POINT MARKET ECONOMIC & MARKET COMMENTARY FROM TRUST POINT. In This Issue: Economic And Market Update Equity Market Update Fixed Income Market Update

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1 In This Issue: Economic And Market Update Equity Market Update Fixed Income Market Update MARKET POINT AN ECONOMIC & MARKET COMMENTARY FROM TRUST POINT ISSUE NO.13 TRUST POINT LA CROSSE 230 Front Street North, PO Box 489 La Crosse, WI PHONE: TRUST POINT MINNEAPOLIS 43 Main Street, S.E. Suite 214 Minneapolis, MN PHONE: Visit us at trustpointinc.com

2 An Economic and Market Update from Trust Point In our last publication, we described 2015 as the year of no return and high volatility. The first quarter of 2016 was no different. Equity indices fluctuated greatly but, by the end of March, most ended very close to where they started. Bonds performed better but were not insulated from large market swings throughout the quarter. From a macroeconomic standpoint, the direction of economic growth still lacks clarity, especially outside the United States. Uncertainties Can Be Worse Than Bad News Equity markets are inherently volatile and one-sided when everything looks and certainly more volatile than the economy. sounds bad. That was the case during the In fact, an old joke on Wall Street says first six weeks of the year. Every word from that the stock market predicted 10 of the Fed was bad, low oil prices were bad the last five recessions. More than ever for the market and the economy, China today, investors date markets instead of could do nothing right, the migrant crisis marrying them: Daters make no longterm commitments and bail out at the first in the U.S., voter enthusiasm for populist was going to destroy Europe and, here sign of trouble. Bombarded by forecasts, presidential candidates created anxiety. breaking news, ideas and tips, investors For the last six weeks of the quarter, make impulsive decisions and frequent however, we got a totally different story; portfolio changes, taking guidance from positive actions from central banks (Chart whichever sources are most convenient, 1) became the only thing that mattered, and focusing on the narratives rather than and markets essentially recovered all of the the hard data. Being a long-term investor ground they lost during the weeks prior. in a short-term world is tough, but we at Trust Point are dedicated to the principle. We understand that emotions get very Source: Bloomberg As of Actual 3 Mths Ago 1 Year Ago Dollar Index Level Mar US Economic Activity ISM Manufacturing (>50=Expansion) Mar ISM Non-Manufacturing (>50=Expansion) Mar Non-Farm Payrolls Mar 215k 271k 84k Unemployment Rate Mar 5.0% 5.0% 5.5% CPI Ex-Food & Energy (yoy) Feb 2.3% 2.0% 1.7% Global Economic Activity JP Morgan Global Manufacturing Index (>50=Expansion) Mar JP Morgan Global Non-Manufacturing Index (>50=Expansion) Mar Chart 1 : Asset Purchases From Major Central Banks Total Assets of Major Central Banks (all in trillions of US dollars) Total Assets* (16.3) *Includes US, ECB, Bank of Japan and PBOC Source : Yardeni, Haver Analytics

3 Global Economic Outlook Still Uncertain Global economic activity has been slowing in the second half of last year. Our view for several quarters now. While the is that global recession risks are rising, manufacturing sector was impacted first, but U.S. recession risks remain low. The the services sector has also showed signs distinction is important. Historically, of weakness lately. At Trust Point, we closely monitor seven Global Recession cyclical bear markets not associated with U.S. recessions have tended to be shorter indicators. At the moment, two have and shallower than those that have confirmed a significant downturn, two are neutral, and three are still giving us the green light (Chart 2). Those are mixed signals, but they represent a worrisome deterioration from readings taken just six and nine months ago. As a result, we have continued to reduce exposure to riskier coincided with U.S. recessions. Ultimately, economic growth (and corporate profits) will hold the key to the medium-term outlook for equities and credit strategies within fixed-income. If the negative trend continues, the recent rally in riskier assets could prove short-lived. strategies, a gradual process we started Chart 2 : Global Recession Indicators INDICATORS KEY DOWNTURN LEVEL Source : Ned Davis Research, JP Morgan, Markit, Ifo Institute, OECD, MEI, CPB, Haver Analytics CURRENT LEVEL NDR Global Downturn Probability Model > 70% 88.9% Breadth of OECD Composite Leading Indicators < 50% 47.2% Global Services PMI < 50% 51.4% Global Manufacturing PMI < 50% 50.5% Breadth of Manufacturing PMI < 50% 68.6% World Trade Volume (Year-to-Year Change) < 1.5% 1.1% lfo World Economic Climate Index < 80% 87.8% Oil Prices Still In Limbo The direction of oil prices has had a significant impact on the recent direction of markets. Currently, global production is running at least 1.5 million barrels a day above demand; that is adding daily to the 300 million barrels of excess inventories ( excess meaning above the five-year average). U.S. inventories alone stand at nearly 200 million barrels above the average and are at the highest level in more than 80 years. These are big numbers. Substantial inventories will have to be worked off before oil prices can stabilize (Chart 3). In recent weeks, oil prices have moved up in anticipation of a meeting scheduled for April 17 between OPEC and non-opec producers in an attempt to formalize a freeze in production. The problem is that even if a freeze is implemented, it will not lead to a quick rebalance between daily supply and demand. Why? Because Saudi Arabia and Russia are still pumping too much oil. In addition, Iran, which is producing 3.2 million barrels a day and aiming for 4 million barrels a day following the lifting of sanctions has continued to say publicly that, for Tehran, the idea of a production freeze is a joke. Eventually, the cure for low oil prices will be low oil prices, but the timing is uncertain. What is certain, however, is that oil prices are no longer being dictated by the actions of OPEC but by the free market. What s more, progress in shale extraction will continue to put downward pressure on costs (and prices). Chart 3 : Oil Prices Brent Oil Price ($/bbl) Source : MRB Partners

4 An Equity Market Update from Trust Point Equity markets experienced their first significant correction since 2011 to start the year. The correction was spurred by global growth fears, with investors overly focused on the price of oil. Some of these fears proved transitory in March, as expectations of continued economic weakness failed to come to fruition. Going forward, stock prices face a more difficult environment than in the recent past, which will result in more modest market returns. A Market Correction, Not A Recession The market did not welcome 2016 with open arms. We saw the first significant correction since 2011 as global equities tumbled down as much as 11% to begin the year, dropping as much as 20% from their recent highs in mid The correction generated a lot of fear from investors and the media, but we feel that fundamentals in the U.S. remain intact and the probability of a U.S. recession is still low. Recently, the energy sector heaved a sigh of relief as the price of oil rebounded from its low of close to $25 a barrel to around $40 a barrel today. We are optimistic that U.S. consumers will continue to benefit from lower gasoline prices and will begin to reap the benefits of higher wages from full employment. As of the most recent report, U.S. wages are up 2.3% over the past year. The combination of higher wages, lower unemployment, and savings from lower gas prices should continue to support consumer spending, which makes up about 70% of the U.S. economy. As seen in Chart 4, meaningful corrections in equity markets typically correspond with U.S. recessions, but we do not believe that one is looming in this case. Major US Equity Index Level Quarter-End 3 Mths Ago 1 Year Ago 3 Years Ago 5 Years Ago S&P 500 2,060 2,044 2,068 1,569 1,326 Dow Jones Industrial Average 17,685 17,425 17,776 14,579 12,320 Nasdaq ,007 4,901 3,268 2,781 Equity Returns (%) 3 Month YTD 1 Year 3 Year (Ann) 5 Year (Ann) US Large Cap Growth 0.7% 0.7% 2.5% 13.6% 12.4% US Large Cap Value 1.6% 1.6% -1.5% 9.4% 10.2% US Mid Cap Growth 0.6% 0.6% -4.7% 11.0% 10.0% US Mid Cap Value 3.9% 3.9% -3.4% 9.9% 10.5% US Small Cap Growth -4.7% -4.7% -11.8% 7.9% 7.7% US Small Cap Value 1.7% 1.7% -7.7% 5.7% 6.7% International Developed -3.0% -3.0% -8.3% 2.2% 2.3% (US Dollar) International Small/Mid Cap Developed -0.6% -0.6% 3.2% 7.3% 5.6% (US Dollar) Emerging Market (US Dollar) 5.7% 5.7% -12.0% -4.5% -4.1% Source: Bloomberg, Morningstar Chart 4: Bear Markets Typically Correspond With Recessions S&P 500 Composite Declines from All-Time Highs 0% -20% -40% -60% -80% 20% Market Decline Indicates a recession -100% Source : J.P. Morgan Asset Management, Standard & Poor s

5 Business Conditions Remain Unfavorable Although a U.S. recession and a more to come by. In addition, for companies severe market downturn appear shipping goods overseas, the unlikely in the near term, prospects for appreciation of the U.S. dollar relative future market gains remain modest. to other currencies has negatively One of the main reasons for our more impacted revenues and profits. In timid outlook is the fact that business conditions are on the decline. In recent years, companies have benefited from cheap labor and low interest rates on debt to increase earnings and profits without much need to invest in projects that grow their revenues. Now that the market is requiring higher interest rates on corporate debt and wage pressure is increasing due to aggregate, these factors have pushed down profit margins and resulted in the first consecutive quarters of earnings declines for companies in the S&P 500 index since the financial crisis of 2008 (Chart 5). With the U.S. stock market P/E above its historical average, the market will likely need to see growth in earnings in order to support higher stock prices in the future. low unemployment, profits are harder Chart 5 : S&P 500 Earnings Growth % Source : Standard & Poor s What Factors Are Driving Stock Markets? What drives stock prices? A reasonable answer would be: companies earnings major central banks provided fuel to the market, as investors started to and prospects for future growth. anticipate that interest rates would Unfortunately, the equity markets are much more dynamic than that, and what drives them one month may be completely different the next. As a case in point, look at Chart 6, where you see stocks moving in lockstep with the price of oil throughout the quarter. Then, in March, central banks became remain lower for longer. These shortterm factors typically have little to do with longer-term fundamentals, but they can generate quite a bit of market volatility. It s important to monitor each market-moving force while remaining focused on longer-term goals. Most investors have a longer time frame the drivers: The European Central and can withstand these short-term Bank announced more aggressive market swings while still achieving monetary-stimulus measures, while their eventual goals. We at Trust Point the U.S. Federal Reserve dampened have been encouraging clients to the outlook for future U.S. rate stay the course and allow this recent hikes. Actions and comments from market correction to play itself out. Chart 6 : Stock Markets Were Overly Focused on the Price of Oil During Q1 Source : Bloomberg S&P 500 Index (R2) Crude Oil (R1) Jan 8 Jan 15 Jan 22 Jan 29 Feb 8 Feb 16 Feb 22 Feb 29 Mar 8 Mar 15 Mar 23 Mar

6 A Fixed Income Market Update from Trust Point Treasury yields tumbled (pushing prices higher) as government bonds continued to be top performers, while corporate bond yields rose sharply (pushing prices lower) before rebounding in March. This created some opportunities even while producing volatility. Many factors contributed to this volatility, but here are a few that caught our attention this past quarter. Interest Rates Volatility Increased In anticipation of the Federal Reserve s first interest rate hike last December, 10-year treasury yields rose to 2.3%. Investors prepared for the Federal Open Market Committee (FOMC) to raise rates four times in Once the calendar turned to January, however, global factors such as Chinese growth concerns and plummeting oil prices quickly caused interest rates to reverse course. Investors flocked to safer assets, and 10-year treasury yields fell from 2.3% to 1.65% by the middle of February the largest two-month treasury rally since In light of renewed skepticism over global growth, investors concluded that the Fed s forecast of four hikes would be detrimental to markets by being too restrictive. By February, Fed-funds futures contracts priced in low probabilities of even a single rate hike (instead of four) by the end of the year (blue line, Chart 7). In March, the Fed stated that global developments posed a risk to growth and cut its projected pace of 2016 rate increases to two. The 10-year treasury remained volatile throughout the quarter and ended March at 1.77%. The low yield levels leave government bond investors continuing to generate very little income, with poor prospects for capital gains going forward. US Yields (%) Quarter-End 3 Mths Ago 1 Year Ago 3 Years Ago 5 Years Ago 3 Month T-Bill 0.2% 0.2% 0.0% 0.1% 0.1% 2 Yr US Treasury 0.7% 1.1% 0.6% 0.2% 0.8% 10 Yr US Treasury 1.8% 2.3% 1.9% 1.9% 3.5% Fixed Income Returns (%) 3 Month YTD 1 Year 3 Year (Ann) 5 Year (Ann) US Intermediate Treasuries 4.1% 4.1% 3.6% 2.4% 4.8% US TIPS 4.5% 4.5% 1.5% -0.7% 3.0% US Mortgages 2.0% 2.0% 2.4% 2.7% 3.2% US Municipals 1.1% 1.1% 2.8% 2.2% 3.3% US Corporates 4.0% 4.0% 0.9% 3.0% 5.2% US Senior Bank Loans 1.5% 1.5% -1.3% 1.8% 3.2% US High Yield 3.2% 3.2% -4.0% 1.8% 4.7% US Convertibles -1.6% -1.6% -7.3% 6.7% 6.3% Global Bond (Hedged) 4.3% 4.3% 3.7% 5.3% 5.5% Global Bond (Unhedged) 5.9% 5.9% 4.6% 0.9% 1.8% Emerging Market Debt (US Dollar) 5.2% 5.2% 4.4% 2.4% 6.0% Source: Bloomberg, Morningstar Chart 7 : Target Federal Funds Rate Continues to Move Lower Dec-15 Median Fed Forcast Mar-16 Median Fed Forecast Mar-16 Market Forecast A Dec-15 Median Fed Forcast Mar-16 Median Fed Forcast Mar-16 Market Forcast Source : Bloomberg

7 Global Central Banks Become Even More Aggressive In Japan, bond investors have to pay the government to lend them money for a decade; 10-year Japanese government bonds are yielding negative.04%. In Germany, investors will earn.15% per year on a 10-year Government Bund investment. These ultra-low yield levels are not unique only to the safe havens of Japan and Germany. As of March 1, about a third of the debt issued by Eurozone governments had a negative yield (Chart 8). The European Central Bank (ECB), as well as the central banks of Denmark, Switzerland, Sweden, and Japan, has adopted a negative-interest-rate policy. Credit Spreads Widened The same global growth concerns that led to the rally in government bonds created a risk-off environment in other sectors of the bond market. U.S. investment-grade and high-yield bond prices fell as investor concerns over corporate profitability increased. With the price of oil falling to 2004 levels, the weakness in energy-company bonds was justified, but even profitable, high-quality corporations felt the pain as a few bad eggs spoiled the basket, so to speak. Spreads (the extra yield over treasuries that investors require to hold corporate bonds) increased dramatically in the high-yield sector to levels not seen since past periods of Most recently, in March, the ECB lowered the rate on the deposit facility by 10 basis points to -.40%, effectively charging banks to deposit money at the ECB. The premise behind these countries negative-interest-rate policies is that banks will be forced to lend money to consumers, thus stimulating spending, inflation, and growth. In addition, the ECB increased its asset purchases while expanding those purchases to include corporate bonds. Foreign central banks are driving global yields to levels that allow U.S. treasuries to remain attractive even after trading at such low yields. recession (Chart 9). This indicated that investors would hold the bonds only if they were paid a yield high enough to compensate for the risk of recession. This created some opportunities toward the middle of February, as investors realized the outlook was perhaps not as bad as the market was pricing in. In short, many bonds were being unfairly punished; providing a catalyst for riskier assets to rally through March. With increased market volatility and prospects for modest returns, we have been reducing risk on markets rallies while taking advantage of opportunities as they are presented. Chart 8 : Negative Rates Around the Globe YEARS TO MATURITY Switzerland Japan Germany Netherlands Finland Belgium France Austria Sweden Ireland Spain Italy UK US Source : Bloomberg, Piper Jaffray as of 3/1/2016 Chart 9 : High Yield Spreads Hit Recessionary Levels in January 2,000 Spread to Worst (basis points) 1,800 1,600 1,400 1,200 1, Indicates a U.S. Recession 826 bps 0 Jan 88 Jan 92 Jan 96 Jan 00 Jan 04 Jan 08 Jan 12 Jan 16 Source : Lord Abbett

8 MARKET POINT Market Point is a quarterly market commentary designed to provide you with an overview of economic conditions, as well as equity and fixed income market summaries for the quarter. This commentary is offered by the Investment management team. The individuals contributing to Market Point are Randy Van Rooyen, CFA, Yan Arsenault, CFA, CAIA, Brandon Hellenbrand, CFA, Steve Brudos and Ryan Bergan. Please feel free to contact any team member with questions. Copyright Trust Point Inc., La Crosse, WI, All Rights Reserved. Pictured: Left to right: Randy Van Rooyen, Yan Arsenault, Brandon Hellenbrand, Steve Brudos and Ryan Bergan The opinions expressed here reflect our judgment at this date and are subject to change. Trust Point uses its best efforts to compile its data from reliable sources, however, it does not warrant the accuracy, completeness or timeliness of any of the information provided. 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. 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. Past performance is no guarantee of future returns. 230 FRONT STREET NORTH I PO BOX 489 LA CROSSE, WI Standard U.S. Postage PAID Mailed from Zip Code Permit No. 125