Market Update Call Audio Transcript December 16, 2014

Market Update Call Audio Transcript December 16, 2014 Speakers: John De Clue, CFA Chief Investment Officer, The Private Client Reserve of U.S. Bank Robert L. Haworth, CFA Senior Investment Strategist, U.S. Bank Wealth Management Thomas M. Hainlin, CFA National Investment Strategist, U.S. Bank Wealth Management Jennifer L. Vail Head of Fixed Income Research, U.S. Bank Wealth Management Terry D. Sandven Chief Equity Strategist, 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 December 16, 2014. The discussion featured our 2015 investment outlook for the global economy and capital markets. Hello and welcome to this market update discussion, which is hosted by U.S. Bank Wealth Management. I m John De Clue, Chief Investment Officer of The Private Client Reserve of U.S. Bank. Thanks for joining us on the call today. Our call is focused on a discussion of 2015. We d like to share with you our outlook for the global economy, as well as the capital markets around the world. Joining me today are several of our senior investment strategists. We have Rob Haworth, Senior Investment Strategist; Tom Hainlin, National Investment Strategist; Jennifer Vail, who heads up our fixed income research; Terry Sandven, Chief Equity Strategist; and Ed Cowling, our Director of Specialty Assets. Specialty Assets would be real estate, oil and gas, timber, farmland, ranchland and so forth. So welcome everyone and thanks for joining the call today. Looking back on 2014, as we prepare to look over the horizon for next year, it was really interesting. I was thinking about where we were this time a year ago. We were coming off a very, very strong equity market. I m not so sure anyone thought that this year we d see to-date the S&P up 8 percent. And of course, the news recently has been all around oil, with a stunning collapse. West Texas Intermediate (WTI) crude is down 43 percent. So, it just goes to show you that just when you think you ve got it figured out, the markets can turn around and surprise you. Important disclosures provided on pages 14 and 15. 1

We hope that we have some things figured out for 2015 and with that in mind I want to start with Rob Haworth, our Senior Investment Strategist. Rob, let s talk a little bit about the U.S. economy. I think most people are aware, we are kind of a bright spot among global economies strong on employment growth and statistics that are equally favorable in industrial production and so forth. What about your view of the malaise that exists outside the United States? Is this going to come back and impact our economy down the road? Rob Haworth: Thank you very much, John. Growth has been pretty solid here in the United States. We ve grown about 4 percent over the last couple of quarters, and as we look into the new year, we re thinking growth averages somewhere between 2.5 percent to 3 percent, which is still a pretty solid number. The non-u.s. problems really haven t impacted us much as we ve moved through 2014, and it probably doesn t really impact us too much in 2015, barring some crises. Factors that make us think that would be we re still very consumer driven, with 68 percent of the U.S. economic activity driven by consumption. Consumers tend to benefit when oil prices fall, as you mentioned, and the dollar strengthens, which is part of what s been happening and what we think happens into the new year. So, the U.S. economy should be on pretty strong footing, with low inflation and solid growth. I think the risks to the U.S. economy, if we look at the new year, would be if this weakness outside the United States rekindles some kind of financial crisis, which we don t foresee happening but it s certainly possible. And the second risk I would point out, John might be if we see some sort of substance of conflict that flares up again and cuts global access to Middle East oil, and we get a significant spike in inflation. Neither of these seem very likely, so we re pretty positive about U.S. growth in the new year and don t see much of an impact from these problems outside the United States just yet. Rob Haworth: So you mentioned the word crisis, but when we look at what s happening with Russia today it s all over the news and the collapse in oil markets, I suppose that has the taste of crisis in it somewhere with WTI, as I said, down 43 percent. The other side of that coin though is I read an estimate that the fall in gasoline prices is like an instantaneous tax cut to the U.S. consumer and that sounds like a good thing. But, talk to us Rob about the prospects for the oil market in 2015. How is it going to impact our outlook for the U.S. economy in the year ahead? This is a great point, John. A 40 percent drop in oil prices probably, at current estimates, if we look at the U.S. Energy Information Administration, the U.S. consumer probably saves $100 billion in 2015 in gasoline alone, which is a pretty nice lift to economic activity. The weakness in oil probably continues. The primary beneficiaries, as we see it, here in the United States are global oil consumers and that comes at the expense of producers. We ve essentially seen strong global supplies and weak Important disclosures provided on pages 14 and 15. 2

global demand. And, to some extent by OPEC not cutting production as they ve done in the past, they are attempting to force some adjustment of global production onto some of these newer entrants into the oil market. An example would be U.S. and Canadian shale oil producers, rather than OPEC cutting their own share. So, if we think about oil over the new year, we probably see a bottom in prices as we move through the first half of 2015, but it will take some time because you don t have this major supplier of global oil. OPEC counts for about one-third of global supply. Making an instantaneous cut to production, we re waiting for lots of small producers to make independent decisions to cut production and those signs will take time to emerge. So as we move through 2015, oil prices probably normalize somewhere higher as we see demand start to converge. With the easing in supply growth and prices, we probably don t hit $100 a barrel again in the new year but end up somewhat higher than they are right now. On balance, that still leaves a pretty clear benefit to the U.S. economy. The U.S. consumer is going to get that benefit from gasoline prices, from lower energy costs. Companies that are outside of that oil industry are going to benefit from having weaker input costs, so it s not going to cost them as much to run their plant or heat their offices or move my packages from one place to the next so that we can have a wonderful holiday. The primary detriment will be seen by U.S. energy companies, and they have been leading in terms of business investment growth over the past year. So, we ll see some retrenchment in that investment growth. On balance, it s a pretty solid year for the U.S. economy and eventually this oil market normalizes. But we could be in for weaker prices to start the year, so it ll be nice to have lower oil prices and it should mean a better economy in the new year. Good, well from I hope your prediction comes true. Thank you, Rob. Let s turn to Tom Hainlin, National Investment Strategist and go outside the United States a little bit. Tom, looking more globally, frankly the performance of international equities has been disappointing relative to the U.S. markets. Some investors are questioning why should I be diversifying internationally in equities? What do you think from your point of view, Tom? Tom Hainlin: Well, John, this is the fourth year in the last five that foreign developed markets have underperformed the United States, and over the last five years, I think that performance gap is about 9 percent to 10 percent per year. But we ve seen these relative performance cycles come and go. This is reminiscent, I think, of the late 1990s when foreign developed stocks underperformed six out of seven years. But then you had this period starting in Important disclosures provided on pages 14 and 15. 3

2002 when international stocks outperformed six years in a row, and then the spread was again about that 9 percent to 10 percent a year over that timeframe. So we just remind investors that the non-u.s. consumer is still relevant. Countries other than the United States account for about 75 percent of all household spending in the world. The non-u.s. economy s still relevant. Countries other than the United States account for about 90 percent of all global merchandise trade that go back and forth. So while we continue to recommend that clients underweight foreign developed stocks relative to U.S. in their portfolios, based on the current environment or near-term outlook, we still believe in the value proposition of international investing. We still see the diversification benefits really in anticipation of another future outperformance cycle. Tom Hainlin: So having said that, let s get specific. We ve got super Mario Mario Draghi, the President of the European Central Bank in Europe who s almost a rock star, and Shinzo Abe, the fellow that Abenomics is named after, in Japan. Talk to us Tom about both Europe and Japan, if you could. Sure. Europe is really struggling right now to generate any momentum in real economic growth. The economy barely grew in the third quarter 0.2 percent. Industrial production is flat it s up again 0.1 percent. Inflation expectations are at an all-time low. That suggests that deflation is a real risk in Europe. And finally, if you look at its trade partners one of them is Russia and as mentioned earlier, given the environment today they are either in or likely headed to a very deep recession. Now the best case for a Draghi-led European recovery probably looks like a combination of aggressive monetary policy from the central bank, which leads to a weaker euro, which results in growth in trade and corporate profits, fiscal stimulus at the country level in the form of tax cuts and infrastructure investments that boosts domestic demand and improves productivity, and finally some kind of a recovering global growth that just boosts the value of European business and European exports. But given the absence right now of a real consensus between the European governments and the European Central Bank (ECB), similar to what we saw for years go on in Japan between the Bank of Japan (BOJ) and the Ministry of Finance, we see our base scenario that Europe just likely continues down this road of limited but not decisive action by the central bank, which leads to weak profit growth and weak credit demand and really kind of stagnant slow growth. And as I said, that s currently our base-case scenario. If you look at the valuations within Europe, they re low but they re just not yet compelling enough given that scenario outlook to kind of improve upon our underweight recommendation to foreign developed equities. Important disclosures provided on pages 14 and 15. 4

Tom Hainlin: What do you think about Japan, Tom? Abe just won a significant vote of confidence, albeit it on low voter turnout. Nevertheless, they seem to be kind of struggling along. What are your thoughts on Japan? The question is whether Japan s becoming a globally-relevant country again after many, many years of stagnation and underperformance and I think what we re seeing, John, is the very early signs of a recovery in Japan. The BOJ is firmly committed to reinflating the economy. We re seeing the very early signs of structural reforms to kind of shape the economy. We re seeing corporations begin to go through kind of slow but important transformation, improving corporate governance looking at efficiencies and improving profitability. And Japan really is at the forefront of a number of disruptions it seems that we see that are shaping the global economy robotics, alternative energy, healthcare and elder care. And we may be seeing Japan transforming from historically what s been a nation of savers to a nation of investors. They ve doubled the amount of equities that pension funds can hold and they ve instituted tax-free investment accounts like IRAs that we have here in the States. So even though right now Japan is still very weak, third quarter economic growth was revised down to negative 1.9 percent. Good news is that the falling oil prices, as Rob talked about, will definitely help Japan. They re an oil-importing country. And as you mentioned, Prime Minister Abe did win the legislative elections that cemented his majority and hopefully the ability to push through the fundamental reforms that need to take place, particularly in the agriculture sector. Tom Hainlin: So it sounds like investors would be well-advised to be selective in the international large-cap equity space. But let s turn to the outlook for emerging markets in 2015 and what you see there Tom. We ve seen dramatic divergence in the individual fortunes of emerging market countries. The Morgan Stanley Emerging Market Index (MSCI EM) this year, I think, has underperformed the S&P 500 by about 15 percent, yet the best-performing stock exchanges in the world are all in Asia, China, India, Philippines, Sri Lanka all up over 20 percent this year in local currency. But the Asian currencies, they ve even held up really well in this volatile rising dollar environment. We see these Asian countries continue to have pretty solid growth prospects for 2015. Not rapid growth but just solid growth. There s the potential for reforms to unlock gains in growth in places like China and India and Indonesia. Inflation is reasonably tame. The debt levels are reasonable. Equity valuations are modest. And many of these countries are net importers of oil and other commodities that should really benefit from these falling commodity prices. Important disclosures provided on pages 14 and 15. 5

On the other side of the emerging markets, basically you ve got the commodity exporters the providers of oil and other commodities in places like Brazil and Russia, Nigeria, Colombia, and not surprising those countries are really struggling. In Russia in particular, the economic sanctions based on the conflict in the Ukraine, the drop in oil revenues based on the falling oil prices, and now the really rapid drop in the value of their currency, just a quick aside. We re seeing a pretty dramatic escalation in the crisis in the Russian economy and Russian financial markets. But unlike 1998, we just don t see the spillover effects from Russia going throughout the emerging market world. The financial links, the trade links are pretty modest and so we see that things stay reasonably well contained within Russia. So while we would continue to be constructive on emerging market economics, we continue to recommend an overweight to emerging market stocks relative to other equities. We would strongly point investors towards active management as we see this continued dispersion in the performance of individual countries and markets and sectors. Tom Hainlin: By active, we mean managers who can make individual bets here and there as opposed to passive index such as an index fund or an exchange-traded fund (ETF), correct? Absolutely, John. Thanks, Tom. Appreciate it. Let s turn to Jennifer Vail, Head of our Fixed Income Research for thoughts on those markets. Jennifer, given the things that Tom just said about the international markets, and given the early comments on the call from Rob Haworth on the U.S. economy, what do you think this means for monetary policies going forward? Jennifer Vail: Well, probably the word of the year for 2015 is divergence continuing divergence in monetary policies, with the Federal Reserve (Fed) and the Bank of England (BOE) set to begin normalizing policy, while the ECB and the BOJ continue to introduce greater easing policies. The ECB is likely to continue to add options to their current quantitative easing (QE) program via the existing piecemeal strategy. This will equate to some near-term measures that potentially include some modifications to the existing targeted long-term refinancing operations to generate some more take-up at that window, possibly buying some lower credit-quality assetbacked securities (ABS) and purchasing some corporate bonds. But the whole idea of government bond purchases is probably unlikely in the immediate term given some of the political and potential legal hurdles. That said John, we expect a middle ground to be achieved in the first half of the year, enabling some forms of sovereign QE likely strictly limited to ultra- Important disclosures provided on pages 14 and 15. 6

high-quality debt issuers. The ECB s hesitation to fully commit to a comprehensive QE program will likely delay the trajectory of monetary policy success within the eurozone. Similarly, in the east, Japan s taken a bit of a different approach. As Tom alluded to earlier, Prime Minister Abe has taken some bold moves with his three-year-old strategy of aggressive monetary policy easing, pushing for deficit budget that did generate some spending on public works and those mentioned reforms to stimulate private investment. This has actually enabled the BOJ to announce substantial monetary strategies, including extending the duration of its purchases by roughly three years and increasing the monetary base by about 25 percent by increasing their purchases of Japanese government bonds (JGBs), ETFs and Real Estate Investment Trusts (REITs). In the near term, we expect policymakers to take some time to assess the efficacy of their recently-announced measures. The plunge in the price of their import bill for crude oil could actually reduce their monthly trade deficit by about 300 billion yen. So the renewed increase in spare capacity since that sales tax hike, and the sharp fall in global energy prices, will likely dampen some price pressure. Thus, we re probably looking at this leading to further stimulus measures, which could be announced probably sometime next spring. Shifting back to the United States, the primary driver of our domestic monetary policy going forward is definitely going to be inflation and wage growth. We expect that the earliest the Fed will begin to lift the federal funds rate is June, with the risk skewed a bit to a September liftoff. Although we believe the trajectory in improvement in the labor markets will validate an increase in the policy rate next year, we do not see that occurring without the additional participation of inflation and wage growth. Inflation is probably going to struggle to approach levels that justify a policy rate shift. We expect a gradual improvement in wage growth and inflation to continue in 2015, reaching those levels that support a change in the Fed s stance by June. Although it s not our base case, the two steps forward one step back passive inflation may lead us to a scenario where it s not until the September 2015 meeting that the Fed feels comfortable with the sustainability of healthy inflation. In their efforts to normalize policy, the Fed may dismiss the recent drop in inflation expectations as transitory. The current levels of employment and domestic growth certainly validate some level of loose monetary policy, but they likely do not support a zero interest rate policy which is generally reserved for emergency situations. So the capital markets interpretation of Fed comments and actions, coupled with the increased regulations, reducing bond market liquidity will likely lead to a continued increase in interest rate volatility, which still remains below the long-term historic levels. Important disclosures provided on pages 14 and 15. 7

Once the Fed liftoff has occurred, we believe the pace of further increases will be data-dependent. It ll probably be slower than the Fed s current summary of economic projections as we believe those global growth and inflation concerns abroad will likely be headwinds to the domestic economy. So our expectation for the 10-year Treasury at the end of 2015 is modestly higher between 2.75 percent and 3 percent. The diverging central bank policies, global growth, oil and geopolitical tensions are all going to be contributors to downward pressure on the U.S. Treasury yields in 2015. Jennifer Vail: What other views do you have on fixed income with the expectations you set forth on these policy shifts? What should clients be thinking about as it relates to their fixed income holdings, their bond holdings in other words, based on your outlook? An increasing feds fund rate is likely to drive short yields up, meaning shorter-dated maturities. Meanwhile global interest in the long end of the yield curve may remain high given the safety and attractive yield offered by the U.S. Treasury market versus the other developed markets we ve been discussing. This is likely to keep a lid on upward pressure on the long end of the curve. In this environment, we would encourage our clients to avoid exposure in the shortest end of the curve in favor of the intermediate to long end of the curve. High yield, emerging debt and lower-quality investment-grade corporates and municipal bonds provide the greater benefit in the steeper portions of that intermediate yield curve, whereas high-quality investment-grade corporates, high-quality municipals and Treasuries are the preferred vehicles for the longest end of the curve. When we look at high yield fixed income, we do expect it to outperform investment-grade options. Falling oil prices have caused some considerable underperformance in the corporate-related sectors. Since our belief on oil is that it will remain relatively low, it will likely continue to be volatile. However, lower and more volatile oil prices are not likely to affect all corporate balance sheets equally. The markets are anticipating a dramatic and widespread negative effect on credit from the lower oil prices. In this type of environment, key underlying corporate fundamentals are often overlooked and selling can be misplaced. We do believe this creates some opportunities in the corporate-related sectors because the market is perhaps overdiscounting the negative prospects for most credits. We also expect to see new issuance in high yield dip in 2015 because there are few maturities until 2016 and 2017. Lastly, interest coverage continues to improve in step with earnings and recovery rates. They also continue to climb so we do not expect to see a sharp increase in default rates until 2016 at the earliest. Important disclosures provided on pages 14 and 15. 8

Tom had mentioned emerging markets, as well. Despite our outlook for modestly rising rates, we actually believe that dollar-denominated debt may be well-positioned for outperformance in 2015. Most of these emerging market currencies have been fairly resilient despite the recent dollar strengths. Many of these countries have increased their currency reserves since the financial crisis, but the credit quality has been gradually improving over the past several years and current spread levels remain appealing relative to the U.S. debt sectors. We believe the combination of improving fundamentals and valuations will drive more investors into this attractive yield sector in 2015. All right, thank you Jennifer. Appreciate it. Let s now turn to equities and Terry Sandven, Chief Equity Strategist. Terry, stocks have been a little bit of a rocky road the last couple of months since the beginning of the fourth quarter. Get out your crystal ball. Look into 2015 and give us an outlook for equities, if you don t mind. Terry Sandven: Yes, thank you, John, and hello everyone. Yes, stocks have been volatile as of late, largely due recently because of the drop in oil prices. In fact, just today (earlier this morning), the Dow Industrials were up over 200 points and as we speak it s up about 75, so that volatility continues. As we look at 2015, we expect U.S. equities will trend higher similar to what we re experiencing in 2014. Our year-end 2015 price target for the S&P 500 is 2,240 and that s based on a price-earnings multiple of 17.5 times our 2015 earnings estimate of $128. As we look internationally, the outlook for international developed and emerging markets is somewhat less optimistic. At least in the near term, as Tom has alluded to. We know that the pace of global growth is slow, driven in part by challenging economic conditions in the eurozone and Japan, and a slowing in the rate of growth in China. However, based on performance, to a degree, it seems the market already reflects this. So far in 2014, the S&P 500, at present, is up approximately 8 percent, while the international-oriented MSCI developed EAFE Index and MSCI Emerging Markets index are in negative territory, down 9.7 percent and 7.8 percent, respectively. So we expect U.S. equities to outperform the international segment again in 2015, but perhaps by somewhat of a narrower margin. Terry, let me ask the obvious question. Equities have had a great run. I mean, this is what, the sixth consecutive year dating back to the end of the financial crisis in 2008 that U.S. equities have been up? But are you concerned? I mean, is this rally long in the tooth that we may be nearing the end of the bull market? Terry Sandven: Well, yes I am concerned. And the volatility that we have experienced in recent days and weeks would imply that investors are concerned, as well. But I also think it s important to assess both market probabilities and fundamentals. Important disclosures provided on pages 14 and 15. 9

Clearly, this bull market is aging up for the sixth consecutive year, as you noted. In fact, the S&P has gone 38 months without a decline of 10 percent or more versus the 18-month average since World War II. So a stock market correction still looms and the probability of a market downturn seems to be increasing. But on the other hand, the fundamental backdrop remains supportive of higher equity prices, which, in our view, suggests that it s still too early to forecast a prolonged market pullback. So John, I would just make two additional items of note. First, while the popular indices remain near all-time highs, perhaps more important, so, too, are earnings. At present, it seems that the primary driver for equities is earnings growth versus debt-driven liquidity and price earnings multiple expansion. In 2014, earnings growth has been a key driver supporting equity prices. In fact, earnings have increased roughly 12 percent, which as of about a week ago, was roughly in line with the year-to-date return of the S&P 500. We look for this close relationship between earnings growth and equity performance to continue in 2015. At present, we re forecasting earnings for the S&P 500 in early 2015 to grow in the 8 percent range and the broad index to advance in a similar fashion. Second, for 2015, the macroeconomic fundamental political environments all seem supportive of higher equity prices. For instance, the U.S. economy is showing varying degrees of improvement, as Rob alluded to earlier. This is evidenced by employment, manufacturing, housing sentiment, retail sales they re all showing varying degrees of progress. And we have favorable market fundamentals rising earnings, low interest rates, restrained inflation, reasonable valuations and, of course, less-compelling alternatives continue to push equity prices higher. And following the midterm elections, the political landscape has shifted toward bipartisan governance, implying, perhaps to a degree, increased brinksmanship and political wrangling but not necessarily budget battles that could have a meaningful negative impact on economic growth. Terry Sandven: So looking forward then, it seems from what you re saying that the environment seems favorable for equities, I ve got that, but as always what are the things we should be watching closely that might affect equity prices, and maybe not in such a good way? That s a good question and I suspect the list of concerns that investors have is perhaps endless. That said, I would focus on four items: earnings, interest rates, inflation and geopolitics. Important disclosures provided on pages 14 and 15. 10

In an earnings-driven market that is connected to economic growth, we need an improving economy to drive earnings. In fact, we talked earlier about oil prices and oil prices clearly are being watched closely. On one hand, lower oil prices are good for consumers. In fact, as of yesterday, according to the Energy Information Administration, the average price of regular gasoline in the United States is currently $2.55. That s $0.69 below year-ago levels. That s a big drop. It clearly is adding to consumer sentiment and bolstering consumer discretionary spending. Conversely, on the negative side, lower energy prices are not particularly good for companies involved in the energy patch (industry). Lower oil prices typically mean less exploration, production, distribution services all of which tend to weigh on earnings growth of energy-related companies. So in short, the earnings outlook is still a work in progress. In aggregate, higher earnings are needed to support higher stock prices. As for interest rates, as Jennifer has mentioned, rates are low and we expect rates, on average, to remain relatively low for the foreseeable future and that of course bodes well for equities. Related to interest rates is inflation. For the most part, inflation is benign, evidenced by minimal wage pressures and low energy costs. Should inflation heat up, that would likely put pressure on PEs, or price-earnings multiples, and imply that equities are overvalued. But at present, inflation appears to be restrained. And lastly, of course, geopolitics remain a wild card. We expect heightened geopolitical tensions will remain the norm versus the exception in 2015 clearly weighing on sentiment as tensions rise and fall. So John, in short, I would just note that based on favorable U.S. macro and fundamental trends, we continue to believe equities will grind higher in the new year. As such, we recommend that investors maintain overweight exposure to equities, adding to positions on pullbacks. And to that end, in an environment of continued earnings growth and restrained inflation, in our view, any weakness, such as what we are currently experiencing, is likely to be reflected more as a pause that refreshes and resets and not necessarily one that represents the start of a bear market. So again, as we look to the end of 2015, our price target for the S&P 500 is 2,240 and that s roughly 11 percent above current levels. Thank you, Terry. Appreciate it very much. Let s now turn to Ed Cowling, Director of Specialty Assets for U.S. Bank. Ed, housing. We forget how critically important housing is to our economy. A Important disclosures provided on pages 14 and 15. 11

little bit choppy this year, with new home construction and the sales of existing homes improving maybe only modestly over the course of the year, yet not necessarily meeting the earlier expectations and certainly not robust. What do you envision for housing next year, and what impact will rising mortgage rates if we see that potentially have? Ed Cowling: Thank you, John. And yes, housing has been very erratic this year. Started out with a cold winter, spiking and then declining mortgage rates, shortage of labor, materials and buildable lots for new homes and investors that were early in on the market recovery have begun to retreat from their buying activity. So new home starts are substantially below historical levels, but yet building activity is gaining traction and the inventory of new homes for sale is at a four-year high. Currently we re building about 700,000 starts for new singlefamily homes each year. That s well below the high watermark set back in the 2005 time period, and even below historical averages. But on the other hand, we have advanced sharply from the 2009 trough when only about 400,000 homes were started. Sales have been essentially flat throughout 2013 and this year, as well. But again, with the promising improvement in employment and in other economic components, there is generally a positive outlook, which is coupled to the economy going forward into 2015. And existing homes those sales had fallen late in 2013 again as the spike in interest rates created uncertainty. But as interest rates have settled, substantially lower home sales have been trending upward during this year. And as I mentioned, mortgage rates have been up and then down this year. Now they re at about the 4 percent to 4.25 percent level. When you look at that in a long-term history, it s still a very low mortgage rate. But they are expected to move up with the increases in the fed funds rate and the 10-year Treasury yield. And so based on projections for the Treasury yield that Jennifer just expressed, we anticipate mortgage rates move to about 4.75 percent to 5 percent by the end of next year. Fairly stable probably in the early parts of the year but then trending upward. I don t think rates are going to rise rapidly and thus will not derail the housing recovery as it did late last year. But the interest rate and the resulting mortgage payments are just part of the equation. Employment gains, wage growth, housing affordability and creditworthiness all have to be present. So if the increase in the fed funds rate is the sign of a strengthening U.S. economy, then a rising mortgage rate means there is good economic growth. That translates into a strengthening housing market. Another key point looking forward is that the rate of the price increases on homes, which has slowed during 2014. It was double-digits, now it s in the single-digits, percentage-wise year-over-year and that s where we expect it to remain next year, as well. Important disclosures provided on pages 14 and 15. 12

I think we will see some choppiness month-to-month in the housing market, but I do believe we see a general trend of continuing improvement as the economy advances through next year. Now John, let me turn to another, very visible component of a part of the housing market and that s apartments. Strong tenant demand and limited construction in the 2009 to 2012 period created very low vacancy rates and strength in the rental rate growth. The abundance of capital for this sector and low interest rates created intense investor demand early in the recovery cycle, certainly before office and retail moved. Investors are still very active and interested in apartments. There is new construction and that will continue, but not outrageously so. I believe apartments are being built where the economy and the jobs support them. As such, the strength of the market and of the particular real estate is very localized. But John, I think we see many markets doing quite well next year and the rental rates will continue to increase where there is a sizable demand for those multi-family projects. Ed Cowling: Good. Appreciate it, Ed. Do you have any other comments on commercial real estate? I think commercial is a little different than housing. It has a lot of the same components, but in commercial real estate in the United States, I see a continued recovery again in line with gains throughout the U.S. economy. Okay, good. Appreciate it. Thank you, Ed. We ve heard a lot today on the investment scene, as well as in the global capital markets. Just to recap a few things from a macro perspective, according to Rob Haworth, we believe U.S. growth remains very solid, supported by job growth and business investment. Globally we re a little more concerned about the international equity markets. As Tom Hainlin said, we re underweight developed market equities think Europe and Japan for the time being. But, we re watching markets very closely, especially Japan. Emerging markets were slightly overweight due to the solid economic growth and the fact that these markets are relatively very, very inexpensive. We would encourage you, as Tom mentioned, to consider active management in emerging markets as opposed to passive indexes or ETFs in that space. Jennifer Vail talked to us about the primary drivers of monetary policy. The Fed is data-dependent so we ll be watching inflation and wage growth very, very carefully. But it looks like, from our view, we probably won t see any action by the Federal Reserve until June 2015, and perhaps with the risk skewed to even later in the year. Important disclosures provided on pages 14 and 15. 13

Terry Sandven has a number of 2,240 on the S&P 500 for year-end 2015. That would be a gain of about 8 percent. He believes that the equity market can be fueled by earnings growth into next year. I want to wrap up today s conversation by saying thank you, as always, for your relationship with us at U.S. Bank and for taking time to attend the call today. Our 2015 outlook commentary is now available and you can read much of the information in more detail. It can be accessed on our website or you can contact your U.S. Bank relationship manager if you d like more information. Again to conclude, all of us here at U.S. Bank wish you a very, very happy holiday season. Thanks once again for listening to the call 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. IMPORTANT DISCLOSURES 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 December 16, 2014 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. 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. Past performance is no guarantee of future results. 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 stock market in general. The Dow Jones Industrial Average (DJIA) is the price-weighted average of 30 actively traded blue chip stocks. 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 MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. Important disclosures provided on pages 14 and 15. 14

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences 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. Investment in fixed income 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. 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. Gains in principal are taxable in that year, even though not paid out until maturity. Investments in asset-backed securities include additional risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic 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. 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). Exchange-traded funds (ETFs) are baskets of securities that are traded on an exchange like individual stocks at negotiated prices and are not individually redeemable. Share of ETFs may trade at a premium or a discount to the net asset value of the underlying securities. Important disclosures provided on pages 14 and 15. 15