before the bell - cdn.ameriprisecontent.com€¦ · eliminate an exception that allowed india to...

Notations:

• For further information on any of the topics mentioned, please contact your Financial Advisor. • Unless specifically stated otherwise, comments contained in this document should not be construed as an investment opinion or

recommendation of any securities mentioned. Charts depicted are from FactSet unless otherwise noted. ____________________________________________________________________________________________________________________________ © 2019 Ameriprise Financial, Inc. All rights reserved. of 14

Before the Bell Morning Market Brief

June 3, 2019

FOR IMPORTANT DISCLOSURES, PLEASE SEE THE DISCLOSURE PAGES AT THE END OF THIS DOCUMENT

MONDAY MORNING MARKET STRATEGY: David M. Joy, Chief Market Strategist “It was the best of times, it was the worst of times.” The opening words of Dickens’ classic “A Tale of Two Cities” might well be applied to today’s domestic economic condition. Depending on where one sits, today’s economy may indeed be the best of times or the worst of times. For individuals, the current condition is just about as good as it gets. The unemployment rate is at a five-decade low, inflation is non-existent, and wages are edging higher. This favorable backdrop is reflected in surveys of consumer confidence. The May reading of consumer confidence from the Conference Board rose for the second straight month and sits “near levels from last fall near an 18-year high”. That sentiment is echoed by the University of Michigan’s Consumer Sentiment Survey. It, too, rose in May and currently sits just below a two-decade high in March 2018. The U.S. consumer confidence survey from the OECD tells a similar story. It has climbed for three straight months through April and currently sits just below its recent high from March 2018. These are favorable times for small business owners as well. The April survey of small business optimism from the NFIB also rose for the third straight month to a level just below its all-time high from last August. The NFIB described the current environment by saying “the continued economic boom is thanks, in a major way, to strong growth in the small business half of the economy”. But that ebullience is noticeably absent when looking at bigger business, especially those affected by the current trade turmoil. The ISM survey of manufacturing purchasing managers declined to a three-year low in April. The ISM remarked in its press release that “export orders contracted for the first time since February 2016. The PMI trade elements are in contraction territory. The PMI has been inching down since November 2018. The manufacturing sector is expanding, but at recent historic lows”. The same is true for the IHS Markit survey, which has been declining since last May, and currently sits at a three-year low. In contrast to its consumer survey, the OECD survey of U.S. business confidence has declined for eight straight months through April and currently sits at its long-term average that signifies the line between optimism and pessimism. The Conference Board’s first quarter survey of CEO confidence, published in April, characterized CEOs as “pessimistic about current conditions”. In its first quarter CEO Economic Outlook, the Business Roundtable noted some easing from the prior quarter “potentially reflecting uncertainty about softening global growth, CEO plans remained historically strong.” But this survey was published back in March. It will be interesting to learn how sentiment may have evolved when these last two surveys are updated for the second quarter. It is worth noting that some of the concern expressed by business leaders may be starting to appear at the consumer level. In its May consumer sentiment survey the University of Michigan noted the following; “Although consumer sentiment remained at very favorable levels, confidence significantly eroded in the last two weeks of May. The late-month decline was due to unfavorable references to tariffs, spontaneously mentioned by 35 percent of all consumers in the last two weeks of May, up from 16 percent in the first half of May…”

Before The Bell June 3, 2019 ____________________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________________ © 2019 Ameriprise Financial, Inc. All rights reserved. of 14

The latest round of trade tension ratcheted higher on May 5th with the president’s tweets directed at China and continued with his threat of tariffs on Mexican imports last Thursday. When these developments are captured as the various sentiment surveys are updated, they are likely to reflect some further deterioration. Certainly, the stock market is saying as much, with the S&P 500 having fallen by 6.6 percent since May 5th. But even more pronounced has been the reaction in the bond market, where the yield on the two-year treasury note has declined from 2.34 percent to 1.88 percent in early trading this week. The ten-year note yield has dropped from 2.53 to 2.11 percent during the same interim. What up until now has been a tale of two economies may be about to merge into one, with a deteriorating sentiment outlook. The latest round of indicators begins this week on Monday, with release of both manufacturing PMI indices. Another strong jobs report on Friday may go a long way in lifting spirits in the near-term, but a trade war that drags on will certainly take its toll on just how optimistic both consumers and businesses view the future. MORNING MARKET COMMENTARY: Anthony M. Saglimbene, Global Market Strategist

• Quick Take: U.S. futures are pointing to a weaker open; Europe is trading mostly lower; Asia finished mixed overnight; West Texas Intermediate (WTI) oil trading at $54.44 per barrel; 10-year U.S. Treasury yield at 2.12%.

• Considering Rising Tariff Threats, Second Quarter Profit Forecasts Are Holding Up: S&P 500 first quarter earnings per share (EPS) declined by 0.4% y/y on sales growth of +5.3 y/y. As a result, S&P 500 EPS declined year-over-year for the first time since Q2’16.

• However, 76% of S&P 500 companies beat EPS estimates, which is above the five-year average. In aggregate, S&P 500 companies surpassed EPS estimates by +5.4% in the first quarter, which was also better than the five-year average of +4.8%.

• With that said, analysts currently expect S&P 500 Q2’19 earnings per share (EPS) to decline by 2.1% y/y, on sales growth of +4.1%. Although we believe a solid corporate earnings backdrop underpins U.S. markets today, the EPS growth trend is obviously on a flat-to-slower growth trajectory this year. In our view, this has to do with tough year-over-year comparisons based on the lower corporate tax boost from last year as well as building business hurdles due to increased tariffs.

• As the embedded FactSet chart above highlights, Q2’19 bottom-up EPS estimates dropped 2.1% during the first two months of the second quarter. Over the last five years, the average decline in bottom-up EPS



estimates during the first two months of a quarter has been 2.5%. Bottom line: earnings estimates are falling as they usually do during the current quarter and within a range of the longer-term average.

• Nevertheless, Q2’19 bottom-up EPS and sales estimates for a variety of S&P 500 sectors have deteriorated since the end of March. Per FactSet data, nine of eleven S&P 500 sectors recorded a decrease in their bottom-up EPS estimates during May, led by Materials. As a result, six of eleven S&P 500 sectors are currently projected to report y/y earnings growth declines in Q2 with Information Technology (-11.8% y/y), Materials (-7.2% y/y), and Consumer Staples (-2.8% y/y) expected to post the weakest EPS growth.

• Goldman Sachs recently highlighted that although S&P 500 companies generate just 2% of their sales from China, a 25% tariff on all imports from China could lower S&P 500 full-year 2019 EPS estimates by as much as 6.0% depending on the forecast and data source used. As we have discussed in these pages for months, U.S. companies are already contending with rising wages, higher input, and transportation costs, as well as pressures from tariffs. Importantly, Q1’19 net profit margins are down y/y across seven of eleven S&P 500 sectors, and Goldman’s EPS tariff impact admittedly does not account for the pass-through of costs or substitution to other suppliers, which may dull the effect of increased duties on Chinese imports. With potential tariffs of 5% on all imports from Mexico set to begin on June 10th, Q2 earnings estimates and tariff impacts could be in flux.

• The U.S. Chamber of Commerce estimates that a 5% tariff on imported goods from Mexico will tax American businesses $17 billion annually. If the tariff rate jumps to 25%, the tariffs will tax American companies an estimated $86 billion annually. States hardest hit would include Texas, Michigan, California, Illinois, Ohio, and Arizona.

• Although S&P 500 EPS estimates for the second quarter again look low, setting up nicely for companies to potentially hurdle above estimates, trade is a huge wildcard. Since we last provided this update, the trade situation has worsened, in our view. We anticipate tariffs to pose a modest threat to Q2 earnings and could build if they are increased over the month. Combined with falling net profit margins, and already negative EPS growth, every little ding to the ship is felt and incrementally saps investor confidence in the future. If investors do not feel confident in the future, they are highly unlikely to push stock valuations higher, in our view.

• Asia-Pacific: Asian equities finished mixed on Monday. In a white paper on the U.S./China trade dispute, the Chinese government noted that the two governments have sorted out differences in the past, though, since 2017, the U.S. has unilaterally escalated tensions. While the paper stated Beijing was willing to work with the U.S. on trade if the circumstances were right, it would not compromise on major issues of principle. In a standard line, China’s government said it did not want a trade war with the U.S. but would be willing to fight if necessary. Importantly, China denied it engages in intellectual property theft and forced technology transfer. Since this is a major U.S. grievance, it is hard to see how the two sides get back to the trade table over the near-term.

• China’s Caixin manufacturing PMI remained unchanged at 50.2 in May versus the prior month and is barely holding onto the expansion mark. The Caixin number, which measures localized, smaller manufacturing companies in China, somewhat contrasts the official manufacturing measure which sits in contraction. However, the business confidence component within the Caixin reading fell to its lowest level since the series began in April 2012.

• A development that is getting less media attention, but is nonetheless important to investors, is on Friday, the White House announced it would terminate India’s designation as a developing country. Effective on June 5th, the U.S. will eliminate an exception that allowed India to export nearly 2,000 products to the U.S. duty-free. As Bloomberg highlighted, the action ends India’s preferential treatment under the decades-old program known as the Generalized System of Preferences, which is designed to promote economic development around the world. For India, the items most at risk are agriculture, auto parts, and pharmaceuticals. According to the Federation of Indian Export Organizations, Indian exporters may have to forgo benefits worth $260 million after the U.S. rule change. Although the U.S. foreshadowed the move for months, due to India’s high trade barriers and unfriendly practices towards foreign competition, the White House delayed the announcement until after India’s election to avoid hurting Prime Minister Narendra Modi.

• Europe: Markets across the region are trading mostly lower at midday. Eurozone manufacturing PMI in May held steady in contraction at 47.7, and in line with April’s reading. The data marks a six-year low in new orders, and a declining workforce could signal that demand is starting to drop-off in Europe. As Bloomberg noted, the data underscores an economy that is struggling to emerge from a slowdown that has lasted more than a year.

• President Trump touched down in the UK today for a three-day state visit. The political environment in Britain is currently in flux, as Conservatives will soon be thrown into a volatile situation of finding a new leader/prime minister and Brexit currently sits as an unsolvable mess. Before leaving for London, President Trump made it clear the UK



should leave the European Union (EU) without a deal if Britain does not secure favorable terms and that he believes Boris Johnson would be a good prime minister.

• U.S.: Equity futures are pointing to a weaker open this morning. According to Reuters, Mexico, and U.S. officials are preparing for discussions this week to avoid escalating tensions and tariffs related to immigration issues at the southern border. Press reports over the weekend, and as we touched on in the 5/31/19 After The Close, pointed to the strong economic connection between the U.S. and Mexico, particularly in autos and agriculture. But the White House over the weekend sent mixed messages about the decision to implement tariffs on Mexico due to its frustration with immigration issues. On the one hand, officials said there was time for Mexico to act and the tariffs could still be avoided. On the other hand, rhetoric on Sunday talk shows supported the idea that the White House fully expects to implement the 5% tariff on imports from Mexico on June 10th.

• Other reports over the weekend discussed the standoff between the U.S. and other nations over trade and immigration. With nineteen months until the next presidential election, foreign countries within President Trump’s blast zone may be more interested in mitigating damage to their economies as opposed to striking a grand deal with the White House. Time will tell, but we would tend to support that idea, particularly if a deal with the U.S. means altering economic policies or bending to the will of a foreign power (i.e., China looking weak compared to the U.S. on the world stage).

• The U.S. docket for economic data is heavy this week, and it comes at a time when investors are growing more uncertain about the pace of growth. This morning, investors will get a look at ISM manufacturing activity for May, and on Wednesday, the ISM non-manufacturing component. May vehicle sales, construction spending, Q1 productivity, the April trade balance, April factory orders, initial jobless claims, and the May nonfarm payrolls report on Friday line the week’s data slate.

• So far, the hard and soft data on the U.S. economy has shown only a modest impact from trade tensions. As a result, stock prices have held up relatively well, considering the rising trade tensions. Although the S&P 500 Index is less than 7.0% off its high, Energy is in a bear market, Materials and Financials are in correction, and Industrials, Health Care, and Information Technology stand on the cusp of a correction. As we highlighted in our headline commentary, earnings expectations for the second quarter are coming down. If stock prices are going to hold near current levels, the economic data will need to continue to show only modest impacts from trade. If tariffs keep rising, however, that may be a lot to ask for.

WORLD CAPITAL MARKETS (all data as of approximately 8:00 AM ET)

Americas % chg. % YTD Value Europe (Intra-day) % chg. %YTD Value Asia/Pacific (Last Night) % chg. %YTD Value

S&P 500 -1.32% 10.74% 2,752.1 DJSTOXX 50 (Europe) -0.09% 12.33% 3,277.6 Nikkei 225 (Japan) -0.92% 3.02% 20,410.9 Dow Jones -1.41% 7.54% 24,815.0 FTSE 100 (U.K.) -0.16% 8.63% 7,150.3 HK Hang Seng ( H. Kong) -0.03% 5.65% 26,893.9 NASDAQ -1.51% 12.86% 7,453.1 DAX Index (Germany) -0.18% 10.86% 11,705.5 Korea Kospi 100 1.28% 1.50% 2,067.9 Russell 2000 -1.35% 9.25% 1,465.5 CAC 40 (France) -0.09% 12.65% 5,203.0 Singapore STI 0.18% 3.92% 3,123.5 Brazil Bovespa -0.44% 10.40% 97,030.3 FTSE MIB (Italy) -0.28% 7.76% 19,746.5 Shanghai Comp. (China) -0.30% 16.42% 2,890.1 S&P/TSX Comp. (Canada) -0.32% 13.37% 16,037.5 IBEX 35 (Spain) -0.44% 6.73% 8,964.9 Bombay Sensex (India) 1.39% 12.01% 40,267.6 Mexico IPC -1.38% 3.85% 42,749.2 Russia TI 1.83% 13.12% 4,732.5 S&P/ASX 200 (Australia) -1.19% 14.84% 6,320.6

Global % chg. % YTD Value Developed International % chg. %YTD Value Emerging International % chg. %YTD Value

MSCI All-Country World Idx -0.83% 9.40% 492.1 MSCI EAFE -0.47% 8.08% 1,817.4 MSCI Emerging Mkts 0.31% 4.18% 998.0 Note: International market returns shown on a local currency basis. Equity index data is total return, inclusive of dividends.

S&P 500 Sectors % chg. % YTD Value Equity Income Indices % chg. % YTD Value Commodities Consumer Discretionary -1.44% 13.04% 878.5 JPM Alerian MLP Index 0.00% 9.66% 24.4 Futures & Spot (Intra-day) % chg. % YTD ValueConsumer Staples -1.41% 10.42% 569.9 FTSE NAREIT Comp. 0.67% 17.66% 19,525.8 CRB Raw Industrials -0.29% -2.79% 467.0 Energy -1.62% 3.53% 432.1 DJ US Select Dividend -1.24% 5.95% 1,971.2 NYMEX WTI Crude (p/bbl.) 1.72% 19.84% 54.4 Financials -1.48% 9.85% 430.6 DJ Global Select Dividend -0.35% 0.45% 207.7 ICE Brent Crude (p/bbl.) 1.00% 16.38% 62.6 Real Estate 0.77% 18.34% 225.1 S&P Div. Aristocrats -1.20% 8.19% 2,593.3 NYMEX Nat Gas (mmBtu) -0.77% -17.18% 2.4 Health Care -0.78% 1.34% 1,007.0 Spot Gold (troy oz.) 0.93% 2.75% 1,317.8 Industrials -1.46% 12.55% 604.8 Spot Silver (troy oz.) 1.06% -4.81% 14.7 Materials -1.23% 4.97% 329.3 Bond Indices % chg. % YTD Value LME Copper (per ton) -0.27% -2.40% 5,806.0 Technology -1.60% 16.49% 1,258.6 Barclays US Agg. Bond 0.41% 4.80% 2,144.8 LME Aluminum (per ton) 0.88% -4.82% 1,773.0 Communication Services -2.04% 14.21% 157.5 Barclays HY Bond -0.34% 7.49% 2,052.4 CBOT Corn (cents p/bushel) 0.12% 9.40% 427.5 Utilities 0.44% 11.01% 293.9 CBOT Wheat (cents p/bushel) 2.68% -0.39% 516.5

Foreign Exchange (Intra-day) % chg. % YTD Value % chg. % YTD Value % chg. % YTD ValueEuro (€/$) 0.2% -2.4% 1.12 Japanese Yen ($/¥) 0.02% 1.31% 108.27 Canadian Dollar ($/C$) 0.2% 1.1% 1.35 British Pound (£/$) 0.0% -1.0% 1.26 Australian Dollar (A$/$) 0.35% -1.23% 0.70 Swiss Franc ($/CHF) 0.3% -1.5% 1.00 Data/Price Source: Bloomberg; Equity Index data is total return, inclusive of dividends where applicable.



THE WEEK AHEAD: Russell T. Price, CFA • A near final tally of Q1 results: Earnings per share down 0.4% but sales per share up 5.3%. There are but a few

companies of the S&P 500 yet to report their Q1 results (9 to be exact), mostly those with January-ending fiscal quarters. As of last Friday, 98% of the 505 current constituents of the S&P 500 had reported their results with aggregate earnings per share (EPS) for the period down 0.4% versus year-ago levels BUT on a sales per share increase of +5.4%.

• Unfortunately, as we look out over the next few quarters at least, consensus estimates of both sales and earnings are likely to have some downside from current levels as a result of the recent escalation of trade tensions.

• The economic calendar is busy this week with a number of potentially market-moving releases on the schedule. We start on Monday with a look at manufacturing, construction activity and auto sales. At 10 AM ET, the Institute of Supply Management’s May Manufacturing Index is expected to show a slight improvement versus its April rating, as did the majority of regional Federal Reserve Bank measures of manufacturing in the month. The Bloomberg consensus estimate of 53.2 represents a continuing moderate pace of expansion for the sector and would be a slight improvement over the 52.8 reported for April. April’s reading, however, represented a continuation of the deceleration trend the Index has witnessed over the last several months and

Ameriprise Global Asset Allocation Committee Global Equity Region - Tactical View

MSCI All-Country GAAC GAAC MSCI All-Country GAAC GAACWorld Index GAAC Tactical Recommended World Index GAAC Tactical Recommended

Region Weight Tactical View Overlay Weight Region Weight Tactical View Overlay Weight

1) United States 54.7% Overweight +3.1% 57.8% 5) Latin America 1.4% Equalweight - 1.4%

2) Canada 3.0% Equalweight - 3.0% 6) Asia-Pacific ex Japan 12.6% Overweight +1.0% 13.6%

3) United Kingdom 5.2% Underweight - 1.0% 4.2% 7) Japan 7.4% Underweight - 1.0% 6.4%

4) Europe ex U.K. 14.6% Underweight - 1.0% 13.6% 8) Middle East / Africa 1.1% Underweight - 1.1% -

Index weighting represents relative weightings based on the regional market capitalization balance of the MSCI All-Country World Index; may not add due to rounding. The GAAC Tactical Overlay, as well as Recommended Tactical Weights, is derived from the Ameriprise Global Asset Allocation Committee (GAAC).Views are expressed relative to the Index and are provided to represent investment conviction in each region. Tactical Allocations are designed to augment Index returns over a 6-12 month time horizon. Index weights as of 2/28/19. Numbers may not add due to rounding.

Ameriprise Global Asset Allocation Committee U.S. Equity Sector - Tactical View

S&P 500 GAAC GAAC S&P 500 GAAC GAACIndex GAAC Tactical Recommended Index GAAC Tactical Recommended

Sector Weight Tactical View Overlay Weight Sector Weight Tactical View Overlay Weight

1) Communication Services 10.3% Equalweight - 10.3% 6) Health Care 14.6% Overweight +2.0% 16.6%

2) Consumer Discretionary 10.1% Equalweight - 10.1% 7) Industrials 9.3% Equalweight - 9.3%

3) Consumer Staples 7.3% Underweight - 2.0% 5.3% 8) Information Technology 21.2% Equalweight - 21.2%

4) Energy 5.4% Overweight +2.0% 7.4% 9) Materials 2.6% Equalweight - 2.6%

5) Financials 12.7% Underweight - 2.0% 10.7% 10) Real Estate 3.1% Overweight +1.0% 4.1%

11) Utilities 3.4% Underweight - 1.0% 2.4%

Index weighting represents relative weightings based on the regional market capitalization balance of the MSCI All-Country World Index; may not add due to rounding. The GAAC Tactical Overlay, as well as Recommended Tactical Weights, is derived from the Ameriprise Global Asset Allocation Committee (GAAC).Views are expressed relative to the Index and are provided to represent investment conviction in each region. Tactical Allocations are designed to augment Index returns over a 6-12 month time horizon. Index weights as of 3/22/19. Numbers may not add due to rounding.



was the weakest reading since October 2016. In our view, there’s little doubt that the economy has hit a soft spot (though still sound) and the direction from here likely depends heavily on the path of trade relations. Despite these issues, we believe recession odds remain low, but they are certainly higher than they were. The associated chart is sourced from FactSet.

• Meanwhile construction spending and auto sales are both expected to rebound from prior month weakness; the Bloomberg consensus sees a 0.5% gain for construction spending and for the seasonally adjusted annualized selling rate for new auto sales to rise to 16.9 million units from April’s 16.4 million. Both sectors are seen as benefiting from recent interest rate declines.

• On Wednesday, markets see their first national measure of May employment gains via payroll-processor ADP’s Employment estimate. The ADP report is widely expected to show a notable decline, but this is relative to the surprisingly strong gain reported in April of 275,000. Such months of outsized strength are usually followed by months that move the averages back to their trends (i.e., weak), thus May is expected to produce a gain of about 180k net new jobs in the private sector.

• Friday’s Labor Department Employment Report, meanwhile, is expected to show a gain of about 195,000 net new jobs for May and an unemployment rate that holds steady at 3.6%. As has been the case over the last several quarters, average hourly wage growth will also be monitored. AHE are expected to see a solid 0.3% month-over-month increase for the month, equating to a year-over-year gain of about 3.2%.

This space intentionally left blank.

June 3 4 5 6 7U.S. Auto Sales Factory Orders ADP Employment Estimate Initial Jobless Claims Employment Report

ISM Mfg. Index Unemployment - Euro Zone ISM Services Index Challenger Layoff Notices Wholesale Inventories

Markit Final PMI Inflation - Euro Zone Fed's Beige Book Trade Balance Consumer Credit

Construction Spending Industrial Production - Brazil Retail Sales - Euro Zone GDP - Euro Zone Industrial Production - Germany

Trade - Brazil Industrial Production - Spain Monetary Policy - Euro Zone Industrial Production - France

Trade - Canada Inflation - Brazil

Manufacturing Activity - Canada Inflation - Mexico



Where Market Fundamentals Stand Heading into The Week:

S&P 500 Trailing and Forward P/E valuations: Source: FactSet Please note: Although we try to maintain consistency as much as possible, Price to Earnings (P/E) ratios may differ modestly from once source to another. Most notably, P/E numbers can often show their most notable differences during an earnings release season as some sources may still use the last full ‘actual’ earnings number (for instance, currently Q4 trailing 12-month earnings per share) while others use earnings per share that are updated for Q1 using a combination of actual and estimated earnings per share. The calculation of earnings (operating earnings versus ‘as reported’ or GAAP) also often differs modestly from one data source to another due to the proprietary use of calculation methodologies. The “average” shown in the charts below represent averages for the period shown.

Consensus Earnings Estimates: Source: FactSet

S&P 500 Earnings Estimates 2014 2015 2016 20206/3/2019 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Est. Est. Est. Est. Est.

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Quarterly $$ amount $30.87 $32.80 $33.54 $36.29 $38.71 $41.13 $42.87 $41.32 $38.80 $40.59 $43.37 $44.66 change over last week $0.01 -$0.02 -$0.01 -$0.02 yr/yr 13.9% 10.7% 6.7% 15.9% 25.4% 25.4% 27.8% 13.9% 0.2% -1.3% 1.2% 8.1% qtr/qtr -1% 6% 2% 8% 7% 6% 4% -4% -6% 5% 7% 3%

Trailing 4 quarters $$ $119.02 $118.67 $119.64 $123.25 $126.42 $128.53 $133.50 $141.34 $149.67 $159.00 $164.03 $164.12 $163.58 $164.08 $167.42 $186.09 yr/yr 6.8% -0.3% 0.8% 11.6% 22.9% 2.1% 11.2%Implied P/E based on a S&P 500 level o 2752 16.8 16.8 16.8 16.8 16.4 14.8

2018 20192017



BY THE NUMBERS: ECONOMIC ACTUALS AND FORECAST:

ECONOMIC NEWS OUT TODAY: Economic Releases for Monday, June 3, 2019. All times Eastern. Consensus estimates via Bloomberg. Time Period Release Consensus Est. Actual Prior Revised to 10:00 AM MAY ISM Manufacturing Index 53.2 52.8 10:00 AM MAY ISM Prices Paid 51.0 50.0 10:00 AM MAY ISM New Orders 52.0 51.7 10:00 AM APR Construction Spending (MoM) +0.5% -0.9% NA MAY U.S. Auto Sales (annualized) 16.8M 16.4M Economic Perspective: Russell T. Price, CFA – Chief Economist • Adjusting our economic forecasts relative to recently announce tariffs: In reflection of the recent escalation of

the U.S. /China dispute, along with the recently proposed new tariffs on imports from Mexico, today we are lowering our 2019 real GDP outlook to +2.2% from +2.4%.

• We believe the U.S. economy is currently supported by strong underlying fundamentals, but pending tariff escalations, reciprocal actions being implemented by counterparties, and other ancillary consequences, will not come without near-term penalties on economic growth prospects, or the sales and earnings of U.S. multinationals. Just as these negatives appeared over-night, they could also see positive developments in short-order as well, though the prospects of such appear modest at this time.

• Our adjusted forecast also likely contains further downside risk without a near-term truce in these disputes. We have made little provision at this time for the just announced tariffs on imports from Mexico. From the starting point of our adjusted +2.2% forecast, we believe there could be further downside risk to our estimates of about 0.4% in each of 2019 and 2020; possibly more under worst-case, yet possible, scenarios.

• Inflation impact: New tariffs and higher tariffs on a greater range of goods should be expected to place greater pressure on inflation here in the U.S. However, we believe much of any tariff-induced inflation pressures are likely to offset by lower commodity prices, particularly for energy-based commodities and the natural downward pressure stemming from demographics, a factor we believe has been putting modest downward pressure on prices for several years. As such, we forecast inflation measures to rise somewhat in the quarters ahead, but we do not see trend rates as rising to problematic levels (above 2.5% on a sustained basis).

• Actuals in the chart at right are sourced from the Commerce Department while estimates are from American Enterprise Investment Services, Inc.

Current Projections:Actual Actual Actual Actual Actual Est. Est. Actual Est. Est. Est.2014 2015 2016 2017 2018 2019 2020 Q1-2019 Q2-2019 Q3-2019 Q4-2019

Real GDP (YOY) 2.5% 2.9% 1.6% 2.2% 2.9% 2.2% 1.6% 3.1% 1.7% 2.3% 2.4%Unemployment Rate 5.6% 5.0% 4.7% 4.1% 3.9% 3.6% 3.5% 3.8% 3.7% 3.6% 3.6%CPI (YoY) 1.6% 0.1% 1.3% 2.1% 2.4% 2.0% 2.2% 1.6% 1.9% 2.2% 2.4%Core PCE (YoY) 1.6% 1.3% 1.7% 1.6% 1.9% 1.8% 2.0% 1.5% 1.6% 1.8% 1.8%

Sources: Historical data via FactSet. Estimates (Est.) via American Enterprise Investment Services, Inc.

YoY = Year-over-year, Unemployment numbers are period ending. GDP: Gross Domestic Product; CPI: Consumer Price Index

PCE: Personal Consumption Expenditures Price Index. Core excludes food and energy Last Updated:

Quarterly

June 3, 2019



FIXED INCOME NEWS & VIEWS: Brian M. Erickson, CFA, Fixed Income Research & Strategy

• Trading today: Ten-year Treasury yields leaned lower with a 2.11% yield this morning in overnight trading reflecting global demand for yield in a repressed global yield context and rising uncertainty in geopolitics. Ten-year Treasury yields declined nearly 40 basis points through May. The Treasury rally sent yields beyond 2-years lower by 35 basis points on average. We believe U.S. economic data takes on greater importance for Treasury markets, with the potential for Treasuries to sell-off with constructive or better than economic expected data that could contradict market expectations for a potential rate cut later this year. 10s/2s Treasury yield spread remains constructive toward risk in our view at +23 basis points, rising above the +17 basis point year to date average over the past two trading sessions.

Thinking Like a Bond Investor • We remain constructive around risk, maintaining a very modest bias toward corporate credit risk in fixed income

allocations. That said, as fixed income investors, we take the opposite side of the bet relative to equity investors. While equity investors benefit from unlimited upside, bond investors are paid to take downside risk. As a result, we look for hot spots in global debt markets that could we want to avoid. Precisely predicting where and when a global recession might set in is nearly impossible, monitoring indicators around hot spots remains a prudent undertaking, the result of which does not tell us when to attempt to time the market (we recommend investors remain invested in an appropriate risk tolerance that can ride throughout the cycle). Rather, by identifying hotspots we can may be able to shape our fixed income portfolio to avoid the foreseeable risks through guidance on investment selection.

• Italy’s sovereign debt level is an example of a hotspot. Two-year sovereign debt yields in Italy declined 4 basis points in trading today to 0.66% but hover 147 basis points over 2-year sovereign debt yields of Greece, a nation with a 181% debt to GDP level that tops Italy’s 131% debt to GDP. The difference lies in Italy’s dependency on debt markets to refinance outstanding debt. Over the next three years, Italy’s refinancing needs are $218 billion, $268 billion, and $226 billion in U.S. dollar terms in 2019, 2020, and 2021, respectively. Through the U.S. has $3.3 trillion of refinancing remaining this year, markets are much more comfortable investing in U.S. government debt. In a way each dollar of debt that requires refunding is a test of investor conviction. Italy, with the fourth largest outstanding balance of sovereign debt behind the U.S., Japan, and France, regularly test markets conviction. Greece on the other hand, continues to benefit from debt restricting in 2016 that pushed out maturities much further into the future, which reduced the near-term refinancing needs substantially in our view.

• We believe the U.S. economy remains steady as fiscal stimulus wraps up and Fed rate policy returned to near neutral. Though China’s slowing growth led to a risk-off in late 2018, we believe expanded lending likely results in a pick-up in growth later this year. From a fixed income perspective, we regard the expansion of debt levels with in China’s economy as a hot spot, in the near-term we believe expanded lending as pushing out any potential bubbles that may have formed after nearly two decades of debt-fueled expansion. The U.S. by contrast has seen a significant increase in sovereign debt and has the capacity and sees market demand that can support current debt levels. Corporate debt increased to a modest extent and likely see elevated defaults through the next cycle. But U.S. consumers have de-levered and employment markets remain strong. Overall, we see are tracking growth in China’s debt levels and the Eurozone’s growth trajectory as potential regions that could sneeze that might lead to a global cold. Regardless, we continue to see U.S. markets as some of the most resilient for fixed income investors to invest in.

Year-end 2019 10-year Treasury Forecast = 3.00% (2.00% to 3.25% scenario range); We forecast a possible quarter point Fed rate hike to 2.50% to 2.75%.

Our Fixed Income Recommendations for the following objectives:

Capital Preservation Total Return Income Key points: • Three-month T-bills yield nearly

2.50%. Real returns are possible once again.

• To the extent portfolios reached for yield, return to the basics in high investment grade bonds with short maturities.

Key points: • Rebuild core fixed income as

the anchor of a portfolio • Target a 6 year duration • Tactical overweight to

Investment Grade Corporates. • Avoid leveraged credit

exposure.

Key points: • Yield has returned to core bond

markets; Treasuries, agency mortgage-backed, and investment grade corporates.

• Yields are near cycle highs; look to term out maturities aligned with income liabilities.



We recommend: Return to short Treasury and high-quality bond investments including a laddered portfolio approach.

We recommend: Rebuild core fixed income allocations for stability and diversification in blended portfolios.

We recommend: Be sure portfolios are not too short. Asset liability matching approaches are best.

Source: Ameriprise Quarterly Capital Market Digest (4/18/19)

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Ameriprise Investment Research Group Ameriprise Financial 1441 West Long Lake Road, Suite 250, Troy, MI 48098 [email protected] For additional information or to locate your nearest branch office, visit ameriprise.com

RESEARCH & DUE DILIGENCE LEADER

Lyle B. Schonberger - Vice President Business Unit Compliance Liaison (BUCL)

Open – Sr Manager

Jeff Carlson, CLU, ChFC – Manager Investment Research Coordinator Kimberly K. Shores Sr Administrative Assistant Jillian Willis EQUITY RESEARCH Equity Research Director Justin H. Burgin – Vice President

Consumer Goods and Services Patrick S. Diedrickson, CFA – Director

Energy/Utilities William Foley, ASIP – Director

Financial Services/REITs Lori Wilking-Przekop – Sr Director

Health Care Daniel Garofalo – Director

Industrials/Materials Frederick M. Schultz – Director

Technology/Telecommunication Curtis R. Trimble – Director

Quantitative Strategies/International Andrew R. Heaney, CFA – Director

STRATEGISTS CHIEF MARKET STRATEGIST David M. Joy – Vice President GLOBAL MARKET STRATEGIST Anthony M. Saglimbene – Vice President

Thomas Crandall, CFA, CAIA – Sr Director, Asset Allocation

Daniel Balter, CFA – Analyst – Quantitative, Asset Allocation

Gaurav Sawhney – Research Analyst

Amit Tiwari – Sr Research Associate CHIEF ECONOMIST Russell T. Price, CFA – Vice President MANAGER RESEARCH

Michael V. Jastrow, CFA – Vice President

Jeffrey R. Lindell, CFA – Director – ETFs & CEFs

Mark Phelps, CFA – Director – Multi-Asset Solutions Equities Christine A. Pederson, CAIA, CIMA – Sr Director – Growth Equity, Infrastructure & REIT

Benjamin L. Becker, CFA – Director – International/Global Equity

Alex Zachman – Analyst – Core Equity

Cynthia Tupy, CFA – Analyst – Value and Equity Income Equity Fixed Income & Alternatives Jay C. Untiedt, CFA, CAIA – Sr Director – Alternatives

Steven T. Pope, CFA, CFP® – Director – Non-Core Fixed Income

Douglas D. Noah – Analyst – Core Taxable & Tax-Exempt Fixed Income

Blake Hockert – Associate – Reporting & Analytics

FIXED INCOME RESEARCH & STRATEGY

Fixed Income Research Brian M. Erickson, CFA – Vice President High Yield and Investment Grade Credit Jon Kyle Cartwright – Sr Director

Stephen Tufo – Director INVESTMENT DUE DILIGENCE

Justin E. Bell, CFA – Vice President

Kurt J. Merkle, CFA, CAIA – Sr Director

Kay S. Nachampassak – Director

Peter W. LaFontaine – Sr Analyst

James P. Johnson, CFA, CFP® – Sr Analyst

David Hauge, CFA – Analyst

Bishnu Dhar – Sr Research Analyst

Parveen Vedi – Sr Research Associate

Darakshan Ali – Research Process Trainee



The content in this report is authored by American Enterprise Investment Services Inc. (“AEIS”) and distributed by Ameriprise Financial Services, Inc. (“AFSI”) to financial advisors and clients of AFSI. AEIS and AFSI are affiliates and subsidiaries of Ameriprise Financial, Inc. Both AEIS and AFSI are member firms registered with FINRA and are subject to the objectivity safeguards and disclosure requirements relating to research analysts and the publication and distribution of research reports. The “Important Disclosures” below relate to the AEIS research analyst(s) that prepared this publication. The “Disclosures of Possible Conflicts of Interest” section, where applicable, relates to the conflicts of interest of each of AEIS and AFSI, their affiliates and their research analysts, as applicable, with respect to the subject companies mentioned in the report. Each of AEIS and AFSI have implemented policies and procedures reasonably designed to ensure that its employees involved in the preparation, content and distribution of research reports, including dually registered employees, do not influence the objectivity or timing of the publication of research report content. All research policies, coverage decisions, compensation, hiring and other personnel decisions with respect to research analysts are made by AEIS, which is operationally independent of AFSI. IMPORTANT DISCLOSURES As of March 31, 2019 The views expressed regarding the company(ies) and sector(s) featured in this publication reflect the personal views of the research analyst(s) authoring the publication. Further, no part of research analyst compensation is directly or indirectly related to the specific recommendations or views contained in this publication. A part of a research analyst’s compensation may be based upon overall firm revenue and profitability, of which investment banking, sales and trading, and principal trading are components. No part of a research analyst’s compensation is based on a specific investment banking transaction, nor is it based on sales, trading, or principal trading. A research analyst may have visited the material operations of one or more of the subject companies mentioned in this research report. No payment was received for the related travel costs. Additional information and current research disclosures on individual companies mentioned in this research report are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor. You may also submit a written request to Ameriprise Financial, Inc., 1441 West Long Lake Road, Troy MI, 48098. Independent third-party research on individual companies is available to clients at ameriprise.com/research-market-insights. SEC filings may be viewed at sec.gov. Tactical asset class recommendations mentioned in this report reflect The Ameriprise Global Asset Allocation Committee’s general view of the financial markets, as of the date of the report, based on then current conditions. Our tactical recommendations may differ materially from what is presented in a customized long-term financial plan or portfolio strategy. You should view our recommendations in conjunction with a broader long-term portfolio strategy. Not all products, services, or asset classes mentioned in this report may be available for sale at Ameriprise Financial Services, Inc. Please consult with your financial advisor. Diversification and Asset Allocation do not assure a profit or protect against loss. RISK FACTORS Dividend and interest payments are not guaranteed. The amount of dividend payment, if any, can vary over time and issuers may reduce or eliminate dividends paid on securities in the event of a recession or adverse event affecting a specific

industry or issuer. Should a company be unable to pay interest on a timely basis a default may occur and interruption or reduction of interest and principal occur. Investments in a narrowly focused sector may exhibit higher volatility than investments with broader objectives and is subject to market risk and economic risk. Income Risk: We note that dividends are declared solely at the discretion of the companies’ boards of directors. Dividend cuts or eliminations will likely negatively impact underlying company valuations. Published dividend yields are calculated before fees and taxes. Dividends paid by foreign companies to ADR holders may be subject to a withholding tax which could adversely affect the realized dividend yield. In certain circumstances, investors in ADR shares have the option to receive dividends in the form of cash payments, rights shares or ADR shares. Each form of dividend payment will have different tax consequences and therefore generate a different yield. In some instances, ADR holders are eligible to reclaim a portion of the withholding tax. International investing involves increased risk and volatility due to political and economic instability, currency fluctuations, and differences in financial reporting and accounting standards and oversight. Risks are particularly significant in emerging markets. Market Risk: Equity markets in general could sustain significant volatility due to several factors. As we have seen recently, both economic and geopolitical issues could have a material impact on this model portfolio and the equity market as a whole. Quantitative Strategy Risk: Stock selection and portfolio maintenance strategies based on quantitative analytics carry a unique set of risks. Quantitative strategies rely on comprehensive, accurate and thorough historical data. The Ameriprise Investment Research Group utilizes current and historical data provided by third-party data vendors. Material errors in database construction and maintenance could have an adverse effect on quantitative research and the resulting stock selection strategies. PRODUCT RISK DISCLOSURES Exchange Traded Funds (ETF) trade like stocks, are subject to investment risk and will fluctuate in market value. For additional information on individual ETFs, see available third-party research which provides additional investment highlights. SEC filings may be viewed at sec.gov

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All fixed income securities are subject to a series of risks which may include, but are not limited to: interest rate risk, call risk, refunding risk, default risk, inflations risk, liquidity risk and event risk. Please review these risks with your financial advisor to better understand how these risks may affect your investment choices. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. This means you may lose money if you sell a bond prior to maturity as a result of interest rate or other market movement. Any information relating to the income or capital gains tax treatment of financial instruments or strategies discussed herein is not intended to provide specific tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. A real estate investment trust or REIT is a company that owns and operates income-producing real estate. In addition, some REITs participate in the financing of real estate. To qualify as a REIT, a company must: I) invest at least 75% of its total assets in real estate assets, II) generate at least 75% of its gross income from real property or interest, and III) pay at least 90% of its taxable income to shareholders in the form of distributions. A company that qualifies as a REIT is permitted to deduct the distributions paid to shareholders from its corporate taxes. Consequently, many REITs target to payout at least 100% of taxable income, resulting in virtually no corporate taxes. An investment in a REIT is subject to many of the same risks as a direct investment in real estate including, but not limited to: Illiquidity and valuation complexities, redemption restrictions, distribution and diversification limits, tax consequences, fees, defaults by borrowers or tenants, market saturation, balloon payments, refinancing, bankruptcy, decreases in market rates for rents and other economic, political, or regulatory occurrences affecting the real estate industry. Ratings are provided by Moody’s Investors Services and Standard & Poor’s. Non-Investment grade securities, commonly known as "high-yield" or "junk" bonds, are historically subject to greater risk of default, including the loss of principal and interest, than higher-rated bonds, which may result in greater price volatility than experienced with a higher-rated issue. Securities offered through AFSI may not be suitable for all investors. Consult with your financial advisor for more information regarding the suitability of a particular investment. For further information on fixed income securities please refer to FINRA’s Smart Bond Investing at FINRA.org, MSRB’s Electronic Municipal Market Access at emma.msrb.org, or Investing in Bonds at investinginbonds.com. DEFINITIONS OF TERMS Agency – Agency bonds are issued by Government Sponsored Enterprises (GSE), but are NOT direct obligations of the U.S. government. Common GSE’s are the Federal Home Loan

Mortgage Corp. (Freddie Mac) Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Bank (FHLB). Beta: A measure of the risk arising from exposure to general market movements as opposed to company-specific factors. Betas in this report, unless otherwise noted, use the S&P 500 as the market benchmark and result from calculations over historic periods. A beta below 1.0, for example, can suggest the equity has tended to move with lower volatility than the broader market or, due to company-specific factors, has had higher volatility but generally low correlations with the overall market. Corporate Bonds – Are debt instruments issued by a private corporation. Non-Investment grade securities, commonly known as “high-yield” or “junk” bonds, are historically subject to greater risk of default, including the loss of principal and interest, than higher-rated bonds, which may result in greater price volatility than experienced with a higher-rated issue. Mortgage Backed Securities – Bonds are subject to prepayment risk. Yield and average lives shown consider prepayment assumptions that may not be met. Changes in payments may significantly affect yield and average life. Please contact your financial advisor for information on CMOs and how they react to different market conditions. Municipal Bonds – Interest income may be subject to state and/or local income taxes and/or the alternative minimum tax (AMT). Municipal securities subject to AMT assume a “nontaxable” status for yield calculations. Certain municipal bond income may be subject to federal income tax and are identified as “taxable”. Gains on sales/redemptions of municipal bonds may be taxed as capital gains. If the bonds are insured, the insurance pertains to the timely payment of principal (at maturity) and interest by the insurer of the underlying securities and not to the price of the bond, which will fluctuate prior to maturity. The guarantees are backed by the claims-paying ability of the listed insurance company. Treasury Securities – There is no guarantee as to the market value of these securities if they are sold prior to maturity or redemption. Price/Book: A financial ratio used to compare a company’s market share price, as of a certain date, to its book value per share. Book value relates to the accounting value of assets and liabilities in a company’s balance sheet. It is generally not a direct reflection of future earnings prospects or hard to value intangibles, such as brand, that could help generate those earnings. Price/Earnings: An equity valuation multiple calculated by dividing the market share price, as of a certain date, by earnings per share. Trailing P/E uses the share price divided by the past four-quarters’ earnings per share. Forward P/E uses the share price as of a certain date divided by the consensus estimate of the future four-quarters’ EPS. Price/Sales: An equity valuation multiple calculated by dividing the market share price, as of a certain date, by the company’s sales per share over the most recent year.



INDEX DEFINITIONS An index is a statistical composite that is not managed. It is not possible to invest directly in an index. Definitions of individual indices mentioned in this report are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor. DISCLAIMER SECTION Except for the historical information contained herein, certain matters in this report are forward-looking statements or projections that are dependent upon certain risks and uncertainties, including but not limited to, such factors and considerations as general market volatility, global economic and geopolitical impacts, fiscal and monetary policy, liquidity, the level of interest rates, historical sector performance relationships as they relate to the business and economic cycle, consumer preferences, foreign currency exchange rates, litigation risk, competitive positioning, the ability to successfully integrate acquisitions, the ability to develop and commercialize new products and services, legislative risks, the pricing environment for products and services, and compliance with various local, state, and federal health care laws. See latest third-party research reports and updates for risks pertaining to a particular security. This summary is based upon financial information and statistical data obtained from sources deemed reliable, but in no way is warranted by Ameriprise Financial, Inc. as to accuracy or completeness. This is not a solicitation by Ameriprise Financial Services, Inc. of any order to buy or sell securities. This summary is based exclusively on an analysis of general current market conditions, rather than the suitability of a specific proposed securities transaction. We will not advise you as to any change in figures or our views. Past performance is not a guarantee of future results. Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. AFSI and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Ameriprise Financial Services, Inc. Member FINRA and SIPC.

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