Volume 9, April 2015

Another Soft PatchThe Ides of March has come and gone and it looks like the economy survived another brutal blow from Mother Nature. To be sure, frigid temperatures in the Midwest and copious snowfalls throughout the Northeast, including a record of almost 109 inches in Boston, carved a deep pothole in the recovery road. Following a period of robust growth last summer and fall, the unseasonable blast of harsh winter weather cooled the economy off considerably as the calendar turned to 2015, crimping household spending on autos and homes as well as other weather-sensitive activities, such as construction. The setback is eerily similar to the experience last year, when the economy was also battered and bruised by winter storms.

But just as the economy came roaring back in 2014 once the weather turned more hospitable, there is every reason to expect a rebound in coming months. The frigid temperatures and snowfall that shuttered consumers in also created pent-up demand even as incomes continued to grow. The personal savings rate increased from 4.5 to 5.5 percent between November and January, providing more firepower for spending in coming months. Meanwhile, the job market continued to heat up, generating fatter paychecks that will nourish consumption. While gasoline prices turned up slightly in February, the plunge over the

previous eight months has yet to be fully transmitted to the spending stream. What’s more, the global oil glut continues to grow, raising the odds of more price declines.

That’s not to say the economy’s journey will be propelled entirely by tailwinds. If the history of this recovery tells us anything, it is that external forces have a pattern of interrupting the uphill climb. Unpredictable weather, of course, is always a potentially disruptive force lurking in the background. But that only temporarily alters the economy’s course, which is reset when the fundamentals reassert themselves. More perplexing are the highly visible headwinds whose effects are not fully understood. The surging dollar is one head-scratcher that may have unforeseen consequences for the economy. Another is the prospective rise in interest rates the Federal Reserve is expected to engineer sometime this year. Then there are the disturbing laggards of the recovery that have yet to kick in and shift the economy’s growth engine into a higher gear. Housing is the most conspicuous one. But the lackluster pace of business investment spending is also of particular concern, both for its near-term growth dampening effects and its longer-term consequences for productivity.

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As the second quarter of 2015 gets underway, Legacy’s investment team collectively discussed aspects of the securities market in review, as well as what they will be watching going forward.

Q: For the first time in 15 years, the Nasdaq index reached a major milestone in March when it crossed the 5000 mark for the first time since March of 2000. How will this affect your thoughts for the rest of the year?

A: When the Nasdaq index was at record highs at the turn of the century, it was because technology stocks were red hot. Today, some of the best performing stocks are biotechnology companies like Gilead Sciences, Amgen, Celgene, and Biogen and they are included in the index. At the end of the day, we don’t pay close attention to a particular index level, and buy what we think are good companies at an attractive price.

Q: What has been done to prepare for interest rate hikes that are projected to occur sometime mid-year?

A: The disappointing payrolls data that came out Friday, March 20, will likely give the Fed more time to raise rates, potentially delaying rising rates until this fall instead of this summer. A rising rate environment is not necessarily bad for equities; it might actually be a healthy sign that the economy is improving. Additionally, long duration bond funds might experience significant price declines if we see a sharp move to higher rates that could be a catalyst to send some bond investors back to equities on the margin. From a portfolio standpoint, we think it pays to keep the bond portion to a duration of less than five years; the extra yield pickup from buying long bonds isn’t worth the risk.

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Legacy’s Investment Department Roundtable Discussion

Legacy Investment Roundtable

Nick Carver Director of Investment Services

Lewis “Bo” Bohannon Senior Portfolio Manager

David Schedler Senior Investment Advisor

David Trotter Trust Investment Officer

David Bauman Financial Planning and

Investment Advisor

Paul Griesbach Trust Investment Officer

Nicole Jones Trust Investment Coordinator

The Almighty DollarThe surging dollar has been one of the more astonishing events of the past year. Yet it is only recently that the run-up has attracted much attention in the media and among policy makers. One reason it has remained under the radar for so long is the ambivalent attitude exhibited over the dollar’s strength. Some believe it is a good thing, reflecting the muscular performance of the U.S. economy relative to the rest of the world. Others have a darker view, believing we are getting the short end of the stick from efforts by foreign central banks to devalue their nations’ currencies. They argue that these foreign entities are exporting their deflation and stagnation to the U.S.

If nothing else, the extreme magnitude of the rise has propelled the dollar into the limelight. Over the past year, the greenback has surged by 20 percent against other major currencies, the second steepest annual increase in more than forty years. Against the euro, the climb has been an even more dramatic 25 percent, pushing the euro

at one point close to parity with the dollar. At its peak last May, one euro would cost $1.39; in mid-March, the exchange rate was as low as $1.04. The dollar has also climbed sharply against many emerging market currencies.

There’s nothing mysterious about the dollar’s strength. Capital tends to flow to currencies that offer safety as well as the highest returns. On both fronts, the greenback has been an attractive magnet. As low as interest rates are on U.S. securities, they are even lower in Europe and

elsewhere, including Italy, Spain and Japan, not to mention Germany where the yield on 10-year securities is close to zero. Meanwhile, the European Central Bank is keeping downward pressure on long-term rates by embarking on a large-scale bond-purchase program aimed at boosting growth in the region, joining the Japanese and several other central banks in similar efforts. The Federal Reserve, in contrast, terminated its bond-purchase program last summer and is poised to raise interest rates sometime later this year.

The DownsidesNeedless to say, the sharp climb in the dollar has drawn the attention of the Federal Reserve, as it threatens to be a drag on growth. While the U.S. economy is 87 percent dependent on domestic demand, it is not immune from an adverse shift in trade. A strengthening dollar makes U.S. goods more expensive on the global marketplace, impairing exports, even as it reduces the cost of foreign goods, stoking the demand for imports. That combination raises the trade deficit, which is a direct hit to the U.S. economy. Indeed, the wider deficit lopped more than one percentage point from real GDP in the fourth quarter of last year, a haircut that loomed large relative to the 2.2 percent overall growth rate.

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The Surging Greenback

Dollar Versus Euro

Dollar Versus Major Currencies

Capital tends to flow to currencies that

offer safety as well as the highest returns. On both fronts, the greenback has been

an attractive magnet.

Another Soft PatchContinued from front page

Q: What is your current position on international stocks and how they may perform during the remainder of 2015?

A: The year started well for international stocks but we have been there before. In the last few years we have seen a strong start to international stocks end up in disappointment for the rest of the year. One thing that is different this year is the start of the quantitative easing program (QE) by the European Central Bank (ECB). The extra liquidity infusion by the ECB might be what the international stock markets need to jump-start a strong rally in 2015 that is sustainable. Markets don’t go up because they are cheap; you need a catalyst and hopefully QE from the ECB will be the spark. We continue to believe that there is more value in international versus domestic stocks, particularly in emerging markets. Legacy’s investment philosophy has tended to steer towards emerging

markets for international exposure—only in our more recent history have we invested in developed international markets. Although the diversification benefits for holding international equities is minimal, to us it looks like a great place to be positioned for the long run.

Q: When you reflect on your outlook for 2015 as the year began, and considering how the year has unfolded so far, has your outlook or focus changed?

A: Our outlook remains largely the same as many of the themes in 2015 are a continuation of what we saw in 2014. A strong U.S. dollar, Fed policy, energy prices, and tough earnings comparisons will continue to dominate headlines. One area in particular that we will be watching is...

To read the conclusion of our investment team’s roundtable discussion, please click here.

Investment Department Roundtable DiscussionContinued from front page

There are indirect effects as well. Almost 50 percent of sales of large corporations are derived from overseas operations and those local revenues are worth less when converted back into the stronger dollar. To be sure, there are also some positive offsets; companies that import parts and supplies to generate output find that the stronger dollar lowers production costs. That enables them to keep prices lower than otherwise and maintain a competitive edge. But to a Federal Reserve that is concerned with the stubbornly low inflation rate in the U.S., the disinflationary impact of falling import prices is just another headwind that complicates policy decisions.

On the positive side, to the extent the increased aggressiveness of foreign central bank policies leads to a pick up in growth overseas, so too will the demand for U.S. exports. That response takes time to unfold. Ultimately, however, the U.S. trade balance is more deeply influenced by the growth rate of our trading partners than by currency values. There are already signs that expansive policies are bearing fruit, as recent data out of Europe and Japan are becoming a bit more upbeat. The signals are not strong enough to ease pressure on the dollar, but they point in the right direction. The ECB has recently increased its 2015 growth outlook for the Euro area based largely on these early signals.

Unclear Lift-off DateUnless it gets out of hand and becomes disruptive to the financial markets, the dollar strength is not likely to short-circuit the Fed’s plan to raise interest rates later this year. What would postpone or even derail its plan is a fundamental slowdown in economic activity. If the recent spate of soft data on consumer spending, industrial production and housing construction is not just a temporary soft patch but reflective of endemic weakness in the economy, the Fed would be hard-pressed to justify a policy shift that puts more obstacles in the way of growth, particularly in a persistently low inflation environment.

With the weather just turning favorable, the Fed has a few months to see how briskly the economy bounces back from the harsh winter. If the response is tepid, expect the central bank to keep its finger off of the rate-hiking trigger. If the rebound lifts growth back to the heady pace seen before the winter storms took hold, look for the lift-off date to meet current expectations, around mid-year or September. By the June meeting, the Fed will have three more months of data to work with, which is enough to give a sense of underlying fundamentals.

Clearly, shifting perceptions regarding the timing of the lift-off date has roiled the financial markets in recent months. Stocks would fall and bond yields rise—sometimes dramatically—whenever a rate hike seemed more likely to come sooner rather than later. These moves, however, are an overreaction to a prospective rate increase. It’s highly unlikely that the Fed will push interest rates up as sharply or as rapidly as it has in past tightening cycles, when its main goal was to slow the economy and tame inflationary pressures. That’s not the purpose this time; the economy is far from overheating and inflation remains well below the Fed’s two percent target. Instead, the Fed would like to restore a more normal policy, as the emergency conditions that compelled it to drive interest rates down to near zero in late 2008 where it has remained, no longer exist.

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The Seeds of Stronger Productivity

Real Private Spending on Research & Development

Julie Wanie has been with Legacy since 2006 and currently coordinates marketing activities and web site design and updates. She holds a BA from the University of Iowa and has over 19 years of experience in the financial services industry. Prior to joining Legacy she spent most of her financial career with Thrivent Investment Management’s corporate office in investment product sales, and service training development and facilitation.

As a transplant to the Fox Cities area, Julie has spent the last 22 years experiencing all the outdoor activities that the northern woods of Wisconsin offer near her lake cottage in Tomahawk. She has snowmobiled to casinos; snow skied in negative wind-chill temperatures in the UP; been covered in trail dust from the back of a four-wheeler; hiked through timberland worried about meeting up with a bear; has provided entertainment for her two daughters with her fantastic wipe-outs on water skis; and has attempted to draw a fish up through an ice fishing hole while her fingers froze. After all these adventures she much prefers to sit by a campfire sipping wine while the summer sun dips below the tree line from across the lake.

As the main event coordinator for Legacy, Julie attends to many details that make client receptions festive and memorable. She is energetic and flexible and uses her excellent communication skills when producing Legacy’s marketing materials. As an event host and seminar facilitator, Julie is an extraordinary public presenter and represents Legacy with exceptional grace and confidence.

Legacy Team Spotlight

Julie A. WanieMarketing and Web Site Coordinator P 920.967.5044

Two Neenah Center | Suite 501 | Neenah, WI 54956 | 920-967-5020 | www.lptrust.com

Slowing ProductivityIndeed, the Fed lowered its growth forecast for the next three years at its latest policy meeting in March and acknowledged that its benchmark interest rate would remain lower than normal even after employment and inflation objectives were met. Despite the reduction in expected growth, the Fed also lowered its forecast for the unemployment rate, which has fallen much more rapidly than anticipated. The main reason growth is not keeping pace with actual and prospective job gains is that productivity growth, or output per worker, has slowed considerably during the recovery—to an annual rate of 0.7 percent over the past four years compared to a two percent average over the previous thirty years; it has actually declined by 0.1 percent during the past year.

Several factors have contributed to this dramatic slowdown in productivity. A key cause is the lackluster pace of capital spending since the recession, depriving workers of more efficient and technologically-advanced tools of production that would generate higher output. No doubt, the reluctance of businesses to step up investment reflects the relatively weak recovery itself, which eroded corporate confidence. Some believe that the shortfall in capital spending reflects a dearth of innovation since the Internet revolution, and that the Internet’s transformative effects in boosting productivity may be running out. The good news is that a key indicator of capital spending and innovation—research and development—is increasing at the fastest pace since the recession. If that positive omen becomes a reality, both the short- and long-term growth prospects would brighten considerably. n

To learn more about Legacy Private Trust Company and our services, visit www.lptrust.com.

Another Soft PatchContinued from page three

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Core Equity PortfolioThe core equity portfolio is designed to ensure broad participation in the equity market, with less than average market volatility, while effectively producing a meaningful performance edge for our clients.

We use an active valuation strategy that employs quantitative and fundamental analysis, focusing on individual stock selection in conjunction with economic sector discipline. Securities are selected through a process incorporating quantitative and fundamental analysis with the qualitative judgment of our senior investment professionals. This rigorous investment process strives to look beyond mainstream consensus opinion to construct portfolios designed to achieve your investment goals and weather varying market conditions.

The chart below shows the sector weightings in the Core Portfolio as of March 31, 2015.

Global Tactical Growth PortfolioThe Global Tactical Growth (GTG) Portfolio is a disciplined, proprietary investment solution designed to maximize long-term investment returns while taking a moderate amount of risk. With GTG, Legacy complements the traditional asset classes of domestic equity and fixed income with foreign equity and fixed income, foreign and domestic real estate, commodities and currencies with a “go anywhere” approach to asset allocation. Legacy’s goal is to position the GTG Portfolio in the best performing asset class using all Exchange Traded Products.

The chart below shows the GTG asset allocation mix across four major asset classes over the past six months. Investment performance in each asset class can vary substantially over time. By systematically over-weighting those asset class categories that offer superior value at a given point in time, risk-adjusted returns can be significantly enhanced.

Featured Legacy Investment Portfolios

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� Domestic Equity � Fixed Income � Foreign Equity � Alternatives (Real Estate, Commodities, Foreign Currency)

Global Tactical Growth Portfolio Composition

Past performance does not predict future results. Current and future results may be lower or higher than those referenced in this newsletter. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity. Investment return and principal value will fluctuate and investments may lose value.

Core Equity Portfolio Composition

Energy – 4%

Information Technology – 16%

Utilities – 4%

Consumer Discretionary – 16%

Consumer Staples – 16%

Health Care – 16%

Industrials – 12% Financials – 16%