CHIEF INVESTMENT OFFICE

Capital Market Outlook

August 5, 2019

The opinions are those of the author(s) and subject to change.

IN THIS ISSUE MACRO STRATEGY

•• Macro Strategy—Recent fears that the record longevity of the U.S. economic Chief Investment Office
expansion makes a recession more likely have caused many investors to move Macro Strategy Team
into cash and other defensive assets. A look at the factors that generally warn of
impending recession suggests that these fears may be overblown. The main exception GLOBAL MARKET VIEW
is Federal Reserve (Fed) policy, which remains restrictive by our time-tested gauges
despite the first rate cut in over a decade. Lauren J. Sanfilippo
Vice President and
•• Global Market View—Against the backdrop of an aging population, a positive Market Strategy Analyst
prospect for the U.S. economy is the Millennial generation—the largest living adult Joseph P. Quinlan
generation on the cusp of their prime working and consumption years. Poised to Managing Director and
reshape the growth and earnings dynamics of multiple sectors in the years ahead, a Head of CIO Market Strategy
stark reality stands— it seems there is no alternative to the Millennials.

•• Thought of the Week—Against a backdrop of rising labor costs and increasing THOUGHT OF THE WEEK
concerns over U.S.-China trade tensions, manufacturing companies have begun to
diversify their supply chains away from China. Vietnam and other countries have Kirsten Cabacungan
Investment Analyst
benefited from these shifts, but certain constraints may limit them from fully taking
China’s place as “The World’s Factory.”
Data as of 8/5/2019 and subject to change.
•• Portfolio Considerations—We remain overweight equities relative to fixed income
and continue to emphasize the U.S. over the rest of the world. We also prefer shorter
dated yields in fixed income, investment-grade credit relative to high yield, and we
believe that the overall level of yields has bottomed in the short term.

Current Market Volatility

Joseph Quinlan, Head of Market Strategy

One hand gave (Fed rate cuts), while the other hand took away (new tariffs on Chinese
goods), triggering down-side pressure and volatility across all asset classes last week.
The trade truce between the U.S. and China came to an abrupt end with the August 1
communication from President Trump that the U.S. was planning a 10% tariff on some
$300 billion of Chinese imports beginning September 1. The tariffs, if implemented, will
target consumer goods for the first time, and has the possibility to open a whole new
front on the U.S.-China trade war. One of China’s policy responses was to allow the yuan
to drop below CNY7.00 to the U.S . dollar for the first time in over a decade, a move
that could precipitate more tit-for-tat currency devaluations and harden the negotiating
positions of the two parties. The government has also ordered state-owned companies
to suspend the importing of U.S. agricultural goods.

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The near-term collateral damage from the spike in trade volatility could potentially
include declining global sovereign yields; diminished inflation expectations; softening
commodity prices; waning business confidence and investment levels; lower corporate
guidance; and a general “risk-off” mentality among investors. Escalating U.S.-China trade
tensions have been accompanied by sharp market selloffs in the past, followed by market
resets/recoveries due to countercyclical forces (e.g., easy monetary policies) and a de-
escalation of trade tensions as the negative effects become more apparent and painful
to both parties. The more the market pain, the more the urgency to find an exit ramp—
although each escalating round of trade tensions has seen eroding mutual trust and
makes it more onerous to cobble together even a truce let alone a trade deal. Investors
need to brace for episodic bouts of trade volatility but not lose sight of current favorable
market fundamentals: better-than-expected U.S earnings; stronger-than-expected
U.S. gross domestic product growth, led by the consumer; global central bank easing;
productivity-led capital expenditures (capex) levels; and fairly priced U.S. equities.

MACRO STRATEGY

Checking for Recession Warnings

Chief Investment Office Macro Strategy Team

In July, the U.S. economic expansion surpassed the record duration of 120 months set in
the 1990s. This month, the expansion becomes 122 months old. Naturally, recent fears
of recession have grown with the age of the expansion. Still, while the current expansion
looks old in the context of two centuries of U.S. experience, it looks young compared
to Australia’s almost three-decade long current expansion, for example, as well as when
judged by a number of other indicators, as discussed below.

Indeed, one has to examine the factors that cause recessions to ascertain whether it’s
sensible to expect one anytime soon. On this score, the factors that cause recessions can
generally be divided into two categories: financial and economic imbalances that create
excessive inflation and force the Fed to restrain economic growth to restore balance; and,
alternatively, Fed policy mistakes that unduly hamper growth and cause recession through
excessive monetary tightening. Looking across these dimensions, we find the greatest risk
remains an unnecessary Fed restraint. There is little evidence in the economic indicators
to suggest a recession caused by economic imbalances or inflationary pressures. There is,
however, strong evidence that Fed policy is slowing down U.S. and global growth, raising
the risks of recession and a deflationary relapse.

SIGNS OF IMBALANCE MISSING

Generally speaking, signs of imbalance often manifest in overheating that creates financial
bubbles and/or inflationary pressures. On the first score of financial excesses, Fed Chairman
Powell summarized the results of the Federal Open Market Committee's (FOMC's) latest
quarterly update on financial stability at his July 31 press conference. The Fed sees few signs
of financial excess across asset valuations and within balance sheets. Consumer balance sheets
have recently been fortified, and debt-service ratios are currently the lowest in over three
decades. The latest benchmark revisions to the national income accounts substantially boosted
the savings rate and incomes of households, raising the prospects for continuing strength in
consumer spending and helping to explain why confidence remains near 50-year highs.

Those same revisions did, however, reduce the financial health assessment of the
nonfinancial corporate sector, which has offloaded a lot of its debt from banks to non-
bank lenders. This is where the Fed has focused its attention for systemic problems
given that banks, like consumers, have substantially deleveraged and are currently in the
strongest financial shape in decades.

One reason there are few signs of inflationary overheating in the U.S. economy is the
choppy and subdued nature of this expansion. In essence, there have been three global

2 of 9  August 5, 2019 – Capital Market Outlook

minicycles since 2009, when the expansion began. Each involved about two years of
accelerating growth followed by a year of slowing before the next upswing. The excesses
that normally accumulate over a cycle have been corrected in these minicycles, helping
to prolong this cycle and postpone a recession.

Late-cycle problems often arise when economic growth becomes more and more
dependent on borrowing. Exhibit 1 shows a normalized composite indicator of how much
borrowing is funding the incremental unit of economic growth. As can be seen, just prior to
the financial crisis in 2008 this leverage ratio reached more than 2.5 standard deviations
above normal as housing and housing finance got deep into bubble territory. After
deleveraging for an extended period after the crisis, borrowing has slowly returned closer
to normal and fizzled out since the Fed began “normalizing” interest rates. Bottom line:
leverage is in a midcycle position, not a late-cycle position, suggesting this expansion likely
has plenty of room to run before financial overheating is a constraint.

Exhibit 1: Midcycle Levels of Leverage.

Index Recession band National Financial Conditions Index: Nonfinancial Leverage (+=Higher Than Avg)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
1973 1978 1983 1988 1993 1998 2003 2008 2013 2018

Sources: Federal Reserve Bank of Chicago/Haver Analytics. Data through July 29, 2019.

Other standard symptoms of overheating are missing as well. The capacity utilization
rate, which typically surpasses 80% when the economy is running full speed and inflation
pressures are building, rolled over well shy of that mark and has been declining as the
manufacturing slowdown has gathered steam in recent months.

A low unemployment rate is another precursor to recession as a tight labor market forces
higher wages, which in turn can raise inflation. Unlike previous cycles, however, higher wages
have not translated into higher inflation this time around. Instead, higher productivity in
recent quarters has allowed workers to enjoy higher wages with more purchasing power. In
fact, the benchmark revisions to the national income accounts boosted 2018 real disposable
income growth by more than a percentage point, helping to explain why real goods
consumption grew at the fastest rate in 15 years in the first half of 2018.

All told, signs of inflationary overheating and financial imbalances are missing despite
the currently strong labor market. Unfortunately, the Fed misinterpreted the implications
of the tight labor market and overtightened policy over the course of 2015–2018,
when the funds rate rose by 225 basis points. In recent testimony, Chairman Powell has
acknowledged as much, admitting that the Fed misjudged the need for higher rates
because it overestimated both the neutral rate of interest and the inflationary impact of
low unemployment. The result is Fed policy went past neutral into restrictive territory.
This, in our view, has created the biggest recessionary risk for the economy. Fortunately,
the Fed has begun “a midcycle” adjustment to correct this policy mistake.

FED THE BIG UNKNOWN

With few signs of late-cycle excesses, inflation falling further below target and fading
economic momentum, the recession question basically boils down to whether the Fed

3 of 9  August 5, 2019 – Capital Market Outlook

can end its restrictive policy before it’s too late. The good news is weak inflation makes
a tight policy unnecessary. The bad news is the Fed does not see policy as restrictive.

The Fed has acknowledged its framework for gauging policy is broken. In our view, the
one indicator of policy that has stood the test of time is the yield-curve spread between
the overnight federal funds rate and the 10-year Treasury note yield. When this spread
is above normal, policy is typically more accommodative and helping growth to increase.
Unfortunately, when the spread is lower than average, as it has been for the past year,
the economy tends to slow down as monetary policy has moved into restrictive territory.
When the spread is inverted, the risk of recession is generally high.

For example, the New York Federal Reserve Bank’s recession probability model, which
is based on the yield-curve spread, rose from less than 10% during the first nine years
of this expansion to over 30% in July. Since 1959, this (rising above 30%) has happened
eight times. In all but one case (1967) recessions occurred.

The Fed’s ease of a quarter-point on July 31 was a step in the right direction. It still
leaves the yield curve inverted, however. The longer this persists, the more likely a
recession will occur. To restore a normal yield-curve slope assuming the 10-year yield
remains around 2% would require about three or four quarter-point cuts. Alternatively,
the 10-year yield could rise back to 3% if growth and inflation remain healthy with the
current funds rate just over 2%, and the yield curve would normalize, signaling policy was
back to neutral. Given spreading global disinflationary pressures and a still-strengthening
dollar, risk management considerations suggest it would be a mistake for the Fed to bet
on that outcome while global growth is slowing.

GLOBAL MARKET VIEW

TINA and the Case for the Millennials

Lauren J. Sanfilippo, Vice President and Market Strategy Analyst
Joseph P. Quinlan, Managing Director and Head of CIO Market Strategy

According to Wall Street speak, TINA (There is No Alternative) helps explain the underlying
preference among investors for historically higher-yielding equities versus lower-yielding
bonds. When it comes to market returns, it seems there are no real alternatives to equities.
The same relationship neatly describes the role of the U.S. consumer in driving U.S.
economic growth—with consumer spending accounting for two-thirds of the economy,
there is no alternative engine. The same TINA-like theme is evolving in U.S. demographics.

We’ve seen it before, demographically, as the post-war Baby Boomer1 generation propelled
economic activity as they moved en masse into their prime working, earning and spending
years. Now, with 10,000 65-year old birthdays a day, Baby Boomers are reaching retirement
age in droves, passing the baton to younger generations. A dynamic that reaches an
important inflection in 2019 but plays out for decades to come: the Millennials, numbering
73 million, are the largest living adult generation,2 and are on the cusp of their prime
working years, household formation years, and heightened consumption years. All of this
is a positive prospect for the U.S. economy and a stark reality—when it comes to future
spending, it seems there is no alternative to the Millennials.

So, rather than assume the popular rhetoric that Millennials are anti-marriage, sharing-
economy-enthusiasts—including but not limited to--cars, clothing, living spaces, working
spaces-- are synthetic meat-eating, bitcoin buffs--we take a look at three dynamics
concerning the Millennials that matter to the markets and economy.

Baby Boomer Generation: Born 1946-1964, age range in 2019: 55-73 years old. Source: PEW Research. As of January 2019.
1

Millennial Generation: Born 1981-1996, age range in 2019: 23-38 years old. Source: PEW Research. As of January 2019.
2

4 of 9  August 5, 2019 – Capital Market Outlook

BY THE NUMBERS

Changes in economic fortunes around the globe can be due to demographics such as
plunging birth rates across the rich world, net negative migration, Europe’s fertility rate
now comfortably below replacement level3 and the U.S. fertility rate recently hitting a new
low.2 And while the working-age population (defined by the United Nations as all people
aged 16 to 64) and total populations are shrinking in nations such as Japan, Germany and
France, in contrast, the U.S. is expected to continue to grow—representing a huge tailwind
to U.S. productivity and a comparatively brighter long-term outlook for the U.S. (Exhibit
2). The U.S. working-age population is set to expand with the gap further deviating in the
coming decades as other G10 countries, on average, turn negative.

Exhibit 2: Prospective Future Work Forces.

Growth in Working-Age Population (15-64), as a percent U.S. G10 ex-U.S.
2.0

1.5

1.0

0.5

0.0
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 2028 2032 2036 2040
-0.5

-1.0

G10 ex-U.S.: Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, UK. Source: United Nations.
Data as of 2018. UN projections out to 2040.

Forty nations now have shrinking working-age populations. In the late 1980s, the number
was nine—think economic headwind as the number of elderly soar and the number of
workers decline. While Millennials are currently 35% of the U.S. labor force today, by
2030 that percentage is expected to increase to 75% of the workforce.4

HOMEBASE MATTERS

Homeownership rates in the U.S. for young people are near their lowest levels in more
than three decades, with about 40% of young adults (ages 25 to 34) distinguished
as homeowners in 2018, according to federal data. That is down from about 48% in
2001, when the generation before them, Generation X,5 were young adults.6 Household
formation tends to pick up noticeably in the 25-34 age range, so whether rented or
owned, this cohort typically drives demand for shelter. Some estimates suggest that over
a 10-year horizon, Millennials and Generation Z7 are expected to fuel a 7% increase in
housing demand—unlikely to counterbalance the 43% increase in supply to the market
from Baby Boomers returning existing stock.8

Also trending higher, Millennials are moving back in with their parents and, with that, for longer
stretches. In 2018, 15% of the older-aged Millennials (25-37 years old) were living in their
parents’ homes. That percentage is nearly double the share of Boomers and Silents9 and 6
percentage points higher than Generation X when they were the same age. Also generous, nearly
80% of parents give some financial support to their adult children, running a bill of $500 billion a
year, which is twice the amount parents parked into a retirement account the same year.10
3
World Bank as of 2018.
4
Pew Research Center analysis of U.S. Census Bureau data. As of January 2019.
5
Generation X: Born 1965-1980, age range in 2019: 39-54 years old. Source: PEW Research. As of January 2019.
6
The Wall Street Journal, “Financial Crisis Yields a Generation of Renters,” July 27, 2019.
7
Generation Z: Born 1997-2012; age range in 2019: 7-22 years old. Source: PEW Research. As of January 2019.
8
Morgan Stanley, June 2019.
9
Silent Generation: Born 1928-1945, age range in 2019: 74-91 years old. Source: PEW Research. As of January 2019.
10
Barron’s, Parent Trap, Vol. XCIX No. 12, March 25, 2019.

5 of 9  August 5, 2019 – Capital Market Outlook

FOREVER YOUNG AND FOREVER INDEBTED

To get the full picture of Millennials’ financial well-being, debt levels accumulated by
Millennials eclipse those of the previous generation with a different mix in the type of
debt. According to the St. Louis Federal Reserve Bank, given their unique housing choices,
mortgage debt is about 15% lower for Millennials and credit card debt was about two-thirds
that of the generation before them (Generation X). Student debt, inescapable by a much
broader age segment with over 44 million borrowers across age segments, burdens this
generation most heavily. Although they are generally better-educated and have the diplomas
to prove it, total student loan debt was over 300% greater than for the generation before
them. Shown in Exhibit 3, all in, the youngest segment’s debt totals around $1 trillion.

Exhibit 3: A Look at the Debt Mix Across Age Groups.

Debt in Trillions $ Auto loans Credit card Mortgage Home equity line of credit Student loans Other
4.0
3.5 $3.4 trillion
$3.1 trillion
3.0 $2.8 trillion

2.5
$2.0 trillion
2.0
1.5
$1.0 trillion $1.0 trillion
1.0
0.5
0.0
18-29 30-39 40-49 50-59 60-69 70+
Totals are rounded for illustrative purposes. Source: Federal Reserve Bank of New York. Data as of May 16, 2019.

To top it off, Millennials are just now hitting stride—entering the key debt accumulation phase
and expected to represent 70% of loan growth over the decade amounting to $600 billion.

INVESTMENT IMPLICATIONS

When considering what consumption will look like in the future, a key structural dynamic is
this: Household consumption generally rises through the prime working years, peaking around
45–54 years old. From there, annual expenditures generally decline such that those over
the age of 75 spend just slightly more than those under 25. Thus, the natural progress of
consumption should accelerate as Millennials age into their prime working and spending years.

Given their potential effects on both productivity and growth, we view the demographic
trends before the U.S. as a net positive for equities relative to the demographic fortunes
of the rest of the world. Ultimately, the shift toward the Millennial generation in the labor
force should support several tailwinds to growth and is supportive of our longer-term
secular bull market stance.

We look to invest in consumption categories that benefit from demographic shifts

such as the retiree spending cohort, as 36% of all healthcare spending is by the 65+
population, according to the U.S. Department of Health and Human Services, as the
cost of healthcare rises with age. Conversely, spending on housing tends to decline with
age, excluding the oldest age group representative of the cost of senior living facilities,
assisted living and other costly elder care options.

The Millennials account for $1.8 trillion in income and represent a $1.3 trillion opportunity
in annual consumer spending according to BofA Merrill Lynch (BofAML) Global Research,
driving dramatic shifts in consumption patterns across the digital world with the rise of the
sharing economy, which has already impacted housing, autos and apparel, to name a few
categories. There are strong tailwinds for growth in a number of consumer-related sectors
like e-commerce, travel and leisure, technology, fitness and cosmetics. In the end, Millennials

6 of 9  August 5, 2019 – Capital Market Outlook

are considered poised to reshape the growth and earnings dynamics of multiple sectors in
the years ahead. For many companies, there will be no alternative to this massive cohort.

THOUGHT OF THE WEEK

Shifting Gears: China to Vietnam

Kirsten Cabacungan, Investment Analyst
Against a backdrop of rising labor costs and increasing concerns over U.S.-China trade
tensions, manufacturing companies, especially in industries like global electronics and apparel/
footwear, have begun to diversify their supply chains away from China. As this trend plays
out, we believe key winners like Vietnam, Taiwan, Malaysia, Chile and India will likely emerge.
Vietnam, in particular, in the last 12 months accounted for two-thirds of the growing trade
deficit between Southeast Asian countries and the U.S., according to BofAML Global Research.

Why Vietnam? Its favorable demographics make it potentially attractive for labor-intensive
exporters. Similar to China, 70% of Vietnam’s population is of working age, but the country
faces less of a risk of a rapidly declining population compared to China.11 Vietnam’s existing
strength in export industries such as phones, electronics and machinery also makes it
competitive. Other benefits include proximity to China, excellence in assembly and low
labor costs. Vietnam’s production workers get paid an average of $216 a month, roughly
half of China’s rate.12 Given these advantages, Vietnam has become a center for supply
chain shifts, more recently accelerated by U.S.-China trade tensions.

While these trends appear promising, Vietnam’s recent increase in exports to the U.S. has
coincided with a pickup in Chinese imports (Exhibit 4). This surge, therefore, may perhaps
be boosted by transshipment, a loophole through which companies reroute goods to avoid
tariffs. In reality, the country still has a long way to go before it challenges China’s status
as “The World’s Factory.” For starters, Vietnam exports make up only a tenth of China’s $2.5
trillion level, and China’s manufacturing capacity may be too large for Vietnam to absorb
alone.13 Moreover, long-standing relationships between Chinese suppliers and U.S. businesses
may be difficult to recreate. And Vietnam’s infrastructure still needs substantial development,
ranking significantly lower than China's in quality, according to the World Bank.

While a deal between the U.S. and China could ease trade uncertainty in the short
term, supply chain shifts out of China may continue to happen as businesses reduce
dependency on Chinese production. Vietnam could be a viable option, but it is not
immune to trade tensions. Ultimately, multinationals may look to move production closer
to the consumer with the help of automation.

Exhibit 4: Vietnam Has Benefited from U.S.-China Trade Tensions.

Additional U.S. imports (U.S. tariffs on China) Additional China imports (China tariffs on U.S.)
% of Country 2019 GDP
8 7.9
7
6
5
4
3 2.1
2 1.5 1.3 1.2 1.0
1 0.8 0.8 0.7 0.7 0.6 0.5 0.4 0.4 0.4
0.3 0.3 0.2 0.2 0.2 0.2
0
Vietnam

Taiwan

Chile

Malaysia

Argentina

Hong Kong

Mexico

Korea

Singapore

Brazil

Canada

Thailand

South Africa

Saudi Arabia

Portugal

Australia

France

India

Egypt

Colombia

Norway

-1

Sources: U.S. Census Bureau; China General Administration of Customs and Nomura. Data as of June 2019.
11
World Bank. Data as of August 2, 2019.
12
Bloomberg. Why Vietnam Could Be Asia's Biggest Trade War Winner. December 2018.
13
Gavekal Research. Can Vietnam Eat China’s Lunch? July 4, 2019.

7 of 9  August 5, 2019 – Capital Market Outlook

MARKETS IN REVIEW

Equities Fixed Income1

Total Return in USD (%) Total Return in USD (%)
Current WTD MTD YTD Current WTD MTD YTD
DJIA 26,485.01 -2.6 -1.4 15.0 Corporate & Government 2.32 1.2 0.9 8.0
NASDAQ 8,004.07 -3.9 -2.1 21.3 Agencies 1.99 0.8 0.7 4.9
S&P 500 2,932.05 -3.1 -1.6 18.3 Municipals 1.82 0.5 0.4 6.4
S&P 400 Mid Cap 1,914.53 -3.4 -2.6 16.2 U.S. Investment Grade Credit 2.38 1.0 0.7 7.1
Russell 2000 1,533.66 -2.8 -2.6 14.6 International 3.05 1.1 0.8 11.3
MSCI World 2,149.99 -2.9 -1.7 15.6 High Yield 5.97 -0.3 -0.3 10.2
MSCI EAFE 1,863.85 -2.6 -1.8 10.6 Prior Prior 2018
MSCI Emerging Markets 1,003.76 -4.2 -3.2 5.7 Current Week End Month End Year End
90 Day Yield 2.00 2.05 1.99 2.36
S&P 500 Sector Returns 2 Year Yield 1.71 1.85 1.87 2.49
Real Estate 2.1% 10 Year Yield 1.85 2.07 2.01 2.68
Utilities 0.3% 30 Year Yield 2.38 2.59 2.52 3.01
Health Care -1.1%
Commodities & Currencies
Consumer Staples -1.9%
Materials -2.9% Total Return in USD (%)
Energy -3.3% Commodities Current WTD MTD YTD
Industrials -3.4% Bloomberg Commodity 163.03 -1.9 -2.2 2.1
Communication Services -3.5% WTI Crude $/Barrel2 55.66 -1.0 -5.0 22.6
Financials -3.8% Gold Spot $/Ounce2 1,440.60 1.5 1.9 12.3
Information Technology -4.3% Prior Prior 2018
Consumer Discretionary -4.6% Currencies Current Week End Month End Year End
EUR/USD 1.11 1.11 1.11 1.15
-6% -4% -2% 0% 2% 4% USD/JPY 106.59 108.68 108.78 109.69
USD/CNH 6.98 6.88 6.91 6.87
Source: Bloomberg, Factset.Total Returns from the period of 7/29/19 to 8/2/19. Bloomberg Barclays Indices.1  Spot price returns.2  All data as of the 8/2/19 close.
Past performance is no guarantee of future results.

Asset Class Weightings (as of 6/4/19) Economic and Market Forecasts (as of 8/2/19)
Under- Over- Q4 2018A Q1 2019A Q2 2019A Q3 2019E 2018A 2019E
Neutral
weight weight
Real global GDP (% y/y annualized) – – – – 3.6 3.2
Global Equities
U.S. Large Cap Growth Real U.S. GDP (% q/q annualized) 1.1 3.1 2.1 1.7 2.9 2.3

U.S. Large Cap Value CPI inflation (% y/y) 2.2 1.6 1.8 1.8 2.4 1.7
U.S. Small Cap Growth
Core CPI inflation (% y/y) 2.2 2.1 2.1 2.2 2.1 2.1
U.S. Small Cap Value
Unemployment rate (%) 3.8 3.9 3.6 3.7 3.9 3.7
International Developed
Emerging Markets Fed funds rate, end period (%) 2.40 2.43 2.40 1.88 2.40 1.63

Global Fixed Income 10-year Treasury, end period (%) 2.68 2.41 2.01 1.85 2.68 2.00
U.S. Governments S&P 500 end period 2507 2834 2942 – 2507 2900
U.S. Mortgages
S&P earnings ($/share) 41 39 41* 42 161.5 165
U.S. Corporates
Euro/U.S. dollar, end period 1.15 1.12 1.14 1.14 1.15 1.17
High Yield
U.S. Investment Grade Tax Exempt U.S. dollar/Japanese yen, end period 110 111 108 105 110 101
U.S. High Yield Tax Exempt Oil ($/barrel, avg. of period, WTI**) 59 55 60 56 65 56
International Fixed Income
The forecasts in the table above are the base line view from BofAML Global Research team. The Global Wealth &
Cash Investment Management (GWIM) Investment Strategy Committee (ISC) may make adjustments to this view over the
course of the year and can express upside/downside to these forecasts.
Past performance is no guarantee of future results. There can be no assurance that the forecasts will be
achieved. Economic or financial forecasts are inherently limited and should not be relied on as indicators
of future investment performance.
A = Actual.  E/* = Estimate.  S&P 500 represents a fair value estimate for 2019.  **West Texas Intermediate
Sources: BofA Merrill Lynch Global Research; GWIM ISC as of August 2, 2019.
BofA Merrill Lynch Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or
more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and wholly owned subsidiary of
Bank of America Corporation.

8 of 9  August 5, 2019 – Capital Market Outlook

Index Definitions
Securities indexes assume reinvestment of all distributions and interest payments. Indexes are unmanaged and do not take into account fees or expenses. It is not possible to
invest directly in an index.
Indexes are all based in dollars.
S&P 500 Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the index focuses on the large-cap segment of the market,
with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market.

Glossary
Standard Deviation is a measure that is used to quantify the amount of variation or dispersion of a set of data values.

Important Disclosures
This material was prepared by the Chief Investment Office (CIO) and is not a publication of BofA Merrill Lynch Global Research. The views expressed are those of the CIO only and are subject
to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill or
Bank of America entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
Global Wealth & Investment Management (GWIM) is a division of Bank of America Corporation. The Chief Investment Office, which provides investment strategies, due diligence, portfolio
construction guidance and wealth management solutions for GWIM clients, is part of the Investment Solutions Group (ISG) of GWIM.
Investing involves risk, including the possible loss of principal. No investment program is risk-free, and a systematic investing plan does not ensure a profit or protect against a loss in
declining markets. Any investment plan should be subject to periodic review for changes in your individual circumstances, including changes in market conditions and your financial ability to
continue purchases.
Economic or financial forecasts are inherently limited and should not be relied on as indicators of future investment performance.
It is not possible to invest directly in an index.
Asset allocation, diversification, dollar cost averaging and rebalancing do not ensure a profit or protect against loss in declining markets. Dollar cost averaging involves continual investment in
securities regardless of fluctuating price levels; you should consider your willingness to continue purchasing during periods of high or low price levels.
Past performance is no guarantee of future results.
Merrill, Bank of America, their affiliates, and advisors do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any
financial decisions.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to
the companies or markets, as well as economic, political or social events in the U.S. or abroad. Bonds are subject to interest rate, inflation and credit risks. Investments in high-yield bonds
(sometimes referred to as “junk 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 junk bond issuer’s ability to make principal and interest payments. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor.
Income for some investors may be subject to the Federal Alternative Minimum Tax. Investments in foreign securities involve special risks, including foreign currency risk and the possibility
of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or
sector may pose additional risk due to lack of diversification and sector concentration.
Investing directly in Master Limited Partnerships (MLP’s), foreign equities, commodities or other investment strategies discussed here, may not be available to, or appropriate
for, Merrill Edge clients. However, these investments may exist as part of an underlying investment strategy within exchange-traded funds (ETF’s) and mutual funds, which are
available to Merrill Edge clients.
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9 of 9  August 5, 2019 – Capital Market Outlook