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March 15, 2018 2018 SGV Economic Forecast Summit Global & National Forecast Christopher Ainsworth, Managing Director

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Page 1: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

March 15, 2018

2018 SGV Economic Forecast SummitGlobal & National Forecast

Christopher Ainsworth, Managing Director

Page 2: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Disclaimer

Page 3: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

The CIO “Bulls Eye”

An succinct and objective perspective on new developments during the quarter and key ongoing macro drivers.

Positive Factors

Broad global synchronized recovery drives earnings growth

Monetary policy worldwide remains accommodative

Healthy consumer and job growth drives U.S. economy

Growth of European economy reduces political risk

Recent Developments

Republican tax plan signed into law, handing President Trump a major legislative achievement

Jerome Powell chosen as next Federal Reserve Chairman, seen as a continuation of accommodative monetary policy

U.K. and the European Union agree to separation financial bill, setting up talks for future trade relationship

Republican electoral defeats potentially signal shift in political winds

Quantitative Easing Roll Off (QERO) begins in U.S. while global central banks tiptoe towards tightening monetary policy

Angela Merkel, recently elected Chancellor of Germany, finds it difficult to form a government

North Korea, categorized as state-sponsor of terrorism, fires another ICBM*

Bitcoin futures begin trading on the Chicago Board Options Exchange and Chicago Mercantile Exchange

Geopolitical and trade tensions (protectionism)

China’s deleveraging campaign and economic transition

QERO and FOMC** composition

Italian elections (March 4th) / Identity Politics

On Watch

Source: Chief Investment Office. Data as of December 31, 2017. *Intercontinental ballistic missile; **Federal Open Market Committee

1

Page 4: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

2018 Outlook: The Next Great Odyssey

We see 2018 as a year of continued transition.

Capital investment via repatriation

Millennial housing cycle

Emerging market middle-class consumers

Second wave of an innovation cycle

Global infrastructure redevelopment

Our outlook of expected dynamics to drive the new upcycle can be seen through a 5 by 5 prism

Central banks to normalize large balance sheets

Tapering of central bank bond-buying programs

A nudge higher in interest rates

Trillions of dollars to fade to positive rate structure

Debt servicing costs to remain at acceptable levels, as growth

hovers at or above trend levels

Expected growth sources New demographic & inflation dynamics expected to allow…

The progression from the prolonged period of secular stagnation and extraordinarily low interest rates to rising

economic growth, enhanced by secular forces, and rising interest rates may generate episodes of concern, which could

eventually set the stage for a new upcycle.

Source: GWIM Investment Strategy Committee (ISC) as of December, 2017.

2

Page 5: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

U.S. GDP Quarterly % Change

3

Page 6: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Manufacturing Survey

Source: www.philadelphiafed.org/manufacturing-BOS Source: Research.stlouisfed.org

Current General Business Conditions

4

Page 7: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Leading Economic Indicator

5

Page 8: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Tight Labor Market

Unemployment rate has declined, which may pressure wage growth

A tight labor market supports faster wage growth.

*Broader measure of unemployment: Total unemployed plus all marginally attached workers, plus total employed part time for economic reasons as a percent of thecivilian labor force, plus all marginally attached workers. Source: (Left) Bureau of Labor Statistics/ Haver Analytics. As of December 15, 2017. (Right) Federal Reserve Bankof Atlanta / Haver Analytics. As of January 3, 2018. Shaded are recessions.

Past performance is no guarantee of future results. Please refer to appendix for asset class disclosures and index definitions.

2.5

5.0

7.5

10.0

12.5

15.0

17.5

Pe

rce

nta

ge

(%

)

Broader Measure of Unemployment*, SA, %

Civilian Unemployment Rate: 16 yr +, SA, %

1

2

3

4

5

6

7

1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Pe

rce

nta

ge

(%

)

Wage Growth Tracker: Overall:

3-Mo Moving Avg of Median Wage Growth Non-Seasonally Adjusted, %

6

Page 9: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Inflation Expectations are SoftInflation running below policy target adds to the case for a cautious Fed tightening cycle. Core

inflation should return to trend over the medium term.

Market-based inflation expectations are still historically low… ...a mood increasingly reflected by consumers.

Source: (Left) Federal Reserve Board /Haver Analytics. As of January 3, 2018. (Right) University of Michigan /Haver Analytics. As of January 3, 2018.

Past performance is no guarantee of future results. Please refer to appendix for asset class disclosures and index definitions.

0.5

1.0

1.5

2.0

2.5

3.0

Pe

rce

nta

ge

(%

)

Calculated 5-Year Forward Inflation Rate EOP, %

1.50

2.25

3.00

3.75

4.50

5.25

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Pe

rce

nta

ge

(%

)

12 Month Expectations: Change in Prices: Median Increase, %

7

Page 10: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Global Profit Outlook

Synchronized global earnings expansion is expected to continue.

Source: (Left) BofA Merrill Lynch Global Research. Data as of November 30, 2017. Source: (Right) FactSet consensus estimates. Data as of January 4, 2017.

Past performance is no guarantee of future results. Please refer to appendix for asset class proxies and index definitions.

Analyst earnings revisions are headed higher across most

regions.

Earnings growth has been synchronized across regions, a

trend expected by analysts to continue.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2010 2011 2012 2013 2014 2015 2016 2017

# S

tock

Up

gra

de

d /

# D

ow

ng

rad

ed

USA Europe Japan Asia Pac ex-Japan

4.3

0.3

5.4

-0.2-3.1

-0.8

16.4

10.69.6

6.8

-6.9

-2.1

-11.1

-19.3

7.0

28.2

13.611.1

-30

-20

-10

0

10

20

30

40

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

Yo

Y,

(%)

Developed Markets

Emerging Markets

8

Page 11: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Countries growing above 2%

Countries growing below 0%Cycle high

Cycle low

Countries growing above 2% and below 0%

Share of all countries

Source: International Monetary Fund. Data as of 2017.

Past performance is no guarantee of future results. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. Please refer to appendix for asset class proxies and index definitions.

Inside the Global Synchronized Economic PickupMore country economies have been growing at faster rates, while those contracting have fallen to a

cycle low.

9

Page 12: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Global Economic Policy Uncertainty

Policy uncertainty is off its highs post-French election, while financial stress remains benign.

Policy uncertainty has declined, financial stress is low

Source: (Left) www.policyuncertainty.com. Data as of December 14, 2017. (Right) Bloomberg and Chief Investment Office. Data as of December 14, 2017.

Notes: Global EPU calculated as the GDP-weighted average of monthly EPU index values for U.S., Canada, Brazil, Chile, UK, Germany, Italy, Spain, France, Netherlands, Russia, India, China, South Korea, Japan, Ireland, Sweden, and Australia, using GDP data from the International Monetary Fund (IMF) World Economic Outlook Database. National EPU index values are from www.PolicyUncertainty.com and Baker, Bloom and Davis (2016). Each national EPU Index is renormalized to a mean of 100 from 1997 to 2015 before calculating the Global EPU Index.Past performance is no guarantee of future results. fees or expenses. It is not possible to invest directly in an index.

Please refer to appendix for asset class proxies and index definitions.

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2012 2013 2014 2015 2016 2017B

ofA

ML

GFS

I

BofA Merrill Lynch Global Financial Stress Index (GFSI)Levels greater/less than 0 indicate more/less financial market stress

0

50

100

150

200

250

300

350

Global Economic Policy Uncertainty Index (EPU)

Global EPU, Current Price GDP Weights

Global

Financial

Crisis

Eurozone Crises, U.S.

Fiscal Fights, China

Leadership TransitionEuropean

Immigration

Crisis

Brexit

Gulf War II9/11

Asian &

Russian

Financial

Crisis

(January 1997 to November 2017)

Using data for 17 countries that account for

2/3 of global GDP

U.S. Elections &

Political developments

in Brazil, China, France,

South Korea, and the

U.K.

10

Page 13: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Global Economy Improving

The synchronized global growth upturn that began last year continues and has broadened.

The Global Wave quantifies trends in global economic activity and is an

amalgamation of seven macroeconomic and market components.**

Global aggregate economic data continue to improve Global Wave suggests continued outperformance for equities

and cyclical rotation

*Organization for Economic Co-operation and Development. **Components of Global Wave: Global Industrial Confidence (Output), Global Consumer Confidence (Demand), GlobalCapacity Utilization (Investment), Global Unemployment Labor (Market), Global Producer Prices (Prices), Global Credit Spreads (Bond Market) and Global Earnings Revision Ratio(Equity Market). Source: (Left) OECD /Haver Analytics. As of December 2017. (Right) BofA Merrill Lynch Global Quantitative Strategy, MSCI, IBES, Bloomberg, OECD, IMF. As ofDecember 2017. Past performance is no guarantee of future results. There can be no assurance that the forecasts will be achieved. Economic or financial forecasts are inherentlylimited and should not be relied on as indicators of future investment performance. Please refer to appendix for asset class disclosures and index definitions.

2.5

3.0

3.5

4.0

4.5

5.0

5.5

11 12 13 14 15 16 17

GD

P (

Yo

Y %

Ch

an

ge

)

OECD & Major Six Non-Mem: Original Series:

Gross Domestic Product (Year/Year % Change)

China/EM Slowdown

Europe

Growing

Again

Dollar-Oil Shock

Bottom

11

Page 14: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

CIO U.S. Recession IndicatorChanges in economic gauges we track are aggregated into the CIO U.S. Recession Indicator. At its current reading, the risk of recession in the U.S. appears to be currently low.

Source: GWIM Chief Investment Office, Bloomberg, National Bureau of Economic Research. *Logistic regression of six macroeconomic variables (initial claims, housing starts, industrial production, domestic vehicle sales, 10yr-3m yield curve, commercial bank loans and leases) against recessionary and non-recessionary periods since January 1970. The start of past recessions has generally been contemporaneous with increases in the indicator above 50%. Data as of November 2017.

Past performance is no guarantee of future results. Please refer to appendix for asset class proxies and index definitions.

Pro

ba

bili

ty (

%)

0

10

20

30

40

50

60

70

80

90

100

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Recession Recession Indicator*

Elevated recession risk >25% Extreme recession risk >50%

12

Page 15: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Tax Reform in a Global ContextTax reform aims to make American firms more competitive and spark a capital expenditure cycle.

This along with household tax cuts are ingredients for stimulating growth in the U.S.

Source: OECD. Data as of December 2017. The key on the right hand side of the chart classify the lines by country, while the top shows what the lines are. Neither

Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. Clients should consult their legal and/or tax advisors before

making any financial decisions. Past performance is no guarantee of future results. Please refer to appendix for asset class disclosures and index definitions.

0

5

10

15

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

U.S. (previous)France

Japan

U.S. (new)

GermanyCanada

Ireland

Headline national corporate tax rates, excluding regional or state levies (%)

U.K.

Corporate tax rates around the

world have been trending lower

for years. We believe tax reform

helps realign the U.S. with other

major economies.

We believe tax reform, along

with other pro-growth fiscal

and regulatory policies, should

strengthen U.S. firms’ standing

in the global economy.

13

Page 16: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Repatriation: Over $1 Trillion to Return to the U.S.?

S&P 500 companies potentially returning over one-trillion dollars may boost earnings per share by two to three dollars on share buybacks. Tech and Health Care may benefit the most.

Source: BofAML Global Research. Data on report published December 20, 2017. *For reference purposes only.

Past performance is no guarantee of future results. Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest directly in an index.

Earnings per share impact by sector from repatriated cash used for buybacks

Sect

or

0.0

0.1

0.1

0.6

0.7

0.8

0.9

1.0

1.8

2.1

5.0

0 1 2 3 4 5 6

Utilities

Real Estate

Telecom

Materials

Industrials

Energy

Discretionary

Staples

S&P 500

Health Care

Technology

Earnings per share impact (%)

Top 20 firms with overseas cash as a % of market cap*

CSCO Cisco Systems, Inc. 36

GILD Gilead Sciences, Inc. 33

NTAP NetApp, Inc. 33

QCOM QUALCOMM Incorporated 31

AMGN Amgen Inc. 30

ORCL Oracle Corporation 30

AAPL Apple Inc. 28

WDC Western Digital Corporation 22

NWS News Corporation Class B 21

STX Seagate Technology PLC 20

WAT Waters Corporation 20

MSFT Microsoft Corporation 20

XLNX Xilinx, Inc. 18

LRCX Lam Research Corporation 18

GE General Electric 18

RL Ralph Lauren Corporation Class A 17

CA CA, Inc. 17

CTXS Citrix Systems, Inc. 16

JNPR Juniper Networks, Inc. 15

VRSN VeriSign, Inc. 14

14

Page 17: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

U.S.: Effective Corporate Tax Rates by Industry

Source: Credit Suisse, S&P Capital IQ/ClariFi, Compustat. Data as of 2016. Past performance is no guarantee of future results. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions. Please refer to appendix for asset class disclosures and index definitions.

Energy

Pharma, Biotech & Life Sciences

Semiconductors & Equipment

Materials

Diversified Financials

Household & Personal Products

Software & Services

Health Care Equipment

Capital Goods

Automobiles & Components

Utilities

Media

Retailing

Telecommunication Services

0% 5% 10% 15% 20% 25% 30% 35% 40%

Decreasing

benefit from

lower statutory

rate

Small cap Russell 2000 corporate tax rates

Effective rate

Retail, Telecom, and Media companies may see the largest windfall from the recently passed

Republican tax plan.

Energy

Pharma, Biotech & Life Sciences

Semiconductors & Equipment

Software & Services

Household & Personal Products

Capital Goods

Automobiles & Components

Materials

Diversified Financials

Health Care Equipment

Utilities

Media

Telecommunication Services

Retailing

0% 5% 10% 15% 20% 25% 30% 35% 40%

Large cap Russell 1000 corporate tax rates

Effective rate

Decreasing

benefit from

lower statutory

rate

15

Page 18: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Buybacks Reach 2nd Highest Amount Since 2009

Corporate buybacks year-to-date, as of Feb. 6, in billions.

Source: Birinyi Associates16

Page 19: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

U.S. Equity Fundamentals and ValuationsEquity valuations are full on an absolute basis, but more attractive versus fixed income. Earnings

growth may be key for further equity upside.

Source: (Both) BofA Merrill Lynch US Equity & US Quant Strategy. *Note: Normalized equity risk premium is the spread between normalized earnings per share (EPS) yield and the normalized risk-free rate (RFR). Normalized EPS is based on a log linear regression of S&P 500 operating EPS. The normalized RFR is the difference between 1) the average of the 30-year Treasury yield and the 5-year rolling average 10-year Treasury yield and 2) the 10-year TIPS spread and the 5-year rolling average CPI inflation rate. Data as of November30, 2017. (Right) Source: BofAML Global Research; Chief Investment Office. *The Chief Investment Office forecasts a S&P 500 2018 earnings per share (EPS) target range of $148–$158, which is depicted by the checkered box. E = Estimate. Past performance is no guarantee of future results. Please refer to appendix for asset class proxies and indexdefinitions.

The normalized equity risk premium* usually undershoots

during bull markets

Earnings momentum for the S&P 500 is forecasted to carry into 2018

Note: Specified (E) is the consensus expectation, an average of analysts’ forecasts surveyed by First Call.

-200bp

0bp

200bp

400bp

600bp

800bp

1000bp

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Average (ex-Tech Bubble) =

363 basis points (bp)

Equity optimism

Equity fear

Tech Bubble

Financial crisis

Euro Crisis,

Fiscal Cliff

12.0

18.1 18.2

15.8

11.911.5

15.9

7.2

11.3 11.4 11.5

12.9

11.7 11.0

12.0

12.8

11

0

2

4

6

8

10

12

14

16

18

20

3Q17 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E 2017E 2018E

Yo

Y,

(%)

BAML Estimate Actual unless specified (E)

Chief Investment Office*

18

Chief Investment Office Range*

17

Page 20: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Non-U.S. Equity Valuations

Across the world, equity valuations relative to the U.S. appear appealing.

Price-to-Book ratios versus the U.S. (MSCI indices)

0.55

0.54

0.58

0.44

0.680.67

0.71

0.54

0.93

0.800.82

0.67

0.50

0.55

0.61

0.44

0.4

0.5

0.6

0.7

0.8

0.9

1.0

0.5 1 1.5 2 2.5 3 3.5 4 4.5

Pri

ce-t

o-B

oo

k o

f re

gio

n v

ers

us

Pri

ce-t

o-B

oo

k o

f U

.S.

Current 15 year average 90th percentile 10th percentile

Source: Chief Investment Office, Bloomberg. Data as of December 29, 2017. Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest directly in an index. Please refer to appendix for asset class proxies and index definitions.

Emerging Markets Developed ex-U.S. Europe Japan

18

Page 21: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

In Europe & Japan, Purchasing Power is KeyIn Japan, rising wages would increase consumer purchasing power and may be instrumental in defeating its population’s “deflationary mindset.” In Europe, purchasing power would lift low margins off the mat, potentially boosting upside.

Source: Chief Investment Office. MSCI, Bloomberg. (Left) Data as of November 30, 2017. (Right) Data as of December 29, 2017

Past performance is no guarantee of future results. Please refer to appendix for asset class proxies and index definitions.

The Japanese labor market is tight, which may result in rising

wages as employers struggle to fill vacancies. Higher inflation

may boost attractive equity valuations.

Profit margins are near a peak in the U.S. but sub-trend in

Europe with room to expand.

0

2

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

%

MSCI US Profit Margin (12m Trailing)

MSCI Europe Profit Margin (12m Trailing)

0.0

0.5

1.0

1.5

2.0

2.5

1964 1970 1976 1982 1988 1994 1999 2005 2011 2017

Ne

w J

ob

s to

Ap

plic

an

ts r

ati

o

19

Page 22: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Global Pickup May Favor Emerging Markets

Growth in global trade volumes have historically been a

tailwind for earnings in Asian Emerging Markets.

In our view, a rebound in global trade, along with the rise of the consumer are trends favoring

Emerging Markets, particularly in Asia.

A pickup in economic growth relative to Developed Markets suggests strength for Emerging Market equities

Note: MSCI DM represented by MSCI World Index

Source: Chief Investment Office. IMF. Bloomberg, MSCI. (Left) Data as of September 30, 2017. (Right) Data as of December 29, 2017.

Past performance is no guarantee of future results. Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest directly in an index. Please refer to appendix for asset class proxies and index definitions.

On a relative price basis, Emerging Markets appear to have plenty

of runway for appreciation if they lead global economic growth.

40

60

80

100

120

140

160

180

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

MSC

I E

M /

MSC

I D

M -

Ind

exe

d t

o 1

00

EM

GD

P m

inu

s D

M G

DP

(%

)

EM-DM Real GDP growth gap

MSCI EM / MSCI DM (rhs)

-20

-10

0

10

20

30

40

-80

-60

-40

-20

0

20

40

60

80

100

120

140

160

2001 2003 2005 2007 2009 2011 2013 2015 2017

Yo

Y, (

%)

Yo

Y, (

%)

EM Asia EPS growth

Global trade volume (rhs)

20

Page 23: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Fixed Income Market TrendsThe disconnect between Federal Reserve projections and market expectations is something to watch,

though it has narrowed. Negative policy rates continue to drive divergences in sovereign yields.

Ex-U.S. global sovereign yields remain close to zero

Source: Bloomberg, Chief Investment Office. Left chart: data as of December 31, 2017. Right chart: data as of December 31, 2017. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurances that the forecasts will be achieved.

Past performance is no guarantee of future results. Please refer to appendix for asset class proxies and index definitions.

In our view, the search for yield, the low supply of sovereign bond inventory, and the negative yield backdrop outside the U.S.,have all led to money flow into U.S. government yields pushing the curve down and long dated yields close to record levels. As central banks move toward policy to help lift the yield curve, we believe longer dated bond yields will creep higher.

Gap between Fed and market rate hike expectations has narrowed

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17

Yie

ld (

%) 10 Year Treasury

10 Year German Bund

10 Year Japanese Government Bond

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

Pro

ject

ed

Fe

de

ral

Fun

ds

Ra

te

Market-implied rate path

Fed-implied rate path

21

Page 24: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

There’s no Smoke From Credit Markets

Source: Bloomberg, Chief Investment Office. Data as of February 6, 2018.*The Option Adjusted Spread is the spread between a fixed income security and the risk-free rate of return, taking into account embedded options within the security.It is not possible to invest directly in an index. Past performance is no guarantee of future results.

High yield sold off moderately while investment grade moved

only slightly, but in the context of the rally, neither move was

outsized.

3.0

3.2

3.4

3.6

3.8

4.0

4.2

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1-Feb-17 1-Apr-17 1-Jun-17 1-Aug-17 1-Oct-17 1-Dec-17 1-Feb-18

Op

tio

n A

dju

ste

d S

pre

ad

, (%

)

Op

tio

n A

dju

ste

d S

pre

ad

, (%

)

Investment Grade High Yield

2.0

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

31-Jan-17 31-Mar-17 31-May-17 31-Jul-17 30-Sep-17 30-Nov-17 31-Jan-18

Op

tio

n A

dju

ste

d S

pre

ad

, (%

)

Bloomberg Barclays EM USD Agg OAS index

Emerging Market U.S. Dollar-denominated debt has not

shown signs of stress during the equity sell-off.

*

(Proxy = Bloomberg Barclays US Aggregate

Corporate Average OAS)

22

Page 25: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

The End of an Era – Quantitative Easing Roll-Off (QERO) Begins

QERO was officially announced at September’s FOMC meeting, designed to gradually reduce

monetary accommodation. The strategy was put into action in October.

… leading to ~10% effective reduction in QE per year, very manageable

Source for all charts: Federal Reserve, Bloomberg, U.S. Trust. Data as of September 22, 2017.

Past performance is no guarantee of future results. Please refer to appendix for asset class proxies and index definitions.

• QE added $3.7 trillion securities to the Fed’s balance sheet• QERO, however, is only forecasted to reduce the Fed’s

securities holdings by 1/3 of that over three years

QE versus Normalization: QERO flows are very reasonable

relative to QE flows …

(150)

(100)

(50)

-

50

100

150

200

250

Feb-08 Mar-09 Apr-10 May-11 Jun-12 Jul-13 Aug-14 Sep-15 Oct-16

Change in balance sheet during QE

Expected 2018-2020 average monthly redemptions

QE 1 QE2 QE3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mo

nth

0

Mo

nth

4

Mo

nth

8

Mo

nth

12

Mo

nth

16

Mo

nth

20

Mo

nth

24

Mo

nth

28

Mo

nth

32

Mo

nth

36

Mo

nth

40

Mo

nth

44

Mo

nth

48

Mo

nth

52

Mo

nth

56

Mo

nth

60

Mo

nth

64

Mo

nth

68

Mo

nth

72

Mo

nth

76

Mo

nth

80

Mo

nth

84

Mo

nth

88

Mo

nth

92

Mo

nth

96

Mo

nth

10

0

Sha

re o

f Q

E p

rog

ram

in p

urc

ha

ses

Pace of QE vs QERO

QE pace QERO pace

• Since the program was well-telegraphed and is relativelymodest in scope, we do not think it will lead to significantmarket moves, but it should add further pressure on long-term rates, in our opinion.

U.S

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olla

rs

(Bln

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Page 26: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

S&P 500 Index & QE

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Page 27: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Total Assets of Major Central Banks

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Page 28: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Total Assets: FED, ECB & BOJ

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Page 29: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Total Assets: % of Local Currency GDP

27

Page 30: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Total Assets: Yearly Percent Change

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Page 31: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Economic Breakdown

Etc.

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Page 32: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Oil OverviewThe U.S. oil rig count has more than doubled in response to the oil recovery since January 2016, and the price rally over the past few months suggests potential strengthening ahead.

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Page 33: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

U.S. Crude Oil Output

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Page 34: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Money Supply Concerns

Source: Evercore ISI32

Page 35: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Aluminum & Steel Product Imports

Source: Bank of America Merrill Lynch Global Research. Data as of February 5, 2018. *Morgan Stanley Capital International All Country World Index.It is not possible to invest directly in an index. Past performance is no guarantee of future results.The chart is based on analyzing every instance of a pullback in the ACWI by 6-7% throughout its history since data began in 1988,then averaging the subsequent stock price recoveries of all such instances. The average is thus a signal number, used to producean average time frame for recovery.

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Page 36: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Current Market Conditions

EARLY EXPANSION

LATE EXPANSION

EARLY CONTRACTION

LATE CONTRACTION

Mid Cycle

LATE EXPANSION

EARLY EXPANSION

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Page 37: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Current Market Conditions

Confidence

Indifference

Dismissal

Denial

Fear

Contempt

Enthusiasm

Caution

Doubt

Contempt

GREED

EARLY EXPANSION

LATE EXPANSION

EARLY CONTRACTION

LATE Panic

CONTRACTION

Mid Cycle

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Page 38: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

Questions?

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Page 39: March 15, 2018 2018 SGV Economic Forecast Summit and...Policy uncertainty is off its highs post-French election, while financial stress remains benign. Policy uncertainty has declined,

.�pU.S. TRUST � Bank of America Corporation