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Capital Markets Review Fourth Quarter 2017

DISCLAIMERS: Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for investment, accounting, legal and tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only. The views expressed are those of Strategic Asset Alliance. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm.

 GLOBAL FINANCIAL MARKETS

• Global equities capped off a strong year with gains in the fourth quarter.
• The S&P 500 ended a strong year with a fourth-quarter gain of +6.6%. US equities were supported by

generally positive macroeconomic data, including better-than-expected third-quarter GDP growth of 3.0%. Lastly, a long-awaited tax reform bill was passed by Congress. Markets rallied on the news, with big permanent cuts for corporations as the centerpiece of the package.

• Eurozone markets ended 2017 on a negative note with the MSCI EMU index returning -0.5% in the

fourth quarter. Profit-taking after this year’s gains and a stronger euro were in part to blame for the downward move. Data showed the eurozone’s economy recovery continuing. The region’s GDP grew by 0.6% in the third quarter, albeit a slight slowdown from 0.7% in Q2. Meanwhile, inflation was 1.5% in November 2017, up from 0.6% in the same month in 2016. The unemployment rate fell to 8.8% in October, the lowest rate since January 2009.

• Japanese equities posted gains as the incumbent political party (i.e. Liberal Democratic Party) won the

October general election while corporate earnings were strong.

• Emerging market equities recorded a strong gain in Q4 and outperformed developed markets with

political developments supporting gains.

1

Summary Capital Market Commentary – 4th Quarter 2017

Source: Schroders, Wellington & SAA

• US Treasury yields rose over the quarter as the Fed hiked rates 0.25% in December, and the yield curve

flattened amid growing momentum behind a tax reform bill which is expected to stimulate growth and inflation.

• December saw yield volatility around this as doubts led to yields initially dropping to 2.34% before

reversing to 2.50% in the run-up to the bill being approved by the Senate. For the quarter overall, 10- year yields increased from 2.33% to 2.41%, five-year yields rose from 1.93% to 2.21% and two-year yields from 1.48% to 1.89%.

• In Europe, positive economic momentum continued unabated, with manufacturing activity at multi-

year highs. The ECB announced the reduction of asset purchases, but extended the program, as well as higher growth forecasts; both announcements provided upward pressure on bond yields. Government yields in Spain, Italy and France performed well on the announcement, but the moves were either reduced or undone later on due to political factors.

• Corporate bonds capped a good year with positive total returns, outperforming government bonds.

Investment grade credit saw stronger returns than high yield, aside from in Europe, as the latter experienced challenging conditions in November having reached elevated valuations.

2

Summary Capital Market Commentary – 4th Quarter 2017

Source: Schroders, Wellington & SAA

3

Executive Summary - Key Capital Market Index Returns

• Indices sorted high/low by Q3 ‘17 performance.

Source: Zephyr StyleAdvisor

• SAA BOTTOMLINE: For Q4-2017, solid economic data globally, benign but increasing inflation, and positive corporate

earnings growth continued to provide a foundation for positive risk asset performance (i.e. lots of green in the above heat chart).

Index Asset Class Oct-17 Nov-17 Dec-17 Q4-2017 2017

Trailing 3 Yr Trailing 5 Yr S&P GSCI Crude Oil U.S. Equity 4.66% 5.24% 5.30% 15.98% 4.09%

• 14.97%
• 17.84%

Dow Jones Industrial Average U.S. Equity 4.44% 4.24% 1.92% 10.96% 28.11% 14.36% 16.37% S&P GSCI Commodities U.S. Equity 3.82% 1.38% 4.41% 9.90% 5.77%

• 7.52%
• 12.16%

MSCI EM (Emerging Markets) International Equity 3.51% 0.21% 3.64% 7.50% 37.75% 9.50% 4.73% S&P High Yield Dividend Aristocrats Index U.S. Equity 1.34% 4.17% 1.15% 6.79% 16.35% 11.83% 15.85% S&P Composite 1500 Growth U.S. Equity 3.23% 2.88% 0.50% 6.74% 26.49% 12.82% 16.84% S&P 500 U.S. Equity 2.33% 3.07% 1.11% 6.64% 21.83% 11.41% 15.79% S&P Composite 1500 U.S. Equity 2.28% 3.12% 1.00% 6.53% 21.13% 11.41% 15.74% S&P MidCap 400 U.S. Equity 2.26% 3.68% 0.22% 6.25% 16.24% 11.14% 15.01% S&P Composite 1500 Value U.S. Equity 1.12% 3.43% 1.51% 6.17% 14.99% 9.54% 14.32% MSCI World Index World Equity 1.92% 2.22% 1.38% 5.62% 23.07% 9.88% 12.26% MSCI World Ex. US Index World Equity 1.38% 1.03% 1.82% 4.29% 24.81% 7.88% 7.97% MSCI EAFE Index International Equity 1.53% 1.06% 1.62% 4.27% 25.62% 8.30% 8.39% MSCI EAFE (Net) International Equity 1.52% 1.05% 1.61% 4.23% 25.03% 7.80% 7.90% S&P SmallCap 600 U.S. Equity 0.95% 3.52%

• 0.52%

3.96% 13.23% 12.00% 15.99% Dow Jones U.S. Select REIT U.S. Real Estate

• 1.09%

3.07% 0.03% 1.98% 3.76% 4.97% 9.09% BofA Merrill Lynch US Convertibles U.S. Convertible Bond 1.63% 0.12%

• 0.20%

1.56% 13.70% 6.80% 10.74% Barclays U.S. Treasury: U.S. TIPS U.S. Fixed Income 0.21% 0.13% 0.92% 1.26% 3.01% 2.05% 0.13% Barclays Capital U.S. Corporate Investment Grade U.S. Fixed Income 0.40%

• 0.15%

0.91% 1.17% 6.42% 3.90% 3.48% S&P/LSTA US Leveraged Loan Index U.S. Fixed Income 0.60% 0.12% 0.40% 1.11% 4.12% 4.44% 4.03% Citigroup WorldBIG Index World Fixed Income

• 0.36%

1.08% 0.32% 1.03% 7.43% 1.95% 0.93% Barclays Capital Municipal Bond U.S. Fixed Income 0.24%

• 0.54%

1.05% 0.75% 5.45% 2.98% 3.02% Barclays U.S. Government/Credit U.S. Fixed Income 0.09%

• 0.12%

0.52% 0.49% 4.00% 2.38% 2.13% Barclays Capital U.S. Corporate High Yield U.S. Fixed Income 0.42%

• 0.26%

0.30% 0.47% 7.50% 6.35% 5.78% Barclays Capital U.S. Aggregate U.S. Fixed Income 0.06%

• 0.13%

0.46% 0.39% 3.54% 2.24% 2.10% Citigroup 3-month T-bill Cash/Cash Equivalent 0.09% 0.09% 0.10% 0.28% 0.84% 0.38% 0.24% Merrill Lynch US Treasury Master U.S. Fixed Income

• 0.11%
• 0.12%

0.35% 0.11% 2.43% 1.47% 1.37% Barclays Intermediate U.S. Government/Credit U.S. Fixed Income

• 0.01%
• 0.31%

0.11%

• 0.20%

2.14% 1.76% 1.50% 10-Year US Treasury U.S. Treasury

• 0.23%
• 0.31%

0.26%

• 0.28%

2.07% 0.94% 0.97% 5-Year US Treasury U.S. Treasury

• 0.22%
• 0.43%
• 0.05%
• 0.71%

0.72% 0.92% 0.64% Alerian MLP Master Limited Partnerships

• 4.14%
• 1.35%

4.74%

• 0.95%
• 6.52%
• 9.33%
• 0.06%

4

U.S. Fixed Income Sector Yields & Returns

Source: Bloomberg Barclays as of 12/31/2017

• SAA BOTTOMLINE: This broken record continues to play on as the difference between U.S. and Global yields is now 1.05% as Fed

rate hikes continue the divergence between the U.S. and other developed markets’ central banks. Additionally, strong capital inflows from foreign investors continue as they seek higher yields which then contributes downward pressure on longer-dated U.S. fixed income maturities.

• Although concerns have heightened about U.S. inflation (i.e. wage inflation particularly), relatively benign inflation still poses

prospective difficulties to the Fed’s policy direction to raise rates.

Index YTW 12/31/2013 12/31/2014 12/31/2015 12/31/2016 9/30/2017 12/31/2017 Aggregate 2.48% 2.25% 2.59% 2.61% 2.55% 2.71% U.S. Credit 3.18% 3.01% 3.54% 3.29% 3.08% 3.19% U.S. Treasury 1.44% 1.43% 1.73% 1.89% 1.95% 2.19% Municipal Bond 3.15% 2.09% 2.11% 2.65% 2.23% 2.36% U.S. High Yield 5.64% 6.61% 8.74% 6.12% 5.45% 5.72% U.S. 5-Yr Treasury 1.74% 1.65% 1.76% 1.92% 1.93% 2.19% U.S. 10-Yr Treasury 3.03% 2.17% 2.28% 2.43% 2.33% 2.41% Global Aggregate (USD) 2.11% 1.62% 1.77% 1.60% 1.61% 1.66% Change to Current Period Aggregate 0.23% 0.46% 0.12% 0.10% 0.16% U.S. Credit 0.01% 0.18%

• 0.35%
• 0.10%

0.11% U.S. Treasury 0.75% 0.76% 0.46% 0.30% 0.24% Municipal Bond

• 0.79%

0.27% 0.25%

• 0.29%

0.13% U.S. High Yield 0.08%

• 0.89%
• 3.02%
• 0.40%

0.27% U.S. 5-Yr Treasury 0.45% 0.54% 0.43% 0.27% 0.26% U.S. 10-Yr Treasury

• 0.62%

0.24% 0.13%

• 0.02%

0.08% Global Aggregate

• 0.45%

0.04%

• 0.11%

0.06% 0.05% U.S. Agg. vs. Global Agg. 0.37% 0.63% 0.82% 1.01% 0.94% 1.05%

Note: Bloomberg Barclays Indices

5

Q4-2017 Fixed Income Sector/Duration - Total Return

Source: Bloomberg Barclays

• SAA BOTTOMLINE: Short-term yields rose, the yield

curve flattened, and spreads tightened amidst growing momentum behind the U.S. tax cut bill which is expected to stimulate growth and inflation.

6

Year 2017 Fixed Income Sector/Duration - Total Return

Source: Bloomberg Barclays

• SAA BOTTOMLINE: Low inflation for

2017 helped pin down Treasury yields even as the Fed marched along with three rate increases during the year. Meanwhile, strong global demand for yield helped support credit markets and spreads tightened further. At the end of 2017, most spreads are at or near ten year lows relative to comparable duration treasuries continuing to make it difficult for fixed income managers to add risk-adjusted yield to portfolios.

7

Q4-2017 U.S. Fixed Income Sector/Duration - Yields

Source: Bloomberg, Barclays

• SAA BOTTOMLINE: Even with rising short-term rates

due to Fed action, no material change from last quarter as overall reinvestment opportunities within the US Investment Grade Bond market persist in the 2%-3% range.

New money and reinvestment yields for U.S. investment grade fixed income range from 2% to 3%

KEY INVESTMENT THEMES FOR 2018

8

9

World Economic Momentum - Manufacturing

Source: Markit, J.P. Morgan Asset Management

• SAA BOTTOMLINE: Global growth continues to strengthen and remains synchronized across the world’s regions. While the U.S. has

been growing for over eight years, other regions are in much earlier phases of their cycles, suggesting there is further room to run but with a heightened focus on inflationary factors.

Heatmap colors are based on PMI relative to the 50 level, which indicates acceleration or deceleration of the sector, for the time period shown

10

Wage Inflation – Concern?

• SAA BOTTOMLINE: Wage inflation is a larger concern than consumer price inflation now that developed economy unemployment rates are

5.3%, the lowest since 1983. All things considered, the US looks to be at or above “full employment”. In Europe, wage inflation pressures are building as well: compensation per employee is rising in France despite an unemployment rate of almost 10%, and one of Germany’s most influential unions asked for a 6% pay raise. Source: J.P. Morgan Asset Management

11

Global Monetary Policy – From “QE” to “QT” but slowly…

• SAA BOTTOMLINE: The other big issue for 2018 is The Decline of Western Centralization: the process by which

central banks reduce their balance sheets after accumulating more than $11 trillion in government, agency and corporate bonds since 2009. The big 4 central banks now own 20% to 40% of their respective country’s government bonds. While the end of the grand monetary experiment is now at hand, we expect that 2018 will still be a year of net central bank accumulation, and when the runoff begins, it is expected to occur over a prolonged period of time. The charts above show [a] rolling 12-month central bank flows and how 2018 is still an accumulation year; [b] a breakdown of flows by central bank, and how only the Fed is projected to be in runoff mode in 2019; and [c] how prolonged the runoff is expected to be, with central bank balance sheets projected to still be larger in 2022 than in 2017.

Source: Commentary by J.P. Morgan Asset Management

12

Market & Investor Barometer – Some Like It Hot, But Not All

Source: J.P. Morgan Asset Management

SAA BOTTOMLINE:

• The contrast between the metrics

addressing the relative richness of various markets and the “Institutional Investor Global Confidence Index” is most stark…does this contrast augur to the downside?

• Since 1930, there have only been 2

years in which the maximum S&P drawdown was just 3%: 1995 and 2017.

• How much good news is already priced

in to the markets and how might that constrain equity returns for 2018? Or amplify downside with any surprises?

• Tax law changes in 2017:
• Will generally propel corporate

earnings higher; especially benefiting domestically-oriented companies with large capital spending needs and normal/low levels of leverage.

• May negatively impact High Yield

market’s “free cash flow” based on the limited deductibility of interest as a percentage of EBIT (Earning Before Interest & Taxes).

• Potential for U.S. elections in 2018 to

dramatically change market expectations?

13

Market & Investor Barometer: U.S. Focus How Does One Define “Hot”?

Source: FactSet, FRB, Thomson Reuters, Robert Shiller, Standard & Poor’s, J.P. Morgan Asset Management

• SAA BOTTOMLINE: While stocks appear to be overvalued according to a number of widely used metrics, the most important metric may be the comparison between the

earnings yield on stocks and the yield on BBB bonds. Using this metric, stocks still look quite cheap. Given fact that bonds and cash still carry pitifully low yields and assuming your organization can tolerate the potential downside risk, the case to overweight equities remains reasonable as we head into 2018 and the 9th year of a bull market.

14

The World as 100 People – Demographic Shifts & Thinking Way Ahead

Source: Graphic by Meghana Sutrave, Data as of 12/2016

SAA BOTTOMLINE:

• How do world

demographics translate into investment trends, ideas, and opportunities?

• How might U.S.-centric

investors consider a broader, more global investment allocation?

• Projections have the

world’s labor force declining and that the elderly, by 2050, will comprise 15% of the population; up from 5% in the 1960s. How does that translate into investment

• pportunities/threats?