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U.S. Bank Wealth Management: Quarterly Reflections & Outlook: Economy & Markets


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Recent activities have shown we are becoming a "multi-speed world" with growth strong in the United States, weak in Europe and Japan, and steady in China. Our investment strategies provide a review of …

Recent activities have shown we are becoming a "multi-speed world" with growth strong in the United States, weak in Europe and Japan, and steady in China. Our investment strategies provide a review of third quarter results and outlooks for the global economy and capital markets.

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  • 1. Quarterly Reflections & Outlook Third quarter review—economy U.S. economy: Federal Reserve (Fed) policy was a key factor during the third quarter as a pathway was developed to end the quantitative easing programs in October. Janet Yellen appears to remain focused on improvements in the labor market, particularly for most key indicators—such as the rate of under-employment, the rate of hiring and wage growth—to return to pre-crisis levels. The employment situation has continued to improve. Total nonfarm payroll jobs now exceed the prior peak achieved in 2008, surpassing 139 million jobs, Important disclosures provided on page 9. Situation Analysis and the unemployment rate dropped to 5.9 percent, the lowest level in more than six years. Wage growth has also begun to slowly improve, averaging annual growth of nearly 2 percent so far in 2014. The consistent progress in employment has supported modest growth in consumer spending, although levels remain relatively low. Consumer attitudes toward debt remain relatively depressed, which is constraining consumer-spending growth as people work to repair their balance sheets. Third quarter 2014 recap: • U.S. economic growth remained strong, growing 4.6 percent in the second quarter. • The unemployment rate dropped to 5.9 percent and nonfarm payrolls rose past the prior 2008 peak by more than one million jobs. • European growth weakened due to sanctions against Russia, and despite the European Central Bank reducing short-term rates to near zero and moving the rate for deposits to negative. • Emerging market economies also experienced slower activity, some due to weaker commodity prices and others due to tighter monetary conditions. • Equity performance was lackluster for the quarter, negatively impacted by a number of tensions. • Persistent broad U.S. dollar strength significantly hindered the total return of local-currency emerging market fixed income. • Home sales continued to improve, albeit not at a constant monthly pace. • Commodity prices fell, driven, in part, by signs of weaker global growth, a stronger U.S. dollar and the nearing of a conclusion to Federal Reserve quantitative easing. Outlook summary: • Becoming a “multi-speed world” with growth strong in the United States, weak in Europe and Japan, and steady in China. • Emerging market commodity-producing economies may struggle due to weaker prices for production. • Global central banks remain a key factor in the global growth equation. • U.S. equities seem well positioned to grind higher into year-end, despite the recent volatility. • We believe Treasury yields will increase steadily over the coming months as the Federal Reserve concludes quantitative easing and methodically reduces monetary stimulus. • In our view, as the economy strengthens, so does housing. • Commodity prices may weaken into 2015 due to a stronger U.S. dollar and strong supply levels in key markets.
  • 2. Improving jobs market. Improving growth. 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sep 30 2014 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% U.S. gross domestic product % change from previous year 8 6 4 2 0 -2 -4 -6 -8 U.S. nonfarm payrolls | year-over-year change (shown in millions) Source: FactSet Research Systems. Data period: 10 years ending 9/30/14. Due to the harsh winter weather, U.S. economic growth began 2014 with a drop of 2 percent. However, the economy rebounded in the second quarter, growing by 4.6 percent. Data over the course of the third quarter, including purchasing manager indexes, auto sales and durable goods orders, indicated growth remained relatively strong but at a lower level than the second quarter. ISM Purchasing Manager surveys rebounded to the highest levels in more than two years. Auto sales reached their highest level in eight years in July, at an annualized rate of more than 17 million vehicles. Durable goods orders reached a historic one-month peak, growing more than 22 percent in July due to a spike in aircraft orders. Excluding the volatile Transportation sector, new orders for durable goods grew 7 percent over the past year, matching the highest levels achieved over the past three years. Global economy: After some improvement in growth for Europe through the first quarter, sanctions against Russia, a major trading partner for Europe, slowed economic activity. In the second quarter, gross domestic product (GDP) was unchanged from the first quarter. Higher frequency economic data, such as purchasing manager surveys and inflation, are pointing to slower economic activity in the third quarter. The European Central Bank (ECB) reacted by reducing short-term interest rates to near zero, cutting the deposit rate to negative, restarting the long-term refinancing operations and proposing a modest program of quantitative easing by purchasing asset-backed securities. In Japan, second quarter GDP contracted due to the April increase in the consumption tax. Data from the third quarter seem to indicate some stabilization in economic activity, although the overall pace remained modest despite continued growth in monetary accommodation. After significant acceleration in price inflation over the prior quarters, the rate of price increases slipped in the third quarter. Emerging market nations, in general, saw weaker activity over the third quarter and slower price inflation. Purchasing manager surveys for China, India, Brazil and Russia have all slowed, although only Brazil and Russia indicated contraction. Economic activity in Russia is slowing due to sanctions by Europe and the United States in response to the conflict with Ukraine. Russia and Brazil are both suffering from falling oil prices, which are reducing cash flows from oil sales. In the meantime, the fall in oil prices is easing inflation pressures in India and China, however, the economies are still struggling through effects of economic reforms. U.S. growth is leading (Manufacturing purchasing manager indexes) Apr 2011 Apr 2012 Apr 2013 Apr 2014 Oct 2011 Oct 2012 Oct 2013 Sep 30 2014 United States Germany China Japan Manufacturing purchasing manager index levels 65 60 55 50 45 40 Source: Strategas Research Partners. Data period: 12/31/10-9/30/14. Third quarter review—capital markets Equities: Equity performance in the third quarter and early fourth quarter has been lackluster, negatively impacted by signs of global economic slowing, falling commodity prices, a rising dollar, geopolitical tensions, speculation of future Federal Reserve (Fed) interest rate hikes, as well as seasonal tendencies for underperformance during the dog days of summer. Situation Analysis: Quarterly Reflections & Outlook Page 2 Important disclosures provided on page 9.
  • 3. Market and sector performance Index Price 10/14/14 2014 2013 3Q QTD YTD* S&P 500 1,877.70 29.6% 0.6% -6.2% 1.6% Dow Jones Industrials 16,315.19 26.5% 1.3% -5.7% -1.6% Russell 2000 1,061.60 37.0% -7.7% -3.6% -8.8% MSCI EAFE 1,746.90 19.4% -6.4% -5.4% -8.8% MSCI Emerging Markets 992.08 -5.0% -4.3% -1.3% 1.1% Sectors of the S&P 500 Weight Information Technology 19.7% 26.2% 4.3% -7.3% 6.1% Financials 16.3% 33.2% 1.9% -5.4% 2.8% Health Care 13.9% 38.7% 5.0% -5.6% 9.9% Consumer Discretionary 11.7% 41.0% -0.1% -6.0% -4.8% Energy 9.7% 22.3% -9.1% -11.7% -9.6% Consumer Staples 9.6% 22.7% 1.2% -1.4% 4.8% Industrials 10.3% 37.6% -1.6% -7.1% -4.4% Materials 3.5% 22.7% -0.3% -9.9% -2.3% Utilities 3.0% 8.8% -4.9% 1.4% 13.9% Telecommunication Services 2.4% 6.5% 1.8% -4.7% -0.5% Source: FactSet Research Systems. *Data through 10/14/14, excludes dividends. Market and sector performance: U.S. large capitalization companies continue to lead performance, as evidenced both in the third quarter and on a year-to-date basis. While the S&P 500 traded generally flat, the popular index outperformed the small cap-oriented Russell 2000 in the third quarter by roughly8 percentage points. It also bested the negative returns of the international-oriented MCSI Emerging Markets and MSCI EAFE indices by nearly 5 percent and 7 percent, respectively. The gap between the S&P 500 and Russell 2000 is even more pronounced on a year-to-date basis as of mid-October. S&P 500 positive... Russell 2000 negative... What happens next? S&P 500 Russell 2000 S&P 500 Russell 2000 1984 1.4% -9.6% 1985 26.3% 28.0% 1987 2.0% -10.8% 1988 12.4% 22.4% 1998 26.7% -3.4% 1999 19.5% 19.6% 2007 3.5% -2.7% 2008 -38.5% -34.8% 2011 0.0% -5.5% 2012 13.4% 14.6% 2014 6.4%* -4.6%* 2015 ? ? Source: Strategas Research Partners. Data shown begins with inception of Russell 2000 in 1978. *Data through 9/25/14. The magnitude of large cap outperformance over small caps is somewhat surprising given that the macro U.S. environment seems to be improving. Typically, small cap companies tend to post favorable performance during periods of economic growth. Heightened geopolitical tensions, concerns of global economic slowing and uncertainties associated with the ending of the Fed’s quantitative easing are perhaps among reasons that investors have favored the liquidity and general visibility of large caps over small caps even though evidence of economic improvement, at least in the United States, appears to be on the rise. Based on the comparable performances since 1984 of the large-cap-oriented S&P 500 and small-cap-oriented Russell 2000, the probabilities seem favorable for small-cap performance in 2015. The lagging performances of the international-oriented MSCI EAFE and MSCI EM indices can be attributed to the economic challenges in the eurozone and indications of tempering growth in China. Given that expectations are for economic sluggishness in those regions to continue into 2015, it seems plausible that the lackluster performance trends among the MSCI EAFE and MSCI EM indices will continue into year-end. Among sectors, performance trends remain inconclusive. The performance of the Healthcare and Utilities sectors stand out, both advancing over 10 percent or more year to date. Healthcare remains a sector for all seasons, having both growth and defensive characteristics. The strong performance of Utilities is somewhat surprising in that, as an interest-rate sensitive sector, it is hard to envision the sector continuing to outperform as the economy strengthens, and if we are indeed approaching a rising interest rate environment. The performance of Information Technology is an encouraging sign that capital expenditure (capex) spending may be increasing—a potential catalyst that could drive the overall equity market higher toward the end of the fourth quarter and into 2015. Also noteworthy is the lagging performance of the cyclical-oriented Industrials and Consumer Discretionary sectors, negatively impacted by economic weakness in the eurozone and a rising dollar. It is also hard to envision meaningful broad market upside from current levels without greater participation from the cyclical sectors. Situation Analysis: Quarterly Reflections & Outlook Page 3 Important disclosures provided on page 9.
  • 4. Fixed income: The 10-year Treasury yield rose 15 basis points during September amid improving retail sales figures and an easing of geopolitical tensions. The Federal Open Market Committee (FOMC) continued to steadily reduce accommodation at the September policy meeting. The FOMC reduced its bond purchases by an additional $10 billion and provided a framework for stimulus removal. Fed officials stated that when the first rate hike occurs, interest on excess reserves will be used to move the Fed funds rate into a target range. Reverse repurchase agreements will be a supplemental tool to guide the Fed funds rate. In our view, this Fed plan is similar to the policy rate systems currently used by the European Central Bank (ECB) and the Bank of England. Policymakers also reiterated that the selling of assets is very unlikely and that the reduction of the Fed’s balance sheet will be gradual. U.S. dollar-denominated emerging market (EM) debt outperformed the foreign-denominated EM bonds by almost 3 percent during September as persistent, broad U.S. dollar strength significantly hindered the total return of local-currency EM fixed income. The dollar was generally supported by the Fed’s methodical shift towards tighter policy, but some idiosyncratic factors also contributed to weakness for certain EM currencies. Unease in Ukraine continued to pressure the Russian ruble and other European EM currencies, while weak economic data contributed to further depreciation of the Brazilian real. The U.S. dollar continues to strengthen against EM currencies Brazilian real Russian ruble South African rand 0% -2% -4% -6% -8% -10% Source: Bloomberg. Data period: 9/01/14-9/30/14. Similar to EM local-denominated debt, the Barclays Global Treasury excluding-US Index declined over 4 percent in September largely as the result of dollar appreciation. Specifically, divergent monetary policy and interest rate outlooks for the U.S. and the euro area generated significant dollar strength against the euro. Over the past few months, the ECB has offered longer-term financing and announced an asset-backed securities purchase program in an effort to ease credit conditions and stoke inflation in the region. Real estate: In general, and as expected, homes sales have improved, albeit not at a constant monthly pace. New single-family-home sales cracked the half-million mark (annualized) in August. This level was last experienced in May 2008. There has been significant variability month to month throughout the year, influenced by the constraints of shortage of developed lots and construction labor on housing starts, but homebuilders are generally more positive about the coming months and prospects for improving sales. One indicator is an increase in the number of homes that are in the sales-contract stage earlier in the construction phase. After a very slow start in 2014, existing home sales have improved to around five million annualized, but that is about 300,000 below same time last year numbers. Available inventory has advanced and the pace of price increases has declined. U.S. home sales activity Aug 31 2014 Aug 2013 Aug 2012 Aug 2011 Aug 2010 Aug 2009 Aug 2008 Aug 2007 Aug 2006 New homes sales Existing home sales (shown in millions) Existing home sales 12 10 8 6 4 2 0 1,200 1,000 800 600 400 200 0 Page 4 New home sales (shown in thousands) Source: FactSet Research Systems. Data period: 8/31/06-8/31/14. Situation Analysis: Quarterly Reflections & Outlook Important disclosures provided on page 9.
  • 5. U. S. commercial real estate continues to improve, with leasing activity advancing over last year. In addition, vacancies are trending downward and there is new supply in some markets. High-tech and energy-related markets are more robust. Commodities: The gains achieved at the start of 2014 for the commodity complex completely eroded during the third quarter, with the S&P GSCI sliding more than 12 percent to a year-to-date loss of more than 7 percent. Losses were broad-based, driven by signs of slowing economic growth, particularly in Europe and China, strong supply growth for several key markets, a stronger U.S. dollar and the nearing conclusion of the Fed’s quantitative easing program. The trade-weighted U.S. dollar for major currencies, as measured by the Federal Reserve, gained more than 7 percent for the quarter against major currencies, weakening the U.S. dollar price for commodities. Stronger dollar results in weaker commodity prices Currency index S&P GSCI Jan Feb Mar Apr May Jun Jul Aug Sep Trade-weighted currency exchange rate index 3 2 1 0 -1 -2 -3 -4 -5 -6 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% S&P GSCI performance Source: FactSet Research Systems. Data period: 1/01/14-9/30/14. U.S. and coalition airstrikes on ISIS targets seemed to ease investor fears about attacks on Iraqi oil fields. Lower fear reduced speculative demand for oil, which led to lower prices and contributed to the oil market losing 13 percent in the quarter. Rising supplies and slipping global economic growth also pressured prices. Daily production levels in Libya have doubled following the end of strikes, recovering about one-third of prior oil production. U.S. oil production has continued to expand, growing by nearly 10 percent in 2014, reaching its highest level since 1986. Weather patterns continue to support crop development, driving grain prices down more than 20 percent for corn, wheat and soybeans. The fall harvest appears likely to exceed production records for corn and soybeans. Weaker growth from China, fewer export deals and news of robust crop supplies in China contributed to prices pressures. Metals prices have reversed gains from earlier in the year. Gold lost 8 percent in the quarter, bringing prices to a near-flat level from the start of the year. Industrial metals prices have been stronger, losing less than 3 percent in the quarter. Sentiment on gold has turned negative, with the U.S. Federal Reserve nearing the end of quantitative easing and discussing plans to increase short-term interest rates in 2015. Geopolitical risks have been insufficient to rekindle flight-to-safety demand for gold given the prospect for positive real interest rates in the United States. Weaker data for global growth led to a decline in speculative long positions in industrial metals. The dwindling of industrial metals supplies, such as copper and aluminum, at key futures exchanges has been insufficient to generate price support. Inventories of copper in London and Shanghai warehouses have reached the lowest levels in more than five years, while aluminum has dropped to the lowest level in nearly three years. Falling copper and aluminum inventories likely to support prices 2010 2011 2012 2013 Sep 30 2014 Aluminum Copper Supply level of aluminum (in millions of metric tonnes) 6.0 5.8 5.6 5.4 5.2 5.0 4.8 4.6 4.4 Page 5 Supply level of copper (in metric tonnes) 900 800 700 600 500 400 300 200 100 Source: FactSet Research Systems. Data period: five years ending 9/30/14. Shows inventories held in warehouses for the London and Shanghai metals exchanges. Situation Analysis: Quarterly Reflections & Outlook Important disclosures provided on page 9.
  • 6. Outlook—economy Global economic prospects seem to be following the differentiation in global monetary policy paths. U.S. fundamentals point to stronger growth and an end to the Fed’s zero-interest rate policy. Deleveraging is constraining recoveries in Japan and the eurozone, and growth is stabilizing in China but at modest levels. Conflict remains a risk factor, particularly if oil supply infrastructure is threatened. Further improvements in the U.S. jobs market and likely improvements in capital spending may lead to U.S. growth averaging 3 percent over the next year. A strong base of consumer spending growth, led by the improving jobs market, should be joined by recoveries in capital spending and housing investment. We expect rising rates on Fed funds, likely to begin by June 2015, may have little detriment on potential U.S. economic growth. Inflation has seen a boost from rising housing prices but is unlikely to accelerate over the next year. Wage growth remains modest, and home price gains seem to be easing from their previously brisk pace. Commodity price shocks remain a modest risk, but improving supplies indicate long-term price pressures. Growth in Europe may stagnate over the next year, growing by less than 1 percent. Banks may continue to reduce their balance sheets to meet capital requirement targets, reducing capital available for economic expansion. European Central Bank easing is likely to be modest, at best, and unlikely to offer much economic stimulus. For Japan, quantitative easing is offering support to the economy, but structural reforms have been slow in coming, indicating to us that economic growth may remain slow. Emerging markets are still the largest contributor to global growth, but weaker commodity prices and relatively tighter monetary policies has led to slowing growth, and now slowing inflation. Growth in China likely averages just 7 percent to 7.5 percent. Easing inflation pressure for China and India leaves them with room for stimulus. Commodity-producing economies may struggle due to weak commodity prices, leaving little budget available for economic support. Outlook—capital markets Equities: Equities have begun the fourth quarter in somewhat of a “muddle through” zone as investors await greater clarity on the pace of inflation and progression of company earnings. While we continue to expect equities to grind higher into year-end, it is likely that the next leg up will be more challenging, with heightened levels of overall market volatility. In recent months, a divergence between U.S. economy and non-U.S. economies—namely European countries—has been developing. The U.S. economy is showing varying degrees of improvement, providing a fundamental basis for equities to trend higher. Conversely, the global economy appears to be experiencing a soft patch and this is potentially problematic for U.S. multinational companies. In the United States, the macro-environment appears favorable. People are finding jobs and spending sentiment is improving. That should bode well for the upcoming holiday spending period. Also in the United States, the fundamental backdrop seems supportive of higher equity prices. While the rate of growth may be slowing some, earnings—on average—are increasing, interest rates remain low, inflation appears restrained and seasonal tendencies point toward positive performance in the fourth quarter. Of near-term concern are earnings and valuation levels, which have fueled the recent volatility. Because of slowing global growth, an earnings reset is in motion. Consensus estimates for the fourth quarter and 2015 are trending down, along with third quarter company results. Additionally, valuation has improved following the mid-October pullback. Relatedly, the pace of earnings growth remains a wild card. In the absence of inflation and widespread earnings deterioration, current valuation levels seem warranted. The November midterm elections will undoubtedly contribute to a “noisy” fourth quarter. Midterm elections have served as an inflection point for equity markets in past years. Equities have historically trended lower in the months prior to the election, before rallying through the election into year-end and in the following year. Providing optimism for performance in 2015, while understanding that the Situation Analysis: Quarterly Reflections & Outlook Page 6 Important disclosures provided on page 9.
  • 7. past is no guarantee of future outcomes, history reflects equity performance in the 12 months following midterm elections as being superb. According to Strategas Research Partners, the S&P 500 has posted positive returns in each 12-month period following midterm elections since 1950. S&P 500 price return 12-month period following midterm election 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 35% 30% 25% 20% 15% 10% 5% 0% Source: Strategas Research Partners. Data as of September 2014. Average since 1950: 16.1 percent. Our published year-end 2014 S&P 500 price target of 2,060, based on a price-earnings multiple of 17.5 times our 2014 earnings estimate of $117.50, may prove to be on the high side following the recent volatility and resetting of earnings for 2014. Looking toward 2015, our preliminary outlook reflects earnings growth in the range of 8 percent, slightly below historical levels, primarily due to expectations of sluggish global growth. We expect to formally introduce a 2015 S&P 500 estimates and price target midway through the third quarter reporting season. Fixed income: Despite the geopolitical tensions and risk aversion that have recently contributed to lower interest rates, we expect Treasury yields to increase steadily over the coming months as the Fed likely concludes quantitative easing in October and methodically reduces monetary stimulus. We anticipate upward pressure on interest rates as the investor estimates for the pace of tightening converge towards the Fed’s forecasts. The pace of accommodation removal assumed by market participants remains well below the Fed’s projections, even after accounting for some of the more ardent supporters of tighter policy. We expect communication from the FOMC at the October and December meetings to be largely focused on the labor market and inflation outlooks. We anticipate that policymakers will remain steadfast in the avoidance of providing any specific timetable for the first policy rate hike. We also anticipate that interest rate volatility will continue to gradually increase and move back towards historical averages. Numerous Fed officials would like to alter or eliminate the FOMC’s current pledge to keep the policy rate at its present low level for a “considerable time” after QE ends. More broadly, as the Fed shifts back towards a more data-dependent framework we expect greater uncertainty regarding the path of policy, and we expect interest rates to be more volatile. Interest rate volatility remains well below historical averages Dec 30 2004 Dec 30 2006 Dec 30 2008 Dec 30 2010 Dec 30 2012 Page 7 Oct 7 2014 MOVE index* Average Basis points Interest rate volatility remains well below historical averages 240 220 200 180 160 140 120 100 80 60 40 Source: BofA Merrill Lynch, Bloomberg. Data period: 12/30/04-9/30/14. *MOVE index: Merrill Option Volatility Estimate. We remain wary of developed market international debt as we remain steadfast in our expectation of additional U.S. dollar strength. We acknowledge that the dollar’s ascension may pause over the next few weeks following the recent sharp appreciation. However, divergent monetary policy and interest rate outlooks are likely to support dollar gains against the euro and the yen through the end of the year and into early 2015. In our view, the European Central Bank (ECB) will probably maintain an extremely accommodative stance over the next three to four quarters. We also see potential for the ECB to lower its policy rate further or expand its asset-backed Situation Analysis: Quarterly Reflections & Outlook Important disclosures provided on page 9.
  • 8. purchase program in order to combat very low, realized inflation and falling inflation expectations. While we do not anticipate supplemental easing measures from the Bank of Japan (BoJ) in the fourth quarter, the BoJ’s significant easing contrasts with the Fed’s stimulus removal and supports dollar strength against the yen. Similarly, our expectation of dollar strength drives our continued preference for dollar-denominated EM debt over foreign-denominated EM bonds. We also see European EM currencies as particularly vulnerable as a result of persistent tensions in Ukraine and anemic economic growth in the euro area. We anticipate overall municipal bond performance to be hindered by rising interest rates. However, in our view, we see limited risk from legislative changes to the tax treatment of muni bonds. In terms of relative performance to Treasuries, we estimate that the 10-year municipal bond-to-Treasury ratio will rise modestly during the fourth quarter as supply is projected to increase somewhat above recent monthly averages. Real estate: Improvements in the economy, with stronger employment gains and increased demand for space, will continue to contribute to the commercial real estate industry recovery. Competition for the best properties will remain strong. Because of this competition, and as fundamentals improve, second-tier markets are and will be the recipient of increased scrutiny and transactions. In our view, as the economy strengthens so does housing. The double-digit year-over-year price appreciation throughout 2013 has retreated as expected to a mid-single-digit level. Mortgage rates have recently ticked slightly upward, and anticipation is for rates to rise, at a moderate level, as Fed policy begins to change in 2015. Moderating returns and reduced inventory of distressed properties in many states have some investors moving to the sidelines. The housing market is becoming more fundamentally based on job and wage growth, affordability and the household formation rate, as opposed to being driven by negative equity and double-digit price increases that prompted investors and cash buyers to seek quick paper profits. First-time and younger homebuyers are needed to fill this gap, but at 27 percent of the existing home purchases, first-time homebuyers are well below the normal level of 35 to 40 percent. There is some current indication of loosening credit requirements, which impacts this important group of buyers, along with wage growth. Commodities: Strong commodity price gains during the first decade of the 21st century led to a significant development of supply. Over the next few years, the story for the commodity complex is likely to become one of demand growth in order to absorb the new supply. Potential global economic growth remains modest due to deleveraging across key developed economies, indicating commodity markets will likely see lower-than-normal volatility and modestly lower prices into 2015. Middle East unrest, including conflicts in Iraq, civil unrest in Libya and Iran’s nuclear ambitions remains a threat to oil-price spikes. Softness in oil market fundamentals seems set to persist Non-OPEC + OPEC noncrude Difference 1Q 2Q 3Q 2012 Global demand 4Q 1Q 2Q 3Q 2013 Barrels per day (shown in millions) 4Q 1Q 2Q 3Q 2014 4Q 1Q 2Q 3Q 2015 4Q 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 Supply growth greatly exceeding demand growth. A picture likely to last for the remainder of the forecast period. Sources: Forecast: Barclays Research. Historical data: U.S. Energy Information Administration (EIA), International Energy Agency (IEA). Prices in general are likely to remain weak into 2015, due to a stronger U.S. dollar and modest prospects for global growth. The industrial metals complex, such as copper, has seen a significant reduction in supply, which may provide support for prices at more modest levels of demand. Inventories for copper at key exchanges in London and Shanghai have reached the lowest levels in more than five years. If global growth improves, due to some form of stimulus, industrial metals may prove to be the leader in the commodity complex. Situation Analysis: Quarterly Reflections & Outlook Page 8 Important disclosures provided on page 9.
  • 9. Situation Analysis: Quarterly Reflections & Outlook Page 9 Contributed by U.S. Bank Wealth Management: • Roosevelt D. Bowman – Senior Fixed Income Analyst • Edgar W. Cowling, Jr., CCIM – Director of Specialty Assets • Robert L. Haworth, CFA – Senior Investment Strategist • Terry D. Sandven – Chief Equity Strategist IMPORTANT DISCLOSURES This commentary was prepared in October 2014 and the views are subject to change at any time based on market or other conditions. This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliates or associated with U.S. Bank in any way. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment. The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 widely traded stocks that are considered to represent the performance of the stock market in general. The Dow Jones Industrial Average (DJIA) is the price-weighted average of 30 actively traded blue chip stocks. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, and is representative of the U.S. small capitalization securities market. The MSCI EAFE Index includes approximately 1,000 companies representing the stock markets of 21 counties in Europe, Australasia and the Far East. The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. The Barclays Global Treasury, ex-US Index includes government bonds issued by investment-grade countries outside the United States, in local currencies, that have a remaining maturity of one year or more and are rated investment grade. The S&P GSCI is a composite index of commodity sector returns that is broadly diversified across the spectrum of commodities. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer-term debt securities. Investments in lower-rated and nonrated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes, and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties (such as rental defaults). © 2014 U.S. Bank N.A. (10/14)