth altogether. It will be a tight line for policymakers to walk.

4 Will policymakers stick to their forecast, or will the slowing global economy and tighter financial conditions cause them to slow their pace or pause outright? The futures market thinks that the near-term upside in policy rates is limited, and we wouldn t bet against that. The bottom line: The Fed s bias toward tightening remains intact, but the pace of rate hikes appears poised to slow. Fixed income: BALANCING RISKS, FINDING OPPORTUNITIES For many investors, bonds serve as an important source of income and portfolio diversifier, providing a ballast to their portfolio when equities decline. In October, the volatility that emerged in equity markets was caused (at least in part) by rising interest rates, creating a brief period of modestly negative returns in bonds even as stock prices were falling. That changed in recent days, as equity market volatility drove a brief flight to quality and highquality bonds proved beneficial. Today, there is little that looks cheap across the capital markets, and bonds are no exception. Consequently, investors may feel stuck between a rock and a hard place in their search for income. Investing in long-term bonds certainly can enhance a portfolio s yield, but also exposes the investor to greater interest-rate risk, which is particularly distasteful in a rising rate environment. Investing in credit-oriented sectors can also enhance yield, but exposure to credit risk when the economy is decelerating and conditions are volatile can create a bumpy ride, while potentially reducing the diversification benefit of bonds at a time when it would be most beneficial. Against that backdrop, high-quality municipal bonds remain an attractive option for many taxable investors. Generally, municipals are less sensitive than taxable bonds to interest-rate fluctuations. In addition, current taxadjusted yields remain attractive relative to high-quality taxable bonds, further enhancing their attractiveness in the current environment. Further, we believe the environment is conducive to active bond managers who are not beholden to closely mirroring a broad market benchmark. The flexibility to manage portfolio positioning and duration, to avoid those sectors and securities that don t present an attractive risk/return profile, to identify interesting opportunities, and make portfolio adjustments over the course of time are among the tools that managers can use to add value and navigate a challenging fixed-income environment. Source: PMFA, Bloomberg, FRED High-quality corporate bonds represented by the ICE BofAML US Corporate A Index, High-yield bonds represented by the ICE BofAML US High Yield BB Index As of 11/30/18

5 Investors must balance a variety of considerations in structuring their bond portfolio. For most investors, bonds represent the portfolio safety net. It may be tempting to reach for yield, but the old maxim holds true in this context: Don t risk a lot for a little. The bottom line: Investing with quality active managers and tilting portfolios toward municipals remain effective ways to navigate the current bond market environment. Global equities: FUNDAMENTALS AND VALUATIONS REMAIN SUPPORTIVE, BUT GREATER VOLATILITY LIKELY TO PERSIST In 2018, U.S. equity returns have been muted, and volatility has emerged from an extended period of dormancy. Although market conditions weren t that unusual from a historical perspective, they may have seemed challenging in the aftermath of the unusually calm markets of Despite a choppier equity market environment, underlying fundamentals remain relatively strong. Strong economic conditions and corporate tax cuts helped to boost corporate earnings growth by more than 20%. With returns weak, equity valuations improved, and stocks look much more favorably priced than they did at this point last year. While we still wouldn t characterize equity markets as cheap, the 15% decline in the price-toearnings (P/E) ratio for the Russell 3000 Index (measuring the broad U.S. equity market) and a nearly 30% decline in the P/E ratio of the small-cap index illustrate that some of the froth has come out of the market in the past 12 months. Looking ahead, we believe that fundamentals should remain largely supportive of equities, but volatility is also likely to remain elevated. First, there s no ignoring the aging of the expansion and cyclical equity bull market or the direction of interest rates and Fed policy. While most expect economic growth to continue through 2019, the equity bull market is well into its ninth year. As we ve seen in recent weeks, even an expected slowdown in growth can unnerve investors at times. Given these latecycle dynamics, investors should be prepared for periodic bouts of increased market volatility as the pace of growth moderates. Source: PMFA, Morningstar 2018 data through 11/30/2018 Against that backdrop, corporate earnings growth is also expected to moderate to a single-digit pace next year, as the tailwind provided the stimulative effects of corporate and individual tax reform and robust growth earlier in 2018 begins to fade.

6 The story has been somewhat different for international equities, which went from leaders in 2017 to laggards in A variety of economic, geopolitical, currency, and trade risks created a challenging environment across both developed and emerging markets. Growth ebbed in Japan and Europe over the course of Emerging markets continue to expand at a stronger pace than developed markets but have seemingly settled into a growth range of 4 5%, with the deceleration in China to an estimated 6.6% for 2018 playing a significant role. Despite these near-term headwinds, we believe that the long-term value in international equities remains attractive. As with U.S. equities, valuations in international markets have also declined sharply in the past year. The P/E ratio for the MSCI EAFE index decreased by more than 20% in the past year. Today, developed market equities trade at a sizable discount to both their long-term average and relative to the United States, while also paying an attractive dividend. We acknowledge the near-term sources of uncertainty but still believe that the outlook for international equities remains attractive for longterm investors. Boil it all down, and you have a tug-of-war in the equity markets between valuations, fundamentals, divergent monetary and fiscal policy, geopolitical risks, and lingering uncertainty around global trade. Those various forces, and the uncertainty around each, are likely to create periodic bouts of volatility for investors. Investors should use those opportunities to rebalance their portfolios, harvest tax losses, or engage in tax swaps to side step avoidable capital gain distributions when practical. Despite the risk, we believe that a continuation of the expansion in the United States in particular, and reasonable valuations should prove supportive of equities, which still appear poised to provide solid returns that should exceed those of cash and highquality bonds over a multiyear time frame. The bottom line: Economic fundamentals and better valuations support U.S. equity returns, but periodic bouts of volatility should be expected. Although near-term risks also exist for international equities, the longer-term opportunity remains compelling. Summary: PULLING IT ALL TOGETHER, WHERE DOES THIS LEAVE INVESTORS? So, pulling it all together, where does that leave us today? We believe the economy remains on a growth path, although it s likely to slow further in the coming year. The Fed will continue to raise rates, although questions remain about the pace and trajectory of short-term rates in the coming year and beyond. From an investing perspective, we believe there are opportunities,

7 but there are also a variety of risks. Fundamentals appear generally solid, and equity valuations look generally better than a year ago, although various sources of uncertainty could contribute to further market volatility. Against a backdrop of market uncertainty and recent volatility, it might be tempting to try to time the market. The allure of attempting to avoid losses and get back into the market in time to benefit from the upside may be tempting. Unfortunately, market timing doesn t work. If you were to invest in the S&P years ago and remain invested over the ensuing period, your annualized rate of return in the S&P 500 would have been about 7.2% through December 31, However, if you missed out on just the 10 best days over that 20-year span, that annualized return would have been cut in half. If you sat on the sidelines and missed only the best 30 days, your annualized return actually turned negative. A range of academic studies have illustrated over the course of time that market timing isn t an effective strategy. The result is that most investors experience portfolio returns that fail to keep pace with the broad market, overwhelmingly because of poor investment decisionmaking. Chart shows the ending portfolio value as of December 31, 2017 of $10,000 investment in the S&P 500 Index on January 1, 1998 Source: PMFA, Standard & Poor's So, what s the key to successful investing? Quite simply, we believe it starts with a plan a plan that is tailored to your tolerance for risk, your goals, your objectives, and your investment time horizon. We would acknowledge that there are risks, but we also believe there are still tremendous opportunities for patient, prudent investors who can remain invested for the long term as they travel down the road ahead. Disclosures Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. You should consult a representative from PMFA for investment advice regarding your own situation. The information provided in this update is based on information believed to be reliable at the time it was issued. Any analysis non-factual in nature constitutes only current opinions, which are subject to change.