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Capital Market Outlook

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JANUARY 20, 2015

Robert T. McGee, Director of Macro Strategy and Research U.S. Trust, Bank of America Private Wealth Management

Joseph P. Quinlan, Managing Director and Chief Market Strategist U.S. Trust, Bank of America Private Wealth Management

WEEKLY CAPITAL MARKET OUTLOOK

Economic Outlook Robert T. McGee, Director of Macro Strategy and Research

WIDENING SIGNS OF GROWTH ABROAD The Organisation for Economic Co‐operation and Development (OECD) composite leading indicator (CLI) for its

34 member countries plus six major nonmember countries rose for the sixth straight month in November,

reaching its highest level since August 2011 (Exhibit 1). This comprehensive indicator of global economic

momentum has tracked the world’s momentum well. It foreshadowed the slowdown that begin in 2011, when

policy was prematurely tightened in Europe and China, along with several other emerging countries, and it

signaled the reversal that began in early 2013. There is a visible hiccup in its upward trajectory in 2014 that

reflects the temporary winter slowdown in the U.S. a year ago as well as Japan’s plunge into a brief tax‐induced

recession. The uptrend has since resumed and been consistent over the past six months, contrary to the

widespread view that global growth slowed in the last half of 2014. The hard numbers do not support that view.

ln Brief

Lower oil prices should boost the pickup in global growth already under way.

While nominal growth outside the U.S. has slowed, that’s because of declining inflation pressures.

Real growth continues to rise slowly from its late 2012 nadir. The big drop in oil prices is a major stimulus

for faster global growth in 2015 and 2016.

The outlook from the inside—what companies are saying.

As we enter a new earnings season, what are the industry trends that investors should be watching? We

examined viewpoints and data from the latest quarterly earnings statements of a group of leading

companies in order to assess the traction that the major trends we are monitoring at the theme, sector

and country levels are getting, and to gain insight into which new ones might be emerging as future return

drivers.

The world’s fragile CORE.

The CORE—(C)hina, (O)il, (R)ussia and commodity producers, and (E)urope—of the global economy has

weakened over the past few months, spooking investors who fear the United States will be drag under by

the rest of the world. Prospects will gradually improve for the CORE over the year, although investors

should expect more volatility in the short run..

CAPITAL MARKET OUTLOOK 2

Exhibit 1: Global Leading Indicator Rises for Sixth Straight Month.

Source: Bureau of Labor Statistics/Haver Analytics.

Data as of January 13, 2015.

The CLI is slightly above its long‐term average, in the zone where the global economy is forecast to improve.

According to the Ned Davis Research Group, “Among the world’s largest economies, trends are generally

looking more constructive. The U.S. is showing signs of stabilizing at high levels, while the Eurozone and Japan

are showing modest improvements from low levels.” As would be expected, there are mixed trends in emerging

markets with Russia looking very bad while “India continues to be the sweetheart of BRICs, with its leading

index at its highest level in two years.” China is showing a positive trend. Both of the strongest of Brazil, Russia,

India and China (BRIC) are big beneficiaries of lower energy prices, which should add fuel to their already

simmering fires. The positive impact of lower oil prices on global growth is likely to become increasingly

apparent as 2015 plays out.

Small business gets its mojo

The sharp drop in gasoline prices has already caused a breakout to the upside in consumer and small business

confidence in the U.S. Consumers have been handed the equivalent of a $1,000‐plus tax refund that has lifted

spending onto a higher growth track. Small businesses are naturally pleased about this and therefore it should

not have been surprising that the National Federation of Independent Business (NFIB) survey of December

business conditions jumped much more than analysts were expecting. Since the economy began picking up

momentum in early 2013, the index has jumped 14% and is now finally back in the range that prevailed during

the late 1990s expansion (Exhibit 2).

Exhibit 2: Small Business Confidence Finally Breaking Out.

Source: NFIB/Haver Analytics.


This return of confidence is evident in hiring plans, which have also jumped back into the healthy zone

(Exhibit 3). In fact, the main problem seems to be finding qualified workers. Almost 45% of businesses report

96

97

98

99

100

101

102

04 05 06 07 08 09 10 11 12 13 14 15

OECD + Major 6 Non-Members: Total Leading Indicator(Nonseasonally Adjusted, Normalized)

Pickup

Slowdown

80

85

90

95

100

105

110

91 94 97 00 03 06 09 12 15

NFIB: Small Business Optimism Index(1-Month Moving Average, Seasonally Adjusted, 1986=100)


difficulty finding qualified workers, up from just about 20% right after the recession ended, when the

unemployment rate was 10% (Exhibit 4).

Exhibit 3: Small Business Hiring Plans Back in Healthy Zone.



Exhibit 4: Tough to Find Qualified Workers.



As the labor market tightens, businesses are giving more wage increases. As can be seen in Exhibit 5, 25% of

small businesses have raised workers’ compensation over the past three months. This is up from zero percent

right after the recession and in line with the range of compensation increase frequency in the second half of the

last expansion.

-10

-5

0

5

10

15

20

05 06 07 08 09 10 11 12 13 14 15

NFIB: Net Percent Planning to Increase Employment(1-Month Moving Average, Seasonally Adjusted)

20

25

30

35

40

45

50

05 06 07 08 09 10 11 12 13 14 15

NFIB: Businesses with Few or No Qualified Applicants for Job Openings(1-Month Moving Average, Seasonally Adjusted, %)


Exhibit 5: Wage Increases Back in High‐Frequency Zone.



The relatively normal behavior of compensation increases given the strong labor market seems at odds with the

surprisingly low increases seen in average hourly earnings in recent employment reports. As can be seen in

Exhibit 6, there is a high correlation (about 90%) between small businesses’ plans to raise compensation in the

next three months and the percentage rise in average hourly earnings two years ahead. This process is just

getting started, according to the NFIB participants. Based on recent compensation increase plans, average

hourly earnings increases look to be headed into the 3%‐to‐4% range in 2016.

Interestingly, the December decline in the year‐over‐year average hourly earnings increase to just 1.6% from

2.5% in August was “predicted” by a drop in compensation‐raising plans back in 2012, which coincided with the

global slowdown’s last phase. From this vantage point, the lagged response of average hourly earnings to prior

economic weakness should not have been so surprising. The corollary of this reasoning is the stronger labor

market in 2013 and 2014 has set the stage for a substantial acceleration in average hourly earnings growth over

2015 and 2016.

Exhibit 6: Plans to Raise Wages Lead Average Hourly Earnings by Two Years and Are Pointing Sharply Higher.

Sources: BLS; NFIB/Haver Analytics.


The November Job Opening and Labor Turnover Survey (JOLTS) data shed additional light on the strong U.S.

labor market dynamics. More job creation is coming from new openings rather than declining layoffs. Layoffs

are already quite low and are consequently a diminishing source of rising employment (which happens when

they decline). Almost 5 million job openings were available in December, the most in the roughly 13‐year

history of this series. This is more than double the number of openings that existed right after the recession

ended (Exhibit 7).

-5

0

5

10

15

20

25

30

35

05 06 07 08 09 10 11 12 13 14 15

NFIB: Net Percent Raising Worker Compensation Over Past 3 Months(1-Month Moving Average, Seasonally Adjusted, %)

0

4

8

12

16

20

0.75%

1.50%

2.25%

3.00%

3.75%

4.50%

05 06 07 08 09 10 11 12 13 14 15 16 17

Average Hourly Earnings of Production and

Nonsupervisory Employees: Total Private Industries

(12-month % change, SA)Left Scale

NFIB: Net Percent Planning to Raise Worker Compensation in Next 3 Months

24-Month Lead, Right Scale

r = 0.86


Exhibit 7: Job Openings Approach 5 Million as Hiring Accelerates.

Source: BLS/Haver Analytics.


Another sign of labor market health is a willingness to quit a job and look for a better one. This behavior exhibits

a cyclical pattern, as one would expect. During a recession and its aftermath, people are more reluctant to leave

a job because the prospect of finding a new one is less likely. As an expansion matures, the willingness to quit

rises with a tightening labor market. Quitting dropped to an unusually low level during the financial crisis and

the first years of the recovery (Exhibit 8) because people were worried they could not find a new job. The quits

rate got as low as about 1.3% in 2009 and 2010. Recently it’s moved up closer to 2%, which is more normal in a

healthy labor market.

Exhibit 8: As Job Market Improves, More People Quit.



Strong labor market belies the secular stagnation thesis

Ironically, the sharp pickup in U.S. economic growth in 2014 coincided with the growing popularity of the

“secular stagnation” thesis, the notion that trend growth in the U.S. is only 1% or 2% in real terms instead of the

3%‐to‐4% rate that has prevailed in recent quarters. This thesis requires a combination of weak labor force

growth and below‐trend productivity growth. Labor force growth is held back by xenophobic immigration

policies. There is no shortage of people who would come to the U.S. if they only could. For billions of people

living in less fortunate societies, the American Dream is still real. According to a recent Fiscal Policy Institute

analysis, immigrants are much more likely to start a new business, compared to the native‐born population.

Low growth because of limited labor supply is a self‐inflicted problem that is easily resolved with a little political

will.

2000

3000

4000

5000

6000

02 03 04 05 06 07 08 09 10 11 12 13 14 15

JOLTS: Job Openings: Total(Seasonally Adjusted, Thousands)

12-MonthMoving Average


1600

2000

2400

2800

3200

02 03 04 05 06 07 08 09 10 11 12 13 14 15

JOLTS: Quits: Total(Seasonally Adjusted, Thousands)



The low productivity growth component of the secular stagnation story does not stand up to scrutiny.

Technological progress is accelerating and it is the key to productivity growth. Faster innovation means faster

productivity growth. The idea that productivity growth is slowing contradicts the tight linkage between

technological progress and productivity. In addition, low labor force growth makes capital relatively cheap

compared to labor. This tends to raise labor productivity by applying more capital per worker to evolving

production processes.

This, for example, was the case in the 1950s, when the small labor force cohort born during the Great

Depression combined with higher productivity to keep gross domestic product (GDP) growth strong. Conversely,

in the 1970s young baby boomers flooded into the workforce, making labor relatively cheap and productivity

low. Given this inverse pattern of labor force growth and productivity, it’s hard to see any basis for the secular

stagnation thesis other than suicidal public policies. The strong signals emanating from the U.S. labor market in

2014 suggest that predictions of secular stagnation are unwarranted by the facts on the ground, especially if the

U.S. can enact a pro‐growth immigration policy in the next few years. Without more immigrants, the labor force

is likely to be too tight by 2017 for growth to continue without significant wage inflation.


Economic Reports in Brief Jonathan Kozy, Senior Research Analyst

Highlights: Fourth‐quarter real GDP growth is still tracking around 3.0%. Consumer spending grew at a healthy

rate in the fourth quarter, even as retail sales data came in below expectations in December. Lower gasoline

prices hurt retail sales figures but are helping consumers, on balance, along with stronger equity markets and

improving labor market dynamics. Improving consumer confidence was evident in the University of Michigan’s

preliminary measure of consumer sentiment for January, which rose to an 11‐year high. As mentioned, small

business confidence is also improving and firms appear more likely to hire and raise wages. The data are

consistent with a number of labor market indicators, including those from the JOLTS, which show a rising trend

in job openings and rising “quits,” a positive dynamic. The latter is a component of the Federal Reserve’s (Fed’s)

Labor Market Conditions Index (LMCI), which firmed in December. On the inflation front, headline figures are

under pressure from falling energy prices, but we suspect “core” measures will return to the 1.5%‐to‐2.0% trend

we have seen the last few years as wage growth gains traction.

Small Business Optimism: Small business confidence rose to its highest level since October 2006. The underlying dynamics in the current reading were very positive. Firms appear to be poised to put money to work, as a number of employment components improved, and firms are planning on raising wages, on balance. The net percent of firms planning capital expenditures over the next three to six months also rose.

Exhibit 9: Small Business Dynamics Improving.



Employment Data: The outlook for the labor market continues to look very positive. The Conference Board’s

Employment Trends Index (ETI), a leading indicator, rose 0.5% in December, reaching a record high. Six of its

eight components made positive contributions for the month. Additionally, the change in the Fed’s LMCI came

in at a solid 6.1 in December, the best reading since May 2014. The index was created to assess changes in labor

market conditions and is derived from 19 indicators. New claims for unemployment compensation, a

component of the ETI, continue to run near or below the troughs of previous cycles. The level of claims suggests

that the labor market is getting close to full employment. For the week ending January 10 claims rose 19,000 to

316,000, and the four‐week moving average rose 6,750 to 298,000.

Retail Sales: Retail sales data came in below expectations for the last month of the quarter, but the quarterly

growth rate is still in line with the 3.0% – 3.5% trend in real consumer spending on goods we have seen over the

last few years. Overall, retail sales were down 0.9% in December following a downwardly revised 0.4% gain in

November (previously 0.7%). Lower gasoline prices weighed on gasoline station sales, which were down 6.5%

for the month, the seventh consecutive monthly decline. Nonstore retail sales, which include internet shopping,

were also lower for the month (‐0.3%). For consumer spending “tracking” purposes, “core” retail sales, which

exclude automobiles, building supplies and gasoline stations, dropped 0.2% for the month and are running at a

3.8% annual rate over the last three months.

Manufacturing Survey Data: Regional manufacturing survey data were mixed, but generally positive. The

headline Empire State manufacturing survey data rebounded from ‐1.23 to 9.95. The expectations survey data

were also up with the general business conditions index reaching its highest level since January 2012. The

Philadelphia Fed Business Outlook Survey, a sentiment measure, dropped for the second straight month to 6.3,

Current LastNovember

2004

March

2009

Small business optimism index 100.4 98.1 107.7 81.0

% of firms expecting higher real sales in 6 mos., net 20.0 14.0 35.0 ‐31.0

% of firms planning to increase employment, net 15.0 11.0 19.0 ‐10.0

% of firms planning capital expenditures in 3‐6 mos., net 29.0 25.0 30.0 16.0

% of firms expecting the economy to improve, net 12.0 13.0 47.0 ‐22.0

% of firms planning to raise worker compensation, net 17.0 15.0 16.0 0.0

Single most important problem: govt. requirements, % 22.0 22.0 10.0 12.0

Single most important problem: taxes, % reporting 27.0 23.0 17.0 22.0


but the future activity index rose. On balance, manufacturing survey data are bullish for the economic outlook

in 2015.

Budget Deficit: The federal government reported a surplus of $1.9 billion in December. The surplus was below

the Bloomberg consensus forecast for a surplus of $3.0 billion. Net receipts were up 17.6% year‐over‐year as

individual income tax receipts and corporate income tax receipts jumped 16.4% and 35.0%, respectively.

Outlays were up 43.8% year‐over‐year, but calendar effects likely pushed payments into December, so the

figure may be misleading on a year‐over‐year basis. On a 12‐month rolling basis, the deficit widened to ‐$487.4

billion (below 3% of GDP) and is down from ‐$572.6 billion in December 2014. Looking ahead, we expect the

positive trend in receipts to continue as the economy continues to gain momentum heading into 2015, and

while outlays may rise, debt‐to‐GDP should be stable, if not improving.

Consumer Confidence: The preliminary reading of the University of Michigan’s Index of Consumer Sentiment

rose 4.6 points in January to 98.2, an 11‐year high. The index of current economic conditions was up 3.5 points

to 108.3, while the expectations component rose 5.2 points higher to 91.6.

Consumer Prices: Headline inflation remains under pressure from lower energy prices, but “core” measures and

labor costs that drive the underlying trend still suggest inflation will track in the 1.5%‐to‐2.0% range. Headline

inflation fell 0.4% in December and is up 0.8% over the last year. The “core” measure was up 1.6% over the last

year and should move gradually closer to the Fed’s 2.0% target as the year progresses.

Exhibit 10: Inflation Likely to Return to 1.5%‐to‐2.0% Trend in 2015.



Industrial Production: Industrial production fell 0.1% in December following its biggest monthly gain since 2010

in November. For the quarter, industrial production grew at a 5.2% rate. For the month, manufacturing output

was up 0.3% while utility output dropped 7.3%, likely as a result of warmer weather.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

01 02 03 04 05 06 07 08 09 10 11 12 13 14

CPI-U: All Items Less Food and Energy(Seasonally Adjusted, 1982-84=100)

12-Month % Change Annualized

6-Month % Change Annualized


Market Strategy Ehiwario Efeyini, Senior Vice President and Senior Analyst

THE OUTLOOK FROM THE INSIDE—WHAT COMPANIES ARE SAYING

As we enter a new earnings season, what are the industry trends that investors should be watching? To help

shed light on this, we examined viewpoints and data from the latest quarterly earnings statements of a group of

leading companies.1 Our aims were twofold: first, to assess the traction that the major trends we are

monitoring at the theme, sector and country levels are getting; and second, to gain insight into which new ones

might be emerging as future return drivers. Our main findings were the following:

1. E‐commerce leading the way in global consumer markets

2. Metals markets may be past the worst, but downward price pressures remain

3. Telecommunications sector still facing many challenges, but longer‐term prospects could be brighter

4. Transportation sector may have the most to gain from low oil prices

5. Cybersecurity remains a major area of future growth

1. E‐commerce leading the way in global consumer markets

What companies are saying:

“As you can see, more and more Chinese consumers are shopping via mobile device…what we are doing right

now is to help more overseas merchants sell their products and services via our online marketplace to Chinese

consumers.” (Alibaba)

“We continue to invest in interconnected retail…and our supply chain team opened our Perris, California direct

fulfillment center, the second of three planned direct fulfillment centers. These automated facilities will support

our online growth.” (Home Depot)

Increasing wireless internet penetration and the rise of the emerging market consumer are two key trends

under our mega themes of “Innovation” and “People,” and the growing global e‐commerce market is being

driven in large part by both. Around the world, the number of people with access to the internet has ballooned

over recent years, almost tripling from roughly 1 billion in 2005 to over 2.7 billion in 2013. And the growing

uptake is not just a rich world phenomenon. Indeed, in absolute terms, the number of internet users in

developing countries overtook the number of developed‐country users in 2008. And of the more than 2.7 billion

internet users globally today, just under 1.8 billion (roughly 65%) are to be found in the emerging world. But

there is still a large divide between rich and poor countries. While less than a quarter of people in industrialized

economies are offline, close to a staggering 70% of emerging market inhabitants are currently not internet

users. Mobile is expected to drive much of the growth in their future usage, with the International Data

Corporation projecting a 48% rise in emerging world smartphone sales between 2014 and 2017—more than

double the developed world increase. China is leading the way. The constant hand‐wringing over its slowing

headline growth rate belies the fact that China is today still 1) the world’s fastest‐growing major economy,

2) the world’s largest smartphone market and 3) the world’s largest e‐commerce market. And the rest of Asia is

following. The Asia‐Pacific region as a whole is expected to overtake North America in total e‐commerce sales

this year (Exhibit 11); and a recent consumer survey by market research firm Nielsen2 found that over half of

online shoppers in the region favored their mobile devices for online shopping (versus around 30% in North

America and Europe). The most popular product categories for online purchase were airline tickets, hotel

reservations, clothing and electronics.

1 All quotations are taken directly from latest company earnings call transcripts, sourced from Bloomberg as of December 31, 2014.

2 “E‐commerce: Evolution or revolution in the fast‐moving consumer goods world?” (August 2014).


Exhibit 11: Asia‐Pacific to Overtake North America in E‐Commerce Sales this Year.

(Global e‐commerce sales, USD billions)

Past performance is no guarantee of future results.

Includes products and services ordered and leisure and unmanaged business travel sales booked using the internet via any device, regardless of the method of payment or fulfillment.

Source: eMarketer.

Data as of 2014.

Growing incomes and rising smartphone penetration should continue to support emerging market e‐commerce,

benefiting retailers with a strong online presence. But this is not just an emerging world trend. It is also worth

noting that even in the mature developed markets, e‐commerce is expected to grow by around 35% over the

next three years—well in excess of mobile device sales. Next‐day or even same‐day delivery is increasingly

becoming a means of differentiation between online retailers, and, as e‐commerce continues to account for a

rising share of total developed world retail sales, real estate demand for warehousing, distribution and other

customer fulfillment facilities should grow relative to the traditional brick‐and‐mortar segment.

2. Metals markets may be past the worst, but downward price pressures remain


“We do see the new suppliers affecting some markets at the moment. For example, expansions from iron ore

producers in Australia and Brazil have been the main driver of lower iron ore prices this year… In Copper, the

market has moved into surplus on the back of supply from new mines.” (Rio Tinto)

“Even though iron ore production reached a record, sales volume remained stable, and our flagship area, ferrous

minerals, suffered most from the reduction in sales prices.” (Vale)

Oversupply and sharp price declines in the oil market over recent months have been grabbing the headlines,

but a similar process has been unfolding in other commodity markets for years. In particular, key industrial

metals such as iron ore and copper have been under sustained pressure since peaking in early 2011. And though

their prices have fallen gradually relative to the dramatic plunge in oil, they have nonetheless fallen just as far

over the past four years (Exhibit 12).

430 484 539 598658 721

326374

418459

499535349

459

568

675

780

881

128

155

175

190

205

219

0

500

1000

1500

2000

2500

2013 2014f 2015f 2016f 2017f 2018f

Rest of WorldAsia-Pacific

Western Europe

North America

Asia-Pacificto overtake North America in e-commerce sales this year

Global e-commerce salesUSD (billions)

1,233

1,471

1,700

1,922

2,143

2,356


Exhibit 12: Iron Ore and Copper Prices have Fallen Just as far as Oil over the Past Four Years.

(Commodity prices index, January 1, 2011=100)


Iron ore is 62% ferrous content.

Source: Bloomberg.


Demand has clearly played a large role. China remains the dominant consumer of metals (commanding a 40%‐

plus share of the global market) and its shift in economic growth away from fixed investment has seen metal

demand slow sharply. But crucially, the global supply response has so far been limited, and the drop in oil prices

has contributed to this by lowering breakeven production costs in what is a highly energy‐intensive industry.

Higher‐cost producers in the iron ore market (particularly in China itself) have been forced to curtail their

output as prices fall. But the dominant low‐cost suppliers (primarily in Australia and Brazil) have meanwhile

continued to expand production from existing mines while remaining profitable, driving the supply glut that

continues to undermine prices. At the same time, new production capacity in copper is set to come online in

Peru (the world’s third‐largest producer) over the next 12 months as a major new mining project in the south of

the country nears completion—many industry analysts are expecting another year of global production surplus

in 2015. However, in both markets the global balance does appear to be shifting. Recent announcements from

Australian copper majors have forecast production declines for this year (including at the world’s largest copper

mine in Chile), while more than 20 iron ore mining projects have reportedly been canceled or suspended over

the past six months. Indeed, having been on a similar downtrend since 2011, balances in other base metals such

as aluminum, nickel and zinc have already tightened; and despite correcting in the second half of the year

alongside the drop in energy, prices for all three of these metals rose in 2014. But while price declines should

moderate from here, we expect that iron ore and copper prices will still be vulnerable to further downside while

China’s industrial activity remains in a structural downtrend, and especially as long as output surpluses persist

for each. Of all the commodity groups, therefore, industrial metals remain our least‐favored.

3. Telecommunications sector still facing many challenges, but longer‐term prospects could be brighter


“During the quarter, we converted 55,000 customers from copper to fiber, bringing our year‐to‐date total to

around 200,000. This network evolution initiative is enabling us to systematically upgrade the network and

provide higher quality of service to customers… We are deploying capital to proactively stay ahead of demand

and our capital investments continue to focus on adding capacity to optimize our 4G LTE network, primarily by

increasing network density and deploying spectrum.” (Verizon)

“We are also building for the future through our global platforms and video delivery and machine‐to‐machine.

New revenue streams from machine‐to‐machine and telematics are beginning to emerge. In the third quarter,

these revenues were approximately $150 million and totaled more than $400 million through nine months, an

increase of more than 40% year‐to‐date…So it’s more than just about a smartphone customer.” (Verizon)

On top of the short‐term risk from a potential rise in interest rates, the telecommunications sector continues to

face a range of headwinds over the medium term. On the demand side, the most glaring have been a mature

developed market subscriber base, declining voice usage and increasing competition from instant messaging

applications. But supply‐side network service challenges also abound. The fundamental challenge stems from

surging data usage around the world, particularly for mobile communication. Over the next three years, for

example, growth in mobile data usage is projected to outstrip the increase in smartphone users by more than

0

20

40

60

80

100

120

140

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

Iron Ore

Copper

Crude Oil


7 to 1, with wireless data usage itself growing at a roughly 60% annualized rate (Exhibit 13).

Exhibit 13: Mobile Data Usage Surging Despite Maturing Smartphone Penetration.

(Number of global smartphone users, global data usage, total number of users, gigabytes per month, billions)


Sources: Cisco Systems; eMarketer.

Data as of 2014.

This is requiring greater investment in network infrastructure to maintain service levels and accommodate

demand in large, fast‐growing segments like video content streaming. Telecommunications firms have to

increase outlays on fiber optics (both directly to end users and to cell towers), purchase more wireless

bandwidth and invest in additional layers of coverage through smaller range cells. But the longer‐term outlook

for the sector may not be universally gloomy. As we have discussed previously (see July 28, 2014, Capital

Market Outlook: “The Internet of Things—Economic Impacts and Investment Implications”), a range of enabling

factors should see the number of internet‐connected objects rise significantly over the coming years. And as

recent company statements acknowledge, this represents a major potential source of growth for network

operators. Cisco Systems expects the number of machine‐to‐machine connections to rise from 500 million in

2014 to 2 billion in 2018, driven by growth in areas such as remote healthcare monitoring, infrastructure

maintenance, home automation and vehicle servicing. While these markets are still at a nascent stage, their

increasing importance could help the telecommunications sector to re‐rate from today’s relatively attractive

valuation levels.

4. Transportation sector may have the most to gain from low oil prices


“When you think about where fuel prices are today versus where they were just a few weeks ago it’s in excess of

$1 billion of cost of goods sold improvement. So, overall, the fuel price reductions we’ve seen in the marketplace

are a huge opportunity going forward.” (Delta Airlines)

“Everything else being equal, lower fuel prices helps elasticity at Express by having that lower surcharge. And

there is a trade‐up factor just as there is a trade‐down factor when prices are extremely high.” (Fedex)

The collapse in oil prices has caused volatility to rise across risk assets and remains a weight on the energy

sector, both in equity and credit markets. Though it still remains to be seen, the fall in retail gasoline prices is

nonetheless expected to lift discretionary incomes and boost consumer spending, while lower crude prices

boost growth rates for importer nations. But the clearest beneficiary so far appears to have been the

transportation sector. While oil prices crashed in the second half of 2014, airlines were one of the best‐

performing of all industry groups; and freight and logistics also outperformed its industrials super‐sector by a

wide margin. Outside the oil and gas industry itself (which is of course affected on both sides), transportation

dominates the list of the most energy‐intensive industries in the U.S. economy—especially the air and truck

segments (Exhibit 14).

0

2

4

6

8

10

12

2013 2014f 2015f 2016f 2017f

Smartphone users

Mobile data usage


Exhibit 14: Transportation Sector among the Most Energy‐Intensive.


Sources: Bureau of Economic Analysis; UBS.

Data as of 2013.

Should gasoline and jet fuel prices remain depressed, we would expect the direct bottom line boost to earnings

to remain a tailwind. For airlines, this should apply particularly where fuel purchases are not hedged, where

customer exposure to net oil‐exporting countries is low and where exposure to faster‐growing oil importers is

high—particularly in higher‐income emerging Asia, where we expect the large, fast‐growing consumer class to

spend more on travel and leisure. Within the logistics industry group, fuel surcharges are likely to be lowered

but will lag the underlying fuel price, which should come as a source of support for profit margins. And recent

industry comments suggest that surcharge reduction should also lead customers to “trade up” to higher‐value

services—particularly for parcels, as opposed to freight. While fuel expenses remain low, the group should also

continue to benefit from a lower cost of purchased transportation. Within the equity market (if not yet in the

real economy), consumer sectors—particularly retail, food and apparel—have also been outperformers during

the oil downdraft. But with valuations for both discretionary and staples looking the most stretched across all

sectors, transportation could yet have the most still to gain from a persistently low oil price.

5. Cybersecurity remains a major area of future growth


“Security was a top concern for customers across all verticals at the Customer Conference, as cyber attacks

continue to increase in size and sophistication… This high level of interest and engagement by our customers is

an indication of why security has continued to be our fastest growing product category.” (Akamai)

“The increase in both the number and severity of advanced attacks is evident in all aspects of our business. Our

incident response teams operate around the clock responding to breaches and we remain active in a record

number of engagements worldwide.” (FireEye)

High‐profile breaches across a range of industries, including retail, telecommunications, media and technology,

put cybersecurity in the spotlight last year. And plans announced early in 2015 by the Obama administration to

legislate closer ties between the government and information technology (IT) security firms have focused more

attention on this key component of our “Innovation” mega theme. A survey released last September by

PricewaterhouseCoopers (PwC)3 found that the number of cyberattacks detected by global respondents rose by

48% to 42.8 million in 2014, with an estimated cost to the global economy of $375 billion to $575 billion. A

separate survey conducted by Hewlett Packard and leading IT security research firm the Ponemon Institute4

estimated an average annual cost of $7.6 million for attacks across 257 companies in seven major economies.

Energy, utilities and financial services were the hardest‐hit, with the greatest costs coming from business

disruption and loss or theft of information. On the risk management side, the highest return on investment

came from next‐generation solutions such as security intelligence systems, advanced perimeter controls and

encryption technologies. This all goes to highlight three main points: 1) Cybercrime is a concern for companies

across all sectors around the world, 2) cyberattacks are growing in number, cost and complexity, and 3) more

effort is being put into addressing them. The PwC survey revealed a 4.9% increase in IT security budgets across

large firms (those with more than $1 billion in revenue) in 2014, while consulting firm AlixPartners projects an

11% annualized increase in global cybersecurity spending over the next three years (Exhibit 15).

3 “Managing Cyber Risks in an Interconnected World: The Global State of Information Security Survey 2015” (September 2014).

4 2014 Global Report on the Cost of Cyber Crime” (October 2014).

Petroleum and coal share of intermediate inputs

Industry

Intermediate Inputs

($bn) Petroleum and Coal Inputs ($bn)

Share of

Inputs

Air Transport 94 41 43.6%

Truck Transport 179 61 34.1%

Rail Transport 38 10 26.3%

Water Transport 42 11 26.2%

Utilities 110 20 18.2%

Mining (excl. oil and gas) 49 6 12.2%

Pipeline Transport 9 1 11.1%

Construction 515 47 9.1%

Farming 234 21 9.0%

Forestry, Fishing 17 1 5.9%


Exhibit 15: Projected Growth in Global Cybersecurity Spending.

(Global cybersecurity spending, USD billions)


Source: AlixPartners.

Data as of 2013.

And with the number of global connected objects (from light bulbs to power sockets, appliances, thermostats,

machine tools and public infrastructure) expected to more than triple by 2020, the number of entry points for

potential attacks will multiply. We therefore expect demand to rise for leading IT security products that go

beyond simple firewalls and use data analytics to examine digital patterns, detect potential breaches and make

inferences as to what an attacker is likely to do next. Specialized security software vendors may also become

bigger acquisition targets for aerospace or defense companies that already have one foot in security services

and are looking to diversify their revenue sources.

Macroeconomic and policy developments are fundamental to our investment outlook, but it will remain critical

to take note of what companies themselves are saying in order to inform, confirm and modify our thematic,

sector and country views. We will continue to keep an ear to the corporate sector for insights into which trends

are having the biggest impact on their businesses, and which new ones might be emerging as future drivers of

investment return.

34 37 41 44

2123

2628

1820

2326

14

17

19

22

0

20

40

60

80

100

120

140

2014f 2015f 2016f 2017f

Rest of World

Asia-Pacific

Western Europe

North America

87

97

109

120


Global Perspective Joseph P. Quinlan, Managing Director and Chief Market Strategist

THE WORLD’S FRAGILE CORE

For most investors, the “Happy” in the New Year has gone missing—at least thus far in 2015. After the first 10

trading days of the year, the Dow Jones Industrial Average had dropped by 2.8%, the S&P 500 by 3.2% and the

Nasdaq by 3.5%. Meanwhile, the general direction of most global equities has been one way: down. What

gives? Why have the global markets stumbled out of the gates?

Answer: The CORE of the world economy has weakened considerably over the past few months, spooking

investors who fear that the one economy exhibiting some strength—the United States—will be dragged under

by the rest of the world.

The CORE is weakening

By CORE, we mean the following: (C)hina, (O)il, (R)ussia and commodity producers, and (E)urope. This cohort,

outside the United States, represents the core of the global economy, with problems in the center reverberating

around/spilling over to other parts of the world. We briefly summarize the key problems in the CORE.

China: 7% growth is a thing of the past

China is in the midst of a long march toward service‐ and consumption‐led growth after decades of relying on

investment and exports to drive economic activity. Real growth has slowed since 2010 and continues to

moderate. While the nation posted 7%+ growth in 2014, and is expected to expand at a similar rate this year,

investors need to rethink (adjust to) a China that expands by 5% to 6% per annum, half the level of a decade

ago.

In the near term, reducing and managing financial risks are key challenges for Beijing following a surge in

nontraditional lending over the past few years. As the World Bank recently noted,

“China’s corporate sector and local government debt has grown rapidly and is high, with an increasing share

intermediated by the non‐bank financial system. Total (household, corporate, and government) debt stands at

250 percent of GDP.”5 Investment accounted for 45% of GDP in 2014; meanwhile, nontraditional credit has

accounted for more than half of net lending flows since 2009 and roughly 70% during 2012 – 2013, according to

the World Bank.

That said, is there a financial crisis brewing in China? The short answer: No. As a percentage of GDP, China’s

public debt level is less than 60%, leaving Beijing the scope to deploy countercyclical fiscal policies and room to

bail out banks as nonperforming loans mushroom in the quarters ahead. In addition, China’s sovereign debt is

predominantly domestically held, while capital controls on portfolio investment and bank lending reduce the

risk of a sharp spike in capital outflows.

Notwithstanding these factors, China’s economic growth story is being rewritten, and the tectonic shift away

from investment‐led growth is being acutely felt in many developing nations dependent on China for export

growth. To the latter point, as China goes, so go many other parts of the world. For instance, Latin America’s

dependence on the Middle Kingdom has soared since 2000, with Latin America’s exports to China surging

tenfold between 2000 and 2013. Emerging market growth will remain challenging as various commodity

producers adjust to China’s new growth path.

Oil: a blessing and a curse?

First the good news: a sustained drop in oil prices will spur global growth, notably global personal consumption

expenditures, and shift real incomes from oil exporters to oil importers. The latter easily outnumber the

former, so softer oil prices are bullish for global growth.

5 World Bank, “Global Economic Prospects” January 2015.


The bad news: the emerging recession in the global energy patch will weigh on global capital expenditures and

potentially trigger corporate credit stress among smaller shale producers in North America; meanwhile, large

integrated oil companies have already announced massive reductions in capital spending this year, actions

whose ripple effects reach far and wide in the general economy. Lower oil prices have also raised the prospects

of credit risks in a number of oil‐exporter nations, whose real growth has been hammered by the commodity

swoon.

It’s the rate of decline in oil prices that has caught the market off guard. Up until the second half of 2014, oil

seemed to be divorced from other commodities like metals and agricultural and raw materials, whose prices

had been declining since the first quarter of 2011. Oil prices, meanwhile, traded in a narrow band of $105 per

barrel until June 2014 before plunging over the next few months. As the World Bank highlights, “By the end of

2014, the cumulative fall in oil prices from the 2011 peak was much larger than that in non‐oil commodity price

indices.”6

It is this dramatic swoon in prices that has rattled the markets, caused a spike in volatility and raised a bevy of

concerns (about growth, deflation and geopolitics, for example) in the minds of investors.

Russia and commodity producers: coping with less capital

The external and internal accounts of Russia and the world’s primary commodity producers have deteriorated

sharply over the past year, with plunging oil revenues squeezing growth, investment, trade and lending in many

parts of the world. As the World Bank notes, “a permanent 10 percent oil price drop could cut GDP growth by

0.8‐2.5 percentage points in the developing oil exporters of the Middle East/Africa in the first year.”7

Two other factors are not helping matters: First, rising geopolitical risks in central Europe and large swathes of

the Middle East have adversely affected revenues/flows of tourism, trade and investment, further compressing

real growth. Second, as noted by the World Bank, public debt levels have increased in oil‐importing nations

from 73% to 88% of GDP during 2011 – 2014, making debt servicing costs that much more arduous. Yet another

risk lies with currency mismatches, with some nations export earnings predominantly denominated in euros, for

instance, while corporate borrowing or external liabilities are predominantly denominated in U.S. dollars. This

dynamic dangerously exposes the debt of many corporates and sovereigns to rapid shifts in exchange rates.

The larger the presence of foreign capital in the local capital markets, the greater the vulnerability to sharp

financial swings. By this metric, some notably exposed nations included Argentina, Peru, South Africa, Mexico,

Indonesia, Hungary and Russia.

Europe: too big to fail, but failing

Also at the core of the global economy is Europe, with the euro area accounting for one‐sixth of global GDP, and

a quarter of global trade and cross‐border banking. Europe, in other words, is too big to fail, with sluggish

demand across the continent depressing export growth of not only the United States but also Eastern Europe,

North Africa, the Middle East and South Asia, which are heavily dependent on European export markets.

Europe is the weakest link of the global economy, and it remains the most fragile component of the global

economy even if the European Central Bank (ECB) surprises on the upside when it comes to quantitative easing

(QE). QE is expected to be launched in Europe this week, but the question remains whether or not the effects

will be sustainable and credible enough to get Europe’s morbid economy moving again.

Encouragingly, the latest economic figures from Germany have improved, while a weaker euro and continued

strength in the U.S.—Europe’s largest export market—should help revive growth in the second half of the year.

A sizable rebound in growth, however, is not expected soon, with Europe still anchored by many structural

impediments to growth like an aging labor force, service‐sector rigidities and high public‐sector deficits.

6 Ibid.

7 Ibid.


Can the CORE hold together?

The fragile CORE is the most significant risk to the global capital markets, and to the United States. The latter,

contrary to some of the views on Wall Street, is not an island—or an economic entity that can easily divorce

itself from the rest of the world or problems in the CORE.

The United States is the largest economy in the world, yet it accounts for just 20% of world GDP and less than

5% of the world population. What happens elsewhere has ramifications at home. A China in transition, the

unfolding oil price shock, plunging growth/demand in Russia and the commodity producers and a failing

Europe—against this backdrop, the fragile CORE is placing substantial stress on the global capital markets and

will continue to do so in the near term.

Not until later this year, when oil prices find a bottom, China finds a floor, Russia and other emerging markets

adjust to the new realities of 2015, and Europe sputters back to life thanks to QE, will the global capital markets,

notably equities, gain traction and grind higher.


Portfolio Positioning Investment Strategy Committee

Portfolio Strategy and Asset Allocation

• We expect equities to outperform fixed income: Our research indicates that we are in the midcycle phase of the business cycle. Equities have traditionally outperformed significantly in the recovery phase and continue to outperform, albeit at a slower pace, in the midcycle. We do not believe the concern over growth is one that becomes reality, and, clearly, we are not in the late‐stage cycle, which is typically characterized by a period of rising rates and tight monetary policy. In addition, relative valuations still favor stocks over bonds. Therefore, we remain overweight equities and underweight fixed income, but we expect a more volatile backdrop.

• Within equities, and relative to other asset classes, we continue to expect U.S. equities to outperform and remain overweight: We continue to expect the U.S. economy to lead global growth, and U.S. equities should outperform accordingly, particularly given the strengthening of the U.S. dollar.

• We are underweight EM equities: Volatility is picking up as risk is being repriced. Valuations are attractive, in our view, and the impact from monetary policy normalization in the U.S. should fade. We remain selective in emerging markets with a preference for Mexico and South Korea, and we are committed to owning what the emerging market consumer needs and buys. Countries with large deficits will be most vulnerable to monetary normalization, especially where investors have seen little encouragement on the reform front. Russia and Brazil continue to remain under pressure and weigh down the indexes.

• We are slightly overweight international developed equities versus our strategic allocation but on a hedged basis: An improving global economic backdrop should provide enough tailwinds to support Europe, in addition to Japan continuing aggressive steps to end deflation. The ECB is still behind the curve, but we expect a QE program to be developed early in 2015, which should support an improved equity environment in Europe. As a result, we remain market weight in Europe. Given our strong dollar view, hedging international exposure, particularly in Europe and Japan, is important at this point in the cycle.

• Sectors: We remain overweight financials as we expect the sector to benefit from a steep yield curve, a firming dollar, improving credit quality and stronger loan growth as the U.S. economic expansion broadens. We also retain our overweight in IT, healthcare and believe energy is at historically low relative valuation levels. We remain neutral weight in materials and industrials, as well as in the consumer sectors. We retain our underweights in utilities and telecommunications.

• We remain underweight fixed income, but we still find opportunities selectively in credit: We recommend that investors maintain a neutral to slightly short duration. We continue to prefer credit over Treasuries, with an emphasis on corporate bonds, municipals, and commercial mortgage‐backed securities (CMBS). However, in the currently higher volatility market, some allocation to Treasuries for liquidity and safety is advised. Given the strength of the U.S. dollar, we are avoiding non‐North American sovereign bonds. Within fixed income, we are maintaining our neutral weight to municipal and corporate high yield and leveraged loans. We also recommend a more active management approach to improve potential returns in an eventual rising rate environment. A barbell strategy of owning bonds with both longer and shorter maturities should perform better than a laddered or bulleted strategy.

• We are tactically underweight commodities: The asset class has not drifted upward following the path of better‐than‐expected growth, as we anticipated when we originally closed out our underweight in the third quarter of 2014. We expect all of the crosscurrents in the commodities space to continue in 2015 with the asset class likely to remain range‐bound at best in 2015. Given current prices, we prefer energy and agriculture‐based commodities versus metals. We will continue to examine our position as we move through the year.

• We are neutral hedge funds: The opportunity set is widening as monetary policy divergence unfolds, globally and volatility has increased.

• We are neutral private equity.

• We remain neutral in real estate as an asset class: Outperformance by real estate investment trusts (REITs) over the last few years has stretched valuations.


• The dollar: Reduced trade and fiscal deficit are part of the new U.S. expansion, which is also supportive of the greenback. Faster relative growth in the U.S. is attracting bigger foreign capital inflows. We expect this positive self‐reinforcing dynamic for a stronger U.S. currency to continue over the next few years. We see the yen moving into the 125‐to‐150 range and the euro approaching parity over the next several years.

• “A Transforming World” investment themes (Earth, people, innovation, markets, government): We continue to emphasize the manufacturing renaissance, cybersecurity, personalized medicine, obesity, the emerging market middle‐class consumer, long‐term North American energy and the natural resource revolution within these categories.


Appendix

ECONOMIC AND MARKET FORECASTS (AS OF JANUARY 16, 2015)

Q1 2014 Q2 2014 Q3 2014 2012 2013 2014 E 2015 E

Real global GDP (% y/y annualized) 3.4 3.3 3.0 – 3.5 3.5 – 4.0

Real U.S. GDP (% q/q annualized) ‐2.1 4.6 3.9 2.3 2.2 2.0 – 2.5 3.5 – 4.5

CPI inflation (% y/y)* 1.4 1.6 1.6 2.1 1.5 1.5 – 2.0 1.5 – 2.0

Core CPI inflation (% y/y)* 1.7 1.7 1.7 2.1 1.8 1.5 – 2.0 2.0 – 2.5

Unemployment rate, period average (%) 6.7 6.2 6.1 8.1 7.4 6.1 5.2

Fed funds rate, end period (%) 0.12 0.12 0.12 0.12 0.12 0.12 0.75 – 1.25

10‐year Treasury, end period (%) 2.73 2.53 2.52 1.78 3.04 2.17 1.5 – 2.5

S&P 500, end period 1872 1960 1972 1426 1848 2059 2175 –2250

S&P operating earnings ($/share) 27.3 29.3 29.6 96.8 107 116 – 120 128 – 130

$/€, end period 1.38 1.37 1.26 1.32 1.37 1.21 1.10 – 1.20

¥/$, end period 103 101 110 87 105 120 120 – 130

Oil ($/barrel), end period 102 106 91 92 98 53 55 – 85

Percent calendar‐year average over calendar‐year average annualized unless stated. E = Estimate.*Latest 12‐month average over previous 12‐month average. Past performance is no guarantee of future results. Economic or financial forecasts are inherently limited and should not be relied on as indicators of future investment performance. Source: U.S. Trust® Investment Strategy Committee.


ASSET ALLOCATION TABLE (AS OF DECEMBER 8, 2014)

ASSET CLASS ALLOCATION WEIGHTING*

Cash Positioning We have a small cash position awaiting deployment when opportunities arise.

Valuation Low yields. Negative real yields.

Equities Positioning We are overweight equities. The midcycle stage of an expansion suggests the equity bull market will continue in 2015, but in a more volatile backdrop.

Emphasis We expect the U.S. and international developed markets to outperform other asset classes.

We are overweight financials, information technology, energy and healthcare.

Valuation Valuations favor equities over fixed income.

U.S. Large Caps Positioning We are overweight large caps based on their exposure to global growth.

Emphasis Emphasis on mega cap growth segment.

Valuation Attractive relative valuation.

U.S. Mid Caps Positioning We are overweight mid caps.

Emphasis Beneficiaries of strengthening U.S. economy led by housing.

Valuation Overvalued relative to large cap.

U.S. Small Caps Positioning We are overweight small caps.

Emphasis Beneficiaries of strengthening U.S. economy led by housing.

Valuation Overvalued relative to large cap.

International Developed

Positioning Japanese equities should enjoy tailwinds from faster global growth. On balance, Europe is likely to remain in a relatively slow growth mode that stymies equity valuations compared to those in the U.S. and Japan.

Emphasis We favor Japanese equities over European equities, where we are neutral weight.

Valuation Attractively valued.

Emerging Markets Positioning We are underweight emerging markets.

Emphasis Asia should continue to outperform on a regional basis. On a country‐specific basis, we favor Mexico and South Korea.

Valuation Valuations are attractive.

Fixed Income Positioning We remain underweight fixed income, as it is less attractive compared to asset classes such as equities.

Emphasis We recommend that investors maintain a neutral to slightly short duration. We continue to prefer credit over Treasuries, with an emphasis on corporate bonds, municipals, and commercial mortgage‐backed securities (CMBS). However, in the currently higher volatility market, some allocation to Treasuries for liquidity and safety is advised. Given the strength of the U.S. dollar, we are avoiding non‐North American sovereign bonds. Within fixed income, we are maintaining our neutral weight to municipal and corporate high yield and leveraged loans. We also recommend a more active management approach to improve potential returns in an eventual rising rate environment. A barbell strategy of owning bonds with both longer and shorter maturities should perform better than a laddered or bulleted strategy.

Valuation Expensive overall.

− +

− +

− +

− +

− +

− +

− +


ASSET CLASS ALLOCATION WEIGHTING*

U.S. Investment‐Grade

Positioning We are underweight mostly due to a significant underweight in Treasuries.

Emphasis Active management.

We continue to prefer corporate bonds over Treasuries. We would also emphasize high‐quality municipals and commercial mortgage‐backed securities.

Valuation Yields near all‐time lows on investment‐grade bonds.

Treasuries are expensive and vulnerable to rising rates.

International Positioning We are underweight.

Emphasis Be selective. Given the strength of the U.S. dollar, we are avoiding non‐North American sovereign bonds.

Valuation North American currencies should perform in line with strength in the U.S. economy.

High Yield Positioning We are neutral.

Emphasis We are maintaining our neutral weight to corporate and municipal high yield, and leveraged loans, given current fundamentals and yield over Treasuries.

Valuation Fair value.

Commodities Positioning We are underweight commodities.

Emphasis We favor energy‐related commodities and soft commodities over metals.

Hedge Funds Positioning We are neutral hedge funds, as we prefer more directional asset classes.

Emphasis We favor distressed‐oriented credit, global macro/CTA and equity long/short strategies.

Private Equity Positioning We advise using a staged approach gaining vintage‐year and global diversification over time.

Emphasis From a sector perspective, we are optimistic on healthcare, energy and infrastructure.

Real Estate Positioning We are neutral real estate as valuations are unattractive.

Emphasis We prefer opportunistic and value sectors.

*Tactical qualitative investment strategy weightings are relative in nature versus the strategic weightings for a fully diversified portfolio. Weightings are based on the relative attractiveness of each asset class. Tactical strategy weightings are for a 12‐ to 36‐month time horizon.

Because economic and market conditions change, recommended allocations may vary in the future. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. All sector and asset allocation recommendations must be considered in the context of an individual investor’s goals, time horizon and risk tolerance.

Not all recommendations will be suitable for all investors.

Alternative investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential, but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity and your tolerance for risk.

Source: U.S. Trust Investment Strategy Committee.

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U.S. EQUITY INDEXES (TOTAL RETURN, PERCENT CHANGE)

CLOSE

1/16/2015 LAST WEEK MTD YTD

LAST 12 MOS.

TRAILING 12‐MO.P/E

GROSS DIV.

12‐MO. YLD.

Dow Jones Indstrl. Avg. 17,511.57 ‐1.25 ‐1.66 ‐1.66 9.17 15.74 2.23

S&P 400 MidCap 1,430.89 ‐0.70 ‐1.45 ‐1.45 7.34 22.31 1.55

S&P 500 2,019.42 ‐1.22 ‐1.85 ‐1.85 11.65 17.90 1.99

S&P 600 SmallCap 678.28 ‐0.34 ‐2.39 ‐2.39 3.55 24.79 1.45

Nasdaq Composite 4,634.38 ‐1.48 ‐2.12 ‐2.12 11.25 37.79 1.30

Russell 1000® 1,123.11 ‐1.18 ‐1.79 ‐1.79 11.11 18.64 1.91

Russell 1000® Growth 946.08 ‐1.09 ‐1.53 ‐1.53 11.20 22.29 1.51

Russell 1000® Value 1,006.32 ‐1.27 ‐2.06 ‐2.06 11.04 15.94 2.32

Russell Midcap 1,637.18 ‐1.03 ‐1.54 ‐1.54 10.86 22.74 1.63

Russell Midcap Growth 732.54 ‐1.41 ‐2.04 ‐2.04 9.11 27.03 1.16

Russell Midcap Value 1,680.13 ‐0.63 ‐1.01 ‐1.01 12.84 19.46 2.12

Russell 2000® 1,176.66 ‐0.75 ‐2.30 ‐2.30 1.62 52.87 1.37

Russell 2000® Growth 707.42 ‐1.09 ‐2.02 ‐2.02 1.38 130.92 0.70

Russell 2000® Value 1,483.49 ‐0.39 ‐2.60 ‐2.60 1.97 33.06 2.05

U.S. EQUITY SECTORS (TOTAL RETURN, PERCENT CHANGE)

10 GLOBAL INDUSTRY CLASSIFICATION STANDARD SECTORS

INDEX WEIGHT

LAST WEEK MTD YTD

LAST 12 MOS.

TRAILING 12‐MO. P/E

GROSS DIV.

12‐MO. YLD.

Consumer Disc. 11.80 ‐1.67 ‐3.43 ‐3.43 8.19 20.59 1.51

Consumer Staples 10.13 0.31 1.63 1.63 19.43 20.81 2.48

Energy 8.05 ‐1.50 ‐4.63 ‐4.63 ‐9.76 12.70 2.89

S&P 500 100.00 ‐1.22 ‐1.85 ‐1.85 11.65 17.90 1.99

Financials 16.03 ‐2.67 ‐4.94 ‐4.94 8.68 14.31 1.84

Healthcare 14.75 0.22 2.91 2.91 25.28 23.36 1.43

Industrials 10.21 ‐1.29 ‐3.43 ‐3.43 6.47 18.10 2.10

Info. Tech. 19.42 ‐2.48 ‐2.76 ‐2.76 15.80 19.34 1.57

Materials 3.16 ‐1.10 ‐1.45 ‐1.45 5.70 17.47 2.16

Telecomm. Services 2.34 1.90 2.43 2.43 6.84 13.55 4.93

Utilities 3.39 2.62 3.02 3.02 32.60 18.89 3.23

INTERNATIONAL MARKETS (TOTAL RETURN, PERCENT CHANGE)

CLOSE


LAST 12 MONTHS

MSCI AC World 185.24 ‐0.49 ‐1.76 ‐1.76 2.69

MSCI EAFE 4,779.29 0.73 ‐1.84 ‐1.84 ‐6.70

MSCI Europe 5,483.38 1.40 ‐2.22 ‐2.22 ‐8.64

MSCI Pacific 4,810.66 ‐0.53 ‐1.13 ‐1.13 ‐3.07

MSCI EM 402.11 ‐0.40 0.15 0.15 0.75

MSCI AC Asia ex Japan 374.44 0.45 0.95 0.95 8.07

CURRENCY SPOT RETURN PERFORMANCE AGAINST THE U.S. DOLLAR (PERCENT CHANGE)

CURRENCY CLOSE


LAST 12 MONTHS

90‐DAY BOND YLD.

Australian Dollar 0.82 0.23 0.59 0.59 ‐6.78 2.41

Brazilian Real 2.62 0.40 1.35 1.35 ‐9.95 12.29

Canadian Dollar 1.20 ‐0.98 ‐3.03 ‐3.03 ‐8.80 0.92

Swiss Franc 0.86 18.12 15.79 15.79 5.37 0.00

Euro 1.16 ‐2.32 ‐4.39 ‐4.39 ‐15.07 ‐0.15

British Pound 1.52 ‐0.07 ‐2.74 ‐2.74 ‐7.36 0.48

Japanese Yen 117.51 0.84 1.93 1.93 ‐11.20 ‐0.04

South Korean Won 1,077.23 1.16 1.28 1.28 ‐1.29 1.97

Singapore Dollar 1.33 0.47 ‐0.12 ‐0.12 ‐4.19 0.61

U.S. GOVERNMENT BONDS (GENERIC, CHANGE IN YIELD)

YIELD

1/16/2015 LAST WEEK YTD

LAST 12 MONTHS

90‐day T‐bill 0.03 0.01 ‐0.01 ‐0.01

Two‐year Treasury 0.49 ‐0.10 ‐0.18 0.08

Five‐year Treasury 1.29 ‐0.16 ‐0.36 ‐0.37

10‐year Treasury 1.83 ‐0.15 ‐0.34 ‐1.03

10‐year TIPS (real) 0.23 ‐0.09 ‐0.24 ‐0.34

BOND INDEXES (BARCLAYS CAPITAL, TOTAL RETURN, PERCENT CHANGE)

YIELD TO WORST 1/16/2015

LAST WEEK MTD YTD

LAST 12MONTHS

Corporate & gov’t. 1.88 0.64 1.73 1.73 7.00

Broad corporate 2.90 0.51 1.76 1.76 8.17

Non‐investment‐grade

6.61 ‐0.31 ‐0.08 ‐0.08 1.39

Treasury bills 0.05 0.01 0.02 0.02 0.06

Treasury notes and bonds

1.17 0.76 1.84 1.84 6.34

Agencies 1.17 0.47 1.13 1.13 4.37

Mortgages 2.43 0.09 0.48 0.48 5.73

Municipals 1.85 0.67 1.41 1.41 9.10

Global gov’t., ex‐U.S.

0.89 0.48 0.26 0.26 ‐2.75

U.S. Aggregate 2.04 0.48 1.35 1.35 6.57

Global Emerging Markets

5.32 ‐0.02 ‐0.60 ‐0.60 1.94

Global Aggregate ex‐USD

0.96 0.34 ‐0.29 ‐0.29 ‐3.36

COMMODITIES (PRICE RETURN, PERCENT CHANGE)

BLOOMBERG COMMODITY INDEX & THE UNDERLYING COMMODITIES

LAST WEEK YTD

LAST 12 MONTHS

Silver 8.11 13.79 ‐12.28

Gold 5.00 7.85 2.60

Natural Gas 4.75 6.60 ‐27.79

Sugar 2.82 5.58 ‐10.04

Aluminum 2.15 ‐0.31 ‐2.54

RBOB Gasoline 2.03 ‐7.55 ‐44.13

Crude Oil 0.29 ‐8.51 ‐43.14

Bloomberg Commodity Index* ‐0.30 ‐0.98 ‐17.42

Soybean Oil ‐0.86 3.89 ‐15.79

Brent Crude ‐1.86 ‐12.39 ‐47.52

NY Harbor ULSD ‐1.94 ‐9.94 ‐42.11

Cotton ‐2.52 ‐1.73 ‐26.24

Zinc ‐2.60 ‐3.66 0.11

Lean Hogs ‐2.97 ‐6.72 ‐5.16

Corn ‐3.31 ‐2.52 ‐16.28

Nickel ‐3.42 ‐2.49 ‐0.59

KCBT Wheat ‐3.91 ‐7.90 ‐11.84

Live Cattle ‐4.06 ‐5.82 13.30

Copper ‐4.99 ‐7.38 ‐21.16

Coffee ‐5.03 2.64 30.88

Wheat ‐5.50 ‐9.67 ‐13.65

Soybeans ‐5.75 ‐3.10 ‐12.41

Soy Meal ‐6.56 ‐6.16 ‐6.05

(*Total‐return index)


Sources: Bloomberg; FactSet; U.S. Trust® Market Strategy Team. 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.


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.

The Barclays Bond Indexes are used as performance benchmarks in each respective category of U.S. debt issuances.

The Barclays Capital U.S. Aggregate Index is an unhedged market capitalization‐weighted index of the total U.S. investment‐grade bond market.

The Barclays Capital U.S. Corporate High‐Yield Bond Index is an unmanaged, market value‐weighted index, which covers the U.S. non‐investment‐grade fixed‐rate debt market. The index is composed of U.S. dollar‐denominated corporate debt in industrial, utility and finance sectors with a minimum $150 million par amount outstanding and a maturity greater than 1 year.

The Bloomberg Commodity Index is composed of futures contracts on 22 physical commodities. It reflects the return on fully collateralized future positions. It is quoted in U.S. dollars.

The Bloomberg International Debt Index represents open‐end, international debt funds domiciled in the U.S.

The BofA Merrill Lynch U.S. 3‐Month Treasury Bill Index consists of a single issue purchased at the beginning of the month and held for a full month. At the end of the month, that issue is sold and rolled into a newly selected issue. The issue selected at each month‐end rebalancing is the outstanding Treasury bill that matures closest to, but not beyond, three months from the rebalancing date. To qualify for selection, an issue must have settled on or before the month‐end rebalancing date. While the index will often hold the Treasury bill issued at the most recent three‐month auction, it is also possible for a seasoned six‐month bill to be selected.

The BofA Merrill Lynch 10‐to‐15‐Year U.S. Treasury Index is a subset of The BofA Merrill Lynch U.S. Treasury Index including all securities with a remaining term to final maturity greater than or equal to 10 years and less than 15 years.

The BOVESPA is a total‐return index weighted by traded volume and comprises most liquid stocks traded on the Sao Paulo Stock Exchange.

The Chicago Board Options Exchange CBOE Volatility Index (VIX) reflects a market estimate of future volatility, based on the weighted average of the implied volatilities of eight OEX calls and puts—the nearest in and out of the money call and put options from the first‐ and second‐month expirations.

The Commodity Research Bureau (CRB) Commodity Index is a measure of price movements of 22 sensitive basic commodities whose markets are presumed to be among the first to be influenced by changes in economic conditions. The commodities used are in most cases either raw materials or products close to the initial production stage which, as a result of daily trading in fairly large volume of standardization qualities, are particularly sensitive to factors affecting current and future economic forces and conditions.

The Commodity Research Bureau (CRB) Food Index is a measure of price movements of basic foodstuffs whose markets are presumed to be among the first to be influenced by changes in economic conditions.

The Conference Board Leading Economic Index (LEI)—Leading Indexes generally signal activity/output in the coming three to six months. Relevant indicators include manufacturers’ new orders, average weekly hours, vendor performance, initial unemployment insurance claims, building permits, money supply (M2), consumer expectations, stock market prices, and interest rate spreads.

The Dow Jones Industrial Average Index, the most widely used indicator of the overall condition of the stock market, is a price‐weighted average of 30 actively traded blue‐chip stocks as selected by the editors of The Wall Street Journal.

The Dow Jones U.S. Select Aerospace & Defense Index measures manufacturers, assemblers and distributors of aircraft and aircraft parts primarily used in commercial or private air transport, and producers of components and equipment for the defense industry, including military aircraft, radar equipment and weapons. The index is weighted by float‐adjusted market capitalization.

The Euro STOXX 50 (price) Index is a free‐float market capitalization‐weighted index of 50 European blue‐chip stocks from those countries participating in the European Monetary Union.

The FactSet World Aggregate Indexes are time‐series composite indexes based on proprietary country, region, sector and industry classification.

Indexes are all based in dollars.

The J.P. Morgan Emerging Markets Bond Index (EMBI) Global tracks total returns for traded external debt instruments in the emerging markets.

The Morgan Stanley Capital International (MSCI) Australia Index is a broad‐based index that tracks the performance of Australian stocks.

The Morgan Stanley Capital International (MSCI) Canada Index is a broad‐based index that tracks the performance of Canadian stocks.

The Morgan Stanley Capital International (MSCI) Emerging Asia Index is a capitalization‐weighted index that monitors the performance of stocks from the emerging Asia region.

The Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index is a capitalization‐weighted index that tracks the total return of common stocks in 21 developed‐market countries within Europe, Australasia and the Far East.

The Morgan Stanley Capital International (MSCI) Europe Index is a broad‐based index that tracks the performance of European stocks.

The Morgan Stanley Capital International (MSCI) Pacific Index is a free‐float‐adjusted market capitalization‐weighted index designed to measure the equity market performance of developed markets in the Pacific region.

The MSCI AC (All‐Country) Asia ex Japan Index is a free‐float‐adjusted market capitalization‐weighted index that is designed to measure the equity market performance of Asia, excluding Japan.

The MSCI ACWI (All‐Country World Index) Index is a free‐float‐adjusted market capitalization‐weighted index that is designed to measure the equity market performance of developed and emerging markets.

The MSCI Emerging Markets Index is a free‐float‐adjusted market capitalization index that is designed to measure the equity market performance of emerging markets. As of May 30, 2011, the MSCI Emerging Markets Index consists of the following 21 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.

The Mumbai Sensex—The Mumbai Stock Exchange Sensitive Index is a cap‐weighted index.


The Nasdaq Composite Index is a market capitalization price‐only index that tracks the performance of domestic common stocks traded on the regular Nasdaq market as well as National Market System‐traded foreign common stocks and American Depositary Receipts.

The OITP (Other Important Trading Partners) Index is a weighted average of the foreign exchange values of the U.S. dollar against a subset of currencies in the broad index that do not circulate widely outside the country of issue. The weights are derived by rescaling the currencies’ respective weights in the broad index so that they sum to 1 in each subindex.

The Philadelphia Federal Reserve Bank Business Outlook Index—The survey panel consists of 150 manufacturing companies in Federal Reserve District III (consisting of southeastern Pennsylvania, southern New Jersey and Delaware). The diffusion indexes represent the percentage of respondents indicating an increase minus the percentage indicating a decrease.

The Reuters/Jeffries CRB Index is an arithmetic average of commodity futures prices with monthly rebalancing.

The Russian Trading System Index (RTSI) is a capitalization‐weighted index that is calculated in U.S. dollars.

The Russell 1000® Growth Index measures the performance of those Russell 1000 Index companies with higher price‐to‐book ratios and higher forecasted growth values.

The Russell 1000® Index consists of the largest 1,000 companies in the Russell 3000 Index. This index represents the universe of large‐ capitalization stocks with a base value of 130.00 as of December 31, 1986.

The Russell 2000® Index is composed of the smallest 2,000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The index was developed with a base value of 135.00 as of December 31, 1986.

The Russell 1000® Value Index measures the performance of those Russell 1000 Index companies with lower price‐to‐book ratios and lower forecasted growth values.

The Russell 2000® Growth Index measures the performance of those Russell 2000 Index companies with higher price‐to‐book ratios and higher forecasted growth values.

The Russell 2000® Value Index tracks the performance of those Russell 2000 Index companies with lower price‐to‐book ratios and lower forecasted growth values.

The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

The Russell MidCap Growth Index measures the performance of those Russell Midcap companies with higher price‐to‐book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth Index.

The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index.

The Russell MidCap Value Index measures the performance of those Russell Midcap companies with lower price‐to‐book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value Index.

The Shanghai Stock Exchange Composite Index is a capitalization‐weighted index.

The Standard & Poor’s (S&P) 500 Index tracks the performance of 500 widely held, large‐capitalization U.S. stocks.

The Standard & Poor’s (S&P) 500 Financials Index is a capitalization‐weighted index that tracks the financials sector of the S&P 500, as denoted by the Global Industry Classification Standard (GICS).


This report is provided for informational purposes only and was not issued in connection with any proposed offering of securities. It was issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not contain investment recommendations. Bank of America and its affiliates do not accept any liability for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. The information in this report was obtained from sources believed to be accurate, but we do not guarantee that it is accurate or complete. The opinions herein are those of U.S. Trust, Bank of America Private Wealth Management, are made as of the date of this material, and are subject to change without notice. There is no guarantee the views and opinions expressed in this communication will come to pass. Other affiliates may have opinions that are different from and/or inconsistent with the opinions expressed herein and may have banking, lending and/or other commercial relationships with Bank of America and its affiliates. All exhibits are based on historical data for the time period indicated and are intended for illustrative purposes only.

This publication is designed to provide general information about economics, asset classes and strategies. It is for discussion purposes only, since the availability and effectiveness of any strategy are dependent upon each individual’s facts and circumstances. Always consult with your independent attorney, tax advisor and investment manager for final recommendations and before changing or implementing any financial strategy.

Other Important Information


All sector and asset allocation recommendations must be considered in the context of an individual investor’s goals, time horizon and risk tolerance. Not all recommendations will be suitable for all investors.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Investing in fixed income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.

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.

Stocks of small cap and mid cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.

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.

Energy and natural resources stocks have been volatile. They may be affected by rising interest rates and inflation, and can also be affected by factors such as natural events (for example, earthquakes or fires) and international politics.

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.

An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage, and short sales, which can magnify potential losses or gains. Restrictions exist on the ability to redeem units in a hedge fund. Hedge funds are speculative and involve a high degree of risk.

Treasury bills are less volatile than longer‐term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time.

Breakdown reflects ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. For additional information on ratings, please see www.standardandpoors.com, www.moodys.com, and/or www.fitchratings.com.

This report may not be reproduced or distributed by any person for any purpose without prior written consent.

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Bank of America, N.A., Member FDIC.

© 2015 Bank of America Corporation. All rights reserved. | AR85GGD3 | NL‐01‐15‐8056.B | 01/2015

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