Investment Strategy Outlook

Baird Market & Investment Strategy Investment Strategy Outlook October 19, 2017 Please refer to Appendix Important Disclosures. Weight of Evidence Offers Bullish Message Outlook Summary Highlights: Central Bank Patience Could Be Tested Global Economy Providing Upside Surprises Seasonal Patterns Argue For Fourth Quarter Strength Breadth Trends Show Improved Rally Participation Improving seasonal patterns have shifted the overall weight of the evidence from neutral to bullish. This suggests that stocks could follow a path of least resistance higher into 2018. Global economic conditions remain strong, and broad market trends are heading in the right direction. Historically stocks rally as year end approaches, although strength over the entire fourth quarter would be a bit surprising (but about on par for what we have witnessed so far in 2017). Optimism is elevated which could argue for some near-term rockiness. Valuations suggest stock prices have already priced in a robust recovery in earnings. We are keeping a close eye on the sole remaining neutral factor: Federal Reserve Policy (or global central banks, more generally). The Fed has telegraphed the beginning of their balance sheet drawdown and the market has priced in one more rate hike yet this year. Central bank surprises are more likely to come from Mario Draghi and the ECB. A faster-than-expected pivot from the current Indicator Review Weight of the Evidence Turns Bullish Central Bank Focus Shifting from Fed to ECB Low Bond Yields Could Be Out of Sync With Global Economy Optimism Excessive, but Shy of Euphoria Sector Leadership from Financials, Industrials, Materials, Health Care do-whatever-it-takes quantitative easing program to a discussion of quantitative tightening could turn overall central bank policy into a headwind for stocks. Evidence of accelerating inflation could put upward pressure on global bond yields, and that could get to the point of being a headwind for stocks as well. While this shift in central bank policy may be timely, it remains very much in experimental mode. We do not have evidence, now, that central banks have become a headwind for stocks. That may come in 2018, but not here yet. For now, central bank policy is neutral, the weight of the evidence has turned bullish, and stocks appear poised to work higher into year end. Bruce Bittles Chief Investment Strategist bbittles@rwbaird.com 941-906-2830 William Delwiche, CMT, CFA Investment Strategist wdelwiche@rwbaird.com 414-298-7802 10R.17

Federal Reserve Policy is still neutral. The Fed has begun to reduce the size of its balance sheet (ever so slightly) and has signaled to the market its expectation that rates will be raised one more time in 2017 (likely in conjunction with the December FOMC meeting). The pace of tightening (still described as policy normalization) has been both gradual and clearly signaled by the Fed. This has helped keep Fed policy as neutral and limited any disruptive impacts. While the Fed has stopped its easing program, the ECB and the Bank of Japan have continued theirs, and central bank balance sheets overall have continued to expand. A more abruptthan-expected shift from easing to tightening by the ECB could turn central bank policy into a headwind for stocks and may be a significant story as we move into 2018. Experimental policy on the part of global central banks has helped keep bond yields low. A shift from balance sheet expansion to balance sheet contraction could put upward pressure on yields. To some extent a modest rise in bond yields would reflect confidence in the recovery being seen in the global economy, but at some point (our guess would be around 2.6% on the 10-year T-Note) this could become a headwind for stocks. A relative lack of inflation pressure and muted inflation expectations provides central banks with the chance to proceed at a modest pace. If this dynamic shifts inflation pressures build, central bank tightening schedules may need to be accelerated. Source: Stock Charts Robert W. Baird & Co. Page 2 of 8

Economic Fundamentals remain bullish. After slipping relative to expectations over the course of the summer, the global economy is back to providing upside surprises. This has been the case for most of the past 18 months. Economic growth has not only been stronger than expected in aggregate, it remains broadly based. 97% of country-level purchasing manager indexes are above 50 (indicating an expansion in activity) and 90% are higher than they were a year ago. The rebound in growth is helping support a rebound in corporate revenue and earnings. While earnings estimates for 2017 have come down slightly since the beginning of the year, the pace of downward estimate revisions has slowed, particularly over the course of the third quarter. As of now, S&P 500 operating earnings are expected to rise nearly 20% this year, followed by another 13% gain in 2018. Robert W. Baird & Co. Page 3 of 8

Even with the improving economic growth fueling an improved earnings backdrop, Valuations remain bearish. Stock prices have already risen in anticipation of the rebound in earnings that is being seen and which is expected to continue. Valuations are elevated based on both trailing earnings and one-year forward earnings. The best case scenario, given current valuations, may well be for the price rally to pause for a time while the recovery in earnings continues. Investor Sentiment is bearish. Investor optimism is excessive by most measures. The latest survey of advisory services shows four bulls for every bear, a nearrecord level of optimism. Data from the NAAIM (National Association of Active Investment Managers) over the past month showed that even the bearish investment managers in its sample had elevated exposure to stocks. At one point, the data showed that the most bearishly positioned managers was at 80% equity exposure (the highest such reading on record). That has now started to unwind, but the survey data remains largely devoid of evidence of skepticism or pessimism. Robert W. Baird & Co. Page 4 of 8

Another way of measuring optimism comes from the University of Michigan s survey of consumers. As of the end of September, 65% of respondents expected stocks to be higher in one year. This surpasses the peaks seen in 2015 and 2007 and is at a level that has not been conducive to continued stock market strength. Providing some offset to this evidence of widespread optimism has been continued elevated levels of partisanship and policy uncertainty. While these may keep the sentiment data from signaling euphoria (which does indeed seem to be lacking), optimism is nonetheless high enough to make the path forward for stocks somewhat rocky. Some degree of price consolidation could help take some of the air out of the sentiment balloon. Seasonal patterns and trends have turned bullish. Both the one-year cycle and the four-year cycle suggest that the uptrend in stocks could gain strength moving into year end. These trends are favorable on their own, but conditions specific to 2017 may have even greater significance. There are many ways to describe the relative lack of volatility seen this year, but the bottom line is that it tends to allow stocks to extend their gains. Also, history shows that when stocks are up through the first three quarters of the year and are making new highs in September, the fourth quarter tends to be strong. This is not to say that stocks cannot hit a rough patch between now and year end, but rather to suggest that the path of least resistance over the course of the quarter as a whole is likely to be higher. Robert W. Baird & Co. Page 5 of 8

Looking ahead, the bullish seasonal tailwind that stocks enjoy heading into 2018 may be relatively short-lived. The weakest periods for stocks in the fouryear cycle tends to be heading into elections. The 2018 mid-term elections are shaping up to be particularly contentious (even perhaps more so than is typically seen in the first term for a new presidency). When viewed in context of potential changes in central bank policy and/or a move higher in bond yields, the low volatility experience of 2017 should be viewed as a gift to be enjoyed, not a new normal to be expected. The good news is that with volatility comes opportunity. Breadth remains bullish. The improved behavior of the broad market over the past month is encouraging, but not without blemishes. After bottoming near 40% in August, the percentage of stocks trading above their 50-day averages has surged to 75%, breaking through a down-trend of lower highs. While this could provide some near-term momentum for stocks, the longer-term trends have struggled to see similar improvement. The percentage of stocks trading above their 200-day averages has climbed from 63% to 74%, but the pattern of lower highs has not been broken. Broad market trends are moving in a positive direction, but a failure to see continued strength and a confirmation of the highs being made by the S&P 500 could weigh on stocks next year. Source: StockCharts Robert W. Baird & Co. Page 6 of 8

BAIRD STRATEGIC ASSET ALLOCATION MODEL PORTFOLIOS Baird offers six strategic asset allocation model portfolios for consideration (see table below), four of which have a mix of equity and fixed income. An individual s personal situation, preferences and objectives may suggest an allocation more suitable than those shown below. Please consult a Baird Financial Advisor in determining an asset allocation that will meet your needs. Model Portfolio Mix: Stocks / (Bonds + Cash) Risk Tolerance All Growth 100 / 0 Well above average Capital Growth 80 / 20 Above average Growth with Income Income with Growth Conservative Income Capital Preservation 60 / 40 Average 40 / 60 Below average 20 / 80 Well below average 0 / 100 Well below average Strategic Asset Allocation Model Summary Emphasis on providing aggressive growth of capital with high fluctuations in the annual returns and overall market value of the portfolio. Emphasis on providing growth of capital with moderately high fluctuations in the annual returns and overall market value of the portfolio. Emphasis on providing moderate growth of capital and some current income with moderate fluctuations in annual returns and overall market value of the portfolio. Emphasis on providing high current income and some growth of capital with moderate fluctuations in the annual returns and overall market value of the portfolio. Emphasis on providing high current income with relatively small fluctuations in the annual returns and overall market value of the portfolio. Emphasis on preserving capital while generating current income with relatively small fluctuations in the annual returns and overall market value of the portfolio. Baird s Investment Policy Committee offers a view of potential tactical allocations among equity, fixed income and cash, based upon a consideration of U.S. Federal Reserve policy, underlying U.S. economic fundamentals, investor sentiment, valuations, seasonal trends, and broad market trends. As conditions change, the Investment Policy Committee adjusts the weightings. The table below shows both the normal range and current recommended allocation to stocks, bonds and cash. Please consult a Baird Financial Advisor in determining if an adjustment to your strategic asset allocation is appropriate in your situation. Asset Class / Model Portfolio All Growth Capital Growth Growth with Income Income with Growth Conservative Income Capital Preservation Equities: Suggested allocation 95% 75% 55% 35% 15% 0% Normal range 90 100% 70-90% 50-70% 30-50% 10-30% 0% Fixed Income: Suggested allocation 0% 15% 35% 45% 50% 60% Normal range 0-0% 10-30% 30-50% 40-60% 45-65% 55 85% Cash: Suggested allocation 5% 10% 10% 20% 35% 40% Normal range 0-10% 0-20% 0-20% 10-30% 25-45% 15-45% ROBERT W. BAIRD S INVESTMENT POLICY COMMITTEE Bruce A. Bittles B. Craig Elder Jay E. Schwister, CFA Managing Director Director Managing Director Chief Investment Strategist PWM Fixed Income Analyst Baird Advisors, Sr. PM Kathy Blake Carey, CFA Jon A. Langenfeld, CFA Timothy M. Steffen, CPA, CFP Director Managing Director Director Associate Director of Asset Mgr Research Head of Global Equities Director of Financial Planning Patrick J. Cronin, CFA, CAIA Warren D. Pierson, CFA Laura K. Thurow, CFA Director Managing Director Managing Director Institutional Consulting Baird Advisors, Sr. PM Director of PWM Research, Prod & Svcs William A. Delwiche, CMT, CFA Managing Director Investment Strategist Robert W. Baird & Co. Page 7 of 8

Appendix Important Disclosures and Analyst Certification This is not 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. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report performance of various sectors of the stock market; direct investment in indices is not available. Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers and not Australian laws. Copyright 2017 Robert W. Baird & Co. Incorporated Other Disclosures United Kingdom ( UK ) disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited ( RWBL ) holds a MiFID passport. This material is distributed in the UK and the European Economic Area ( EEA ) by RWBL, which has an office at Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB and is authorized and regulated by the Financial Conduct Authority ( FCA ). For the purposes of the FCA requirements, this investment research report is classified as investment research and is objective. The views contained in this report (i) do not necessarily correspond to, and may differ from, the views of Robert W. Baird Limited or any other entity within the Baird Group, in particular Robert W. Baird & Co. Incorporated, and (ii) may differ from the views of another individual of Robert W. Baird Limited. All substantially material sources of the information contained in this report are disclosed. All sources of information in this report are reliable, but where there is any doubt as to reliability of a particular source, this is clearly indicated. Robert W. Baird Group and or one of its affiliates may at any time have a long or short position in the company/companies mentioned in this report. Where the Group holds a long or short position exceeding 0.5% of the total issued share capital of the issuer, this will be disclosed separately by your RWBL representative upon request. 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Baird Group and or one of its affiliates may be party to an agreement with the issuer that is the subject of this report relating to the provision of services of investment firms. An outline of the general approach taken by Robert W. Baird Limited in relation to conflicts of interest is available from your RWBL representative upon request. Baird s policies and procedures are designed to identify and effectively manage conflicts of interest related to the preparation and content of research reports and to promote objective and reliable research that reflects the truly held opinions of research analysts. Analysts certify on a quarterly basis that such research reports accurately reflect their personal views. This material is not intended for persons in jurisdictions where the distribution or publication of this research report is not permitted under the applicable laws or regulations of such jurisdiction. Investment involves risk. The price of securities may fluctuate and past performance is not indicative of future results. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. You are advised to exercise caution in relation to the research report. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. RWBL is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the FCA under UK laws, which may differ from Australian laws. As such, this document has not been prepared in accordance with Australian laws. Robert W. Baird & Co. Page 8 of 8