2016 Investment Outlook

2016 Investment Outlook Presentation By:

Ten Predictions | January 2016 Robert C. Doll, CFA
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Senior Portfolio Manager
Chief Equity Strategist

2015 Recap 2015 RETURNS 2015 U.S. Returns

90-Day Treasury Bills 0.1% Stocks 1.4%
10-Year U.S. Treasury 1.5%
U.S. Bonds 0.6% Bonds 0.6%
High Yield Corporate Bonds −4.4%
S&P 500 1.4% Cash 0.1%
MSCI World ex U.S. −2.6%
MSCI Emerging Markets −14.6%
Commodities −23.3%

Data source: Morningstar Direct as of 12/31/15. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. 90-Day Treasury Bills:
BofAML U.S. Treasury Bill 3-Month Index. 10-Year U.S. Treasury: U.S. Treasury T-Bill Constant Maturity Rate 10 Yr. Index. U.S. Bonds: Barclays U.S. Aggregate Bond Index. High Yield Corporate Bonds: Barclays U.S. Corporate High Yield 2%
Issuer Capped Index; Commodities: Thomson Reuters/CoreCommodity CRB Index. For U.S. Returns, Stocks: S&P 500 Index; Bonds: Barclays U.S. Aggregate Bond Index; Cash: BofAML U.S. Treasury Bill 3-Month Index.

2

2015 Recap

1. Significant negative earnings surprises occurred primarily because of
the strong dollar and weak oil

2. Underlying U.S. GDP growth has been reasonably good
3. The Fed normalization process was delayed
4. U.S. services inflation clearly bottomed
5. The China scare haunted markets
6. Emerging markets sank due to the strong dollar and weak commodities
7. U.S. political cycle has been bizarre

3

2015 Ten Predictions – Scorecard Overall Scoring 6
2 (x.5)
Correct 2
Half Correct
Wrong

1. U.S. GDP grows 3% for the first time since 2005
2. Core inflation remains contained, but wage growth begins to increase
3. The Federal Reserve raises interest rates, as short-term rates rise more than long-term rates
4. The European Central Bank institutes a large-scale quantitative easing program
5. The U.S. contributes more to global GDP growth than China for the first time since 2006
6. U.S. equities enjoy another good yet volatile year, as corporate earnings and the

U.S. dollar rise
7. The technology, health care and telecom sectors outperform utilities, energy

and materials
8. Oil prices fall further before ending the year higher than where they began
9. U.S. equity mutual funds show their first significant inflows since 2004
10. The Republican and Democrat presidential nominations remain wide open

7.0 Correct

Scorecard based on Bob Doll's 2015 Ten Predictions with data as of December 2015.

4

2016 Theme

MUDDLE THROUGH CONTINUES

Trends to Watch
 Improving global growth
 Modest increase in global trade
 Some pickup in inflation in developed economies
 Limited improvement in corporate profits
 Fed funds rate and U.S. yield curve to move moderately higher
 Slower pace of dollar increase
 Volatile, trendless commodity prices

The Risks
 Deflation imported from outside U.S.
 Reflation in U.S. leads to inflation
 Geopolitics, terrorism, cyberattacks

5

One View of 2016

THE GOOD … A recession is unlikely
THE BAD … Difficult to see significant market gains
THE UGLY … Tactical moves may be required to make money

Ideas compiled from Nuveen Asset Management and Strategas Research Partners.

6

PREDICTION 1

U.S. real GDP remains below 3% and nominal GDP below 5%
for an unprecedented tenth year in a row

Real and Nominal Growth Remain Subdued

_ U.S. Real GDP _ U.S. Nominal GDP

16.0% 16.0%

12.0% Long-Term Average: 3% 12.0% Long-Term Average: 5%
8.0% 8.0%
Percentage Change (2009 Dollars)
Percentage Change (Current Dollars)
4.0% 4.0%

0.0% 0.0%

-4.0% -4.0%

-8.0% -8.0%

-12.0% -12.0%
1945 1955 1965 1975 1985 1995 2005 2015 1945 1955 1965 1975 1985 1995 2005 2015

Estimated Estimated

Data source: Bureau of Economic Analysis, 1945 − 2016. Data for 2015 and 2016 is estimated.

7

PREDICTION 1

U.S. real GDP remains below 3% and nominal GDP below 5%
for an unprecedented tenth year in a row

Real and Nominal Growth to Be Modest Again

Consumption 2015 2016 Healthy, but flat
Investment ESTIMATED ESTIMATED Mixed
Government Fiscal austerity over
Net Exports +2.1% +2.0% Drag
Inventory +0.8% +0.8% Slight drag
REAL GDP +0.4%
GDP Deflator — –0.4%
NOMINAL GDP –0.4% –0.1%
–0.1%
2.7%
2.4% 1.8%
1.1%
4.5%
3.5%

Data source: JPMorgan, Nuveen Asset Management estimates.

8

PREDICTION 1

U.S. real GDP remains below 3% and nominal GDP below 5%
for an unprecedented tenth year in a row

Nonfarm Payroll Jobs (In Thousands)Employment Growth Remains Strong 260 221 175
2014 2015 2016 2E0s1ti6mate*
Monthly Average Change in Nonfarm Payrolls
Estimate
300

250

199
200 188

173
150

100

50
2011 2012 2013

Data source: Bloomberg, 1/1/11 − 12/31/15. Source for 2016 estimate is Nuveen Asset Management.

9

PREDICTION 1

U.S. real GDP remains below 3% and nominal GDP below 5%
for an unprecedented tenth year in a row

The Business Cycle Is Still Advancing

1. Job growth strong
2. Wage growth accelerating
3. Labor’s share of GDP just starting to increase
4. Confidence numbers acceptable
5. Positively sloped yield curve
6. Low oil prices
7. Government spending to contribute to growth

10

PREDICTION 1

U.S. real GDP remains below 3% and nominal GDP below 5%
for an unprecedented tenth year in a row

The U.S. Consumer Is Spending, but Selectively

POSITIVES NEGATIVES
1. Job growth: strong 1. Borrowing rate: lower than normal
2. Wage growth: accelerating 2. Savings rate: rising
3. Housing starts: improving 3. Brick and mortar retail sales: weak
4. Existing home sales: increasing 4. Gasoline sales (given decline in prices): weak
5. Auto sales: at high levels
6. E-commerce sales: increasing
7. “Experience spending”: positive

11

PREDICTION 1

U.S. real GDP remains below 3% and nominal GDP below 5%
for an unprecedented tenth year in a row

Global Growth Appears Mixed, with Several Contributors and Detractors

Global Growth Scale1 | GDP2 (as a % of Global)

43.4% ■ Japan
■ China
■ Non-Commodity Exporters
■ Commodity-Based Economies

22.4% 3.8% 17.2%

56.6%

■ U.S. 13.3% 16.7% 20.8%
■ U.K. 5.8%
■ Euro Area

Contributing to Global Growth Detracting from Global Growth

1 Based on the global economic growth pulse outlined in the MRB Theme Report, “Desynchronized Cycle: Taking The Pulse of Regional Growth.” September 17, 2015. 12
2 Nominal GDP in U.S. dollars; Source: The World Bank, MRB Partners, Inc.
Data source: MRB Partners, as of December 2015. Used with permission.

Yield (%)PREDICTION 2

U.S. Treasury rates rise for a second year, 2015
but high yield spreads fall
13
Bond Bear Market in Year Four

10-Year U.S. Treasury Bond Yield, July 2012 ‒ December 2015

3.5%

3.0%

2.5%

2.0%

1.5%
Yield Trough:1.43%
July 2012

1.0%

0.5%

0.0%
2012 2013 2014

Data source: FactSet, 7/25/12 — 12/31/15. Past performance is no guarantee of future results.

PREDICTION 2

U.S. Treasury rates rise for a second year,
but high yield spreads fall

Inflation Is Experiencing Crosscurrents

HIGHER INFLATION LOWER INFLATION

1. Tightening labor markets (rising wage growth) 1. Impact of stronger dollar
2. Increasing rental rates 2. Low commodity prices
3. Rising health care insurance 3. Competitive retail environment

Year-Over-YearWage Growth Continues to Climb Steadily
Percentage Change (%)
Change Year-Over-Year

_ Average Hourly Earnings (All Employees)
3.75%
3.50%
3.25%
3.00%
2.75%
2.50%
2.25%
2.00%
1.75%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Data source: Bureau of Labor Statistics, Morgan Stanley Research, 12/31/08 – 9/30/15. Data from 12/31/15 –12/31/17 is estimated.

14

PREDICTION 2

U.S. Treasury rates rise for a second year,
but high yield spreads fall

Relatively Small Rate Increases Will Result in Losses Due to Low Coupons

YIELD REQUIRED YIELDS

MATURITY AS OF FOR ZERO RETURN BASIS POINT FORECAST FORECAST
(YEARS) CHANGE YIELD RETURN
12/31/15 IN 1 YEAR 1.06% 1.50% 0.60%
2 0.46% 2.00% 0.84%
5 1.05% 2.11% 0.29% 2.75% −1.52%
10 0.16% 3.25% −1.38%
30 1.76% 2.22%

2.27% 2.56%

3.02% 3.18%

Data source: Bloomberg, Nuveen Asset Management estimates as of 12/31/15. Yields based on representative U.S. Treasury bond yields. Past performance is no guarantee of future results.

15

PREDICTION 2

U.S. Treasury rates rise for a second year,
but high yield spreads fall

Who’s Right? The Fed or the Market?

_ U.S. Effective Fed Funds Rate _U.S. Expected Fed Funds Rate Implied by: --- Fed Dot Plots1 Market Expectations2

5%

4%
Fed

3%

Rate (%) 2%
Market

1%

0%

-1%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Data source: BCA Research, 2008 – 2020. Data from 2016 – 2020 is estimated. Used with permission.
1 Median midpoint target as noted in Summary of Economic Projections, Federal Reserve, September 2015.
2 As discounted in the Overnight Indexed Swaps (OIS) curve, December 9, 2015.

16

PREDICTION 2

U.S. Treasury rates rise for a second year,
but high yield spreads fall

Spreads Remain Attractive Given Low Default Rates

(A recession may be necessary for high yield to underperform)

_ Barclays High Yield Spread _ Moody’s U.S. High Yield Default Rate

2,500 18%

16%

2,000 14%

High Yield Spread (basis points) 12% Moody’s Default Rate

1,500 10%
1,000
18 Year Spread 8%
500 Average = 581 bp
- 6%
SeSpe-9p7 Current Spread 602 bp 4%
1997
18 Year Default Rate 2%
Average = 4.6%
SeSpe-0p0 Current Defaults 2.5% 0%
2000
SeSpe-0p3 SeSpe-0p6 SeSpe-p09 SeSpe-p12 SSepe-p15
2003 2006 2009 2012 2015

Data source: Barclays Capital and Moody's. Barclays High Yield Spread 9/30/97 – 11/30/15 and Moody's U.S. High Yield Default Rate as of 9/30/15. Most recent data available. The Barclays High Yield Spread is represented by
Barclays U.S. High Yield 2% Issuer Capped Index. Past performance is no guarantee of future results.

17

PREDICTION 3

S&P 500 earnings make limited headway as consumer spending
advances are partially offset by oil, the dollar and wage rates

S&P 500 Consensus Expectations2015 Earnings Revisions Were Negative 1/1/15 2015 2016
7/1/15
_ 2015 _ 2016 (Estimated) $126.49 $141.50
12/31/15 $118.93 $133.55
$145 $117.26 $126.91

$140

$135

$130

$125

$120

$115 FebF2e0b15 MarM2a0r15 AprA2p0r15 MaMy 2a0y15 JunJ2u0n15 Jul 2Ju0l15 AugA2u0g15 SepS2e0p15 OctO2c0t15 NovN2o0v15 DecD2e0c15
JanJ2a0n15 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015 2015
2015

Data source: BofAML, First Call, 1/1/15 – 12/31/15. S&P 500 Consensus earnings per share (EPS) expectations calculated daily. 2016 data is estimated. Used with permission.

18

PREDICTION 3

S&P 500 earnings make limited headway as consumer spending
advances are partially offset by oil, the dollar and wage rates

9% Growth in 2016 Would Be the Third Highest for This Recovery (and Likely Too High)

S&P 500 Earnings Per Share Growth (Year-Over-Year)

50%Year-Over-Year Growth (%) 12%
40% 9%

40% -1% 2016 2017
2015
30% Consensus Consensus

20%
15%

10% 6% 6% 8%
0%

-10%
2010 2011 2012 2013 2014

Data source: J.P. Morgan, Thomson EPS, as of December 2015. Past performance is no guarantee of future results. Used with permission.

19

PREDICTION 3

S&P 500 earnings make limited headway as consumer spending
advances are partially offset by oil, the dollar and wage rates

S&P 500 Earnings Could End Below Consensus in 2016

Revenue 2015 2016 2016
ESTIMATED ESTIMATED CONSENSUS
Margins
–3.5% 3.0% 4.0%
Share Repurchases +0.6% –0.1% 1.8%
+2.1% 2.0% 2.2%
Total –0.6% 5.0% 8.2%

S&P 500 Earnings Per Share $118 $124 $128
(2014: $118.78)

Data source: JPMorgan, Strategas Research Partners, Nuveen Asset Management estimates, as of December 2015.

20

PREDICTION 3

S&P 500 earnings make limited headway as consumer spending
advances are partially offset by oil, the dollar and wage rates

Annual Net Profit Margins (%)Will Corporate Profit Margins Remain High?

_ Annual Net Profit Margins (%)

12%

10%

8%

6%

4%

2%

0%
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 YTD
2015
through
November

Data source: BofA Merrill Lynch, 12/31/86 – 11/30/15. Past performance is no guarantee of future results. Used with permission.

21

PREDICTION 3

S&P 500 earnings make limited headway as consumer spending
advances are partially offset by oil, the dollar and wage rates

U.S. GDP and Corporate Earnings Are Driven by Different Types of Companies

The rise in the dollar and lower energy prices have had a larger impact on the S&P than on GDP,
which delivered a profit recession without an economic recession

Share of U.S. Employment Share of Earnings in S&P 500

 Service Industries  Manufacturing/Goods Producing Industries

14% 32%
86% 68%

Data source: Deutsche Bank Research, as of December 2015. Torsten Slok, David Bianco, Ju Wang and Winnie Nip. Used with permission.
Service industries: Financials, Multiline Retail, Specialty Retail, Internet & Catalog Retail, Diversified Consumer Services, Hotels, Restaurants & Leisure, IT Services, and Health Care Providers & Services.

22

PREDICTION 4

For the first time in almost 40 years, U.S. equities experience
a single-digit percentage change for the second year in a row

Equity Market Building Blocks

Fundamentals CURRENT LIKELY DIRECTION
Monetary Policy 0
Sentiment +
Valuation + –
+
0
0
0

23

PREDICTION 4

For the first time in almost 40 years, U.S. equities experience
a single-digit percentage change for the second year in a row

U.S. Equities Have Not Performed as Well When a New President Must Be Elected

S&P 500 Index Average Annual Performance During Presidential Election Years

S&P 500 Index Average Annual Performance (%) 10%
8% 7.0% 7.5%
6%

4%

2%

0%

-2%

-4% All Presidential Election Years All Years
-4.0%

-6%
Election Years Where New
President MUST be Elected

Data source: BMO Capital Markets Investment Strategy Group, Bloomberg, for presidential election years from 1928 – 2012. Indicates an average of the annual performance for those election years that fall into these categories.
Past performance is no guarantee of future results. Used with permission.

24

PREDICTION 4

For the first time in almost 40 years, U.S. equities experience
a single-digit percentage change for the second year in a row

How Have the Markets Responded to Past Elections?

S&P 500 Average Annual Performance During Election Years

20% 15%

13.0% 13%

10% 10%
S&P 500 Index Average Annual Performance (%) 13.0%
S&P 500 Index Average Annual Performance (%) 8.0%
10.2%
8%
0%
-10% -3.0% 5%
-20%
-5.5% 3% 2.2% 3.3%

-13.0%

Negative 0% to 10% 10% to 20% Greater than 20% 0.1%

S&P 500 Performance in Year Before Election 0%
> 3% < 3% > 6% < 6% > 3% < 3%

GDP Unemployment Rate Inflation (CPI)

Data source: BMO Capital Markets Investment Strategy Group, Bloomberg, for presidential Data source: BMO Capital Markets Investment Strategy Group, Bureau of Economic Analysis and Bureau of
election years from 1928 – 2012. Indicates an average of S&P 500 annual performance Labor Statistics for presidential election years from 1928 – 2012. Indicates an average of S&P 500 annual
during presidential election years, based on prior year's returns. Past performance is no performance during presidential election years, based on prior year's macro conditions. GDP annual data from
guarantee of future results. Used with permission. 1928. Unemployment rate and CPI from 1947. Past performance is no guarantee of future results. Used
with permission.

25

PREDICTION 4

For the first time in almost 40 years, U.S. equities experience
a single-digit percentage change for the second year in a row

Initial Rate Hikes May Not Derail Equities

CURRENT STATE S&P 500 PERFORMANCE 14.2%
12 MONTHS AFTER FED RAISES RATES 4.6%
[√] Low Interest Rates
High Interest Rates 12.1%
[√] 3.1%
Low Inflation
[√] High Inflation 8.8%
2.2%
Declining Oil
Rising Oil

Data source: J.P. Morgan, 1958 – 2014. Past performance is no guarantee of future results. Data based on the 11 initial rate hikes since 1958. Low/High Interest Rates: Fed Funds Rate below or above 2.5%; Low/High Inflation:
CPI below or above 2.5%; Declining/Rising Oil: year-over-year change in oil price below or above 0%. Used with permission.

26

PREDICTION 4

For the first time in almost 40 years, U.S. equities experience
a single-digit percentage change for the second year in a row

Equity Market Forecast1 2015 2015 2016
OUTLOOK OUTLOOK OUTLOOK
EARNINGS & RETURN 12/31/14 12/31/15 12/31/15
EXPECTATIONS
Economy (Earnings) $128 $118 $124
P/E Target 17.3x 17.3x 17.3x
S&P 500 Target 2200 2044 2150

COMPONENTS OF RETURN 8% –1% 5%
Earnings ─ 0% ─
P/E 2% 2% 2%
Yield 10% 1% 7%
Total Return

1 Based on the S&P 500 Index.
Data source: Bloomberg, Nuveen Asset Management for all forecasted, estimated and target figures.

27

PREDICTION 4

For the first time in almost 40 years, U.S. equities experience
a single-digit percentage change for the second year in a row

The Bull Market Is Not Over Yet WHAT ENDS A
BULL MARKET?
WHY SHOULD THE 1. Recession prospects
BULL MARKET CONTINUE? 2. Accelerating inflation
1. Several more years of economic, earnings 3. Tight money
4. Excessive wage inflation
and dividend growth 5. High interest rates
2. Nearly ideal (“Goldilocks”) real growth rates 6. Investor euphoria
3. Ideal inflation (1.5% to 2.5%)
4. Accommodative monetary policy
5. Non-excessive valuation levels
6. Investor skepticism (climbing walls of worry)

28

PREDICTION 4

For the first time in almost 40 years, U.S. equities experience
a single-digit percentage change for the second year in a row

Risk Factors for Equities

 Message from declining commodity prices and rising credit spreads
 Deflationary conditions in many places
 Myriad of geopolitical hotspots
 Increasing populism
 Large budget and current asset deficits
 Fed policy mistake
 Rising inflation in U.S.
 Weakening stock market breadth

29

PREDICTION 5

Stocks outperform bonds for the fifth consecutive year

Stocks Have a Recent History of Outperforming Bonds

S&P 500 INDEX BARCLAYS U.S.
AGGREGATE BOND INDEX

2012 15.9% 4.2%

2013 32.0% –2.0%

2014 13.5% 6.0%

2015 1.4% 0.6%

2016 ??? ???

Data source: Morningstar Direct, as of 12/31/15.

30

PREDICTION 5

Stocks outperform bonds for the fifth consecutive year

How Have Stocks and Bonds Performed After the Fed First Raises Rates?

Performance and Yields After First Fed Tightening

S&P 500 PERFORMANCE 10-YEAR U.S. TREASURY YIELD
DATE OF FIRST RAISE +12 MONTHS
START 1 YEAR LATER DIFFERENCE
1.85%
3/31/1983 4.1% 10.62% 12.47% 1.67%
0.79%
1/5/1987 2.6% 7.05% 8.72% 1.63%
0.25%
3/30/1988 13.3% 8.55% 9.34% –0.67%
0.92%
2/4/1994 1.9% 5.87% 7.50%

6/30/1999 6.0% 5.78% 6.03%
6/30/2004 4.4% 4.58% 3.91%

AVERAGE 5.4% AVERAGE

Percent of Periods 100.0% Percent of Periods 83.0%
with Positive Returns with Higher Yields

Data sources: Strategas Research Partners, S&P, Bloomberg, 3/31/83 – 6/30/04. Date of First Raise is determined by the Effective Federal Funds Rate.

31

PREDICTION 5

Stocks outperform bonds for the fifth consecutive year

Expected Returns and Suggested Asset Mixes

Stocks 2015 2016 SUGGESTED
Bonds RETURNS EXPECTED RETURNS ASSET MIX
Cash
+1.4% 7.0% +5% vs normal (was +10)
0.6% –1.5% –10% vs normal (was –10)
0.0% 0.5% +5 vs normal (was 0)

Data source: Cornerstone Macro. Used with permission.

32

PREDICTION 6

Non-U.S. equities outperform domestic equities, while
non-U.S. fixed income outperforms domestic fixed income

U.S. Markets Have Outperformed in Recent Years

EQUITIES BONDS

BARCLAYS U.S. BARCLAYS GLOBAL

RUSSELL MSCI WORLD AGGREGATE AGGREGATE BOND
1000® INDEX
EX-U.S. INDEX BOND INDEX EX-U.S. INDEX

2010 16.1% 9.4% 6.5% 5.0%

2011 1.5% –11.8% 7.8% 4.4%

2012 16.4% 17.0% 4.2% 4.1%

2013 33.1% 21.6% –2.0% –3.1%

2014 13.2% –3.9% 6.0% –3.1%

2015 0.9% –2.6% 0.6% –6.0%

Data source: Morningstar Direct, as of 12/31/15. Past performance is no guarantee of future results.

33

PREDICTION 6

Non-U.S. equities outperform domestic equities, while
non-U.S. fixed income outperforms domestic fixed income

U.S. Assets Have Outperformed … But the U.S. May Underperform
in Recent Years … Going Forward

1. Global growth anxiety 1. Improving global growth
2. Commodity price collapse 2. Trade improvement
3. Surge in the dollar 3. Commodity price stabilization
4. Diminished deflation risk
5. Dollar momentum slowing
6. Upturn in global profits

Data source: Morningstar Direct, as of 12/31/15. Comparison of S&P 500 Index to MSCI World ex-U.S. Index.

34

PREDICTION 6

Non-U.S. equities outperform domestic equities, while
non-U.S. fixed income outperforms domestic fixed income

Alternate Prediction

India replaces China as the emerging market with the strongest economic growth

 China – grows at slower rate than in the past, led by consumption. Importance of
mass affluent, rather than luxury consumption

 India – growth will be faster than in the past, led by rising savings and investment.
Luxury consumption to grow as income inequality rises

 Both countries – large, domestically-oriented capital markets increasingly open to
foreign investment

 India – will have a larger population than China by 2022

GDP PROJECTIONS 2015 ESTIMATED 2016 ESTIMATED 2017 ESTIMATED
China 6.9% 6.5% 6.5%
India 7.4% 7.6% 7.8%

Data source: MRB, United Nations, Nuveen Asset Management, as of December 2015.

35

PREDICTION 7

Information technology, financials and telecommunication
services outperform energy, materials and utilities

OVERWEIGHTS UNDERWEIGHTS

INFORMATION TECHNOLOGY ENERGY
 Superior organic growth  Adverse supply-demand picture
 Strong balance sheets, cash flows, earnings growth  Credit issues
 Valuation discount to market  Valuation not cheap relative to current fundamentals
Risk: Non-U.S. economies weaken Risk: Global growth accelerates

FINANCIALS MATERIALS
 Loan growth improving  In secular decline (prices falling)
 Positive revisions likely  Emerging markets weak
 Compelling valuations/ROE improving  Dollar headwinds
Risk: Credit problems haunt Risk: Global growth accelerates/dollar falls

TELECOMMUNICATION SERVICES UTILITIES
 Extraordinarily cheap  Very low earnings and dividend growth
 High yield compared to alternatives  Bond-like stocks lag as rates rise
 Good free cash flow  Not cheap even with 2015 underperformance
Risk: Further price wars Risk: Very weak economy

36

PREDICTION 7

Information technology, financials and telecommunication
services outperform energy, materials and utilities

Theme and Common Factor Preferences

OVERWEIGHT UNDERWEIGHT
Mid-cycle cyclicals Deep cyclicals
Strong free cash flow Cash-consuming companies
Energy users Energy producers
Big cap Small cap
Growth style Value style
Unit growth Pricing power

37

PREDICTION 8

Geopolitics, terrorism, and cyberattacks continue
to haunt investors but have little market impact

Terrorism Is Experiencing But Has Produced Only Temporary
a Bull Market Market Reactions

 Proliferation of sophisticated weapons  9-11 attacks
 2004 Madrid train bombings
 Collapse of surveillance capabilities  2005 London bus bombings
 2015 Paris attacks
 American geopolitical disengagement  Multiple attacks in Asia
(especially in Middle East)

Why Is This Important?

 Human societies adjust to new security threats surprisingly quickly (e.g., Israel)

 Terrorism against soft targets becomes ineffective once social attitudes adjust
to its higher probability

 Terrorism that strikes hard targets (e.g., energy, transportation, communication,
public service infrastructure) could cause different outcomes

38

PREDICTION 8

Geopolitics, terrorism, and cyberattacks continue
to haunt investors but have little market impact

“There are two types of companies: those who have been hacked, and
those who don’t yet know they’ve been hacked.”

John Chambers, CEO of Cisco Systems

Perception of Cybersecurity Risk Is Increasing

3,000

Index of Cyber Security Value2,500
Mar 2011
May 20112,000
Jul 2011
Sep 20111,500
Nov 2011
Jan 2012
Mar 2012
May 2012
Jul 2012
Sep 2012
Nov 2012
Jan 2013
Mar 2013
May 2013
Jul 2013
Sep 2013
Nov 2013
Jan 2014
Mar 2014
May 2014
Jul 2014
Sep 2014
Nov 2014
Jan 2015
Mar 2015
May 2015
Jul 2015
Sep 2015
Nov 2015
1,000 Mar Jul Nov Mar Jul Nov
Mar Jul Nov Mar Jul Nov Mar Jul Nov 2014 2014 2014 2015 2015 2015
2011 2011 2011 2012 2012 2012 2013 2013 2013
39
Data source: Cybersecurity Index, BofA Merrill Lynch, March 2011 – November 2015. Index value, calculated monthly, with base = 1000 in March 2011.
A higher index value indicates a perception of increasing risk, while a lower index value indicates the opposite.

PREDICTION 8

Geopolitics, terrorism, and cyberattacks continue
to haunt investors but have little market impact

Geopolitical Issues Exist in Many Places Around the Globe

1. Middle East oil
2. Russia
3. Iran
4. China
5. North Korea
6. Globalization

40

PREDICTION 9

The federal budget deficit rises in dollars and as a
percentage of GDP for the first time in seven years

The Era of Fiscal Austerity Is Over 2009 2015
PEAK TROUGH
Federal Budget Deficit $439 B
Percent of GDP $1,413 B
2.4%
9.8%
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What Are the Implications?

 Both political parties dislike fiscal restraint

 Republicans want to spend more on defense

 Democrats want to increase domestic spending

 Everyone wants tax credits, which are not paid for

 Monetary policy Fiscal policy

PREDICTION 9

The federal budget deficit rises in dollars and as a
percentage of GDP for the first time in seven years

The Deficit Should Rise from Here

FEDERAL BUDGET DEFICIT

2009 $1,413 9.8%
2010 $1,294 8.7%
2011 $1,300 8.5%
2012 $1,087 6.8%
2013 $680 4.1%
2014 $485 2.8%
2015 $439 2.4%
2016 (Estimated) $560 3.0%
2017 (Estimated) $625 3.2%

Data source: Cornerstone Macro. BofA Merrill Lynch, Nuveen Asset Management estimates, as of December 31, 2015.

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Contribution to GDP (%)PREDICTION 9

The federal budget deficit rises in dollars and as a
percentage of GDP for the first time in seven years

Government Spending Will Contribute to GDP

Government Contribution to Real GDP (4 Quarter Average)

1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2%
-0.4%
-0.6%
-0.8%
-1.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Data source: Strategas Research Partners, The World Bank, 2007 – 2015. Used with permission.

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PREDICTION 10

Republicans retain the House and the Senate
and capture the White House

White House Senate

 A political party has held the presidency for more than two terms only once  Senate will likely follow
since FDR/Truman (Reagan/Bush) the White House

 Existing president's approval rating is key (Obama's is in the mid-40s)  Senate could remain
Republican if the
 Leading candidates (Clinton and Trump) have high negative ratings election is close

 Republicans must unify and improve support from women and minorities House

 Hillary Clinton is generally viewed as a relatively weak candidate  House will likely
remain Republican
 Republicans are fractured; they need to unify to win
(A brokered convention is likely a losing proposition)

 Democrats will likely win the White House (and take the Senate)
if Trump is the Republican nominee

 Issues are fluid: terrorism, foreign policy, economy

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PREDICTION 10

Republicans retain the House and the Senate
and capture the White House

Election Projections

House CURRENT PROJECTED CHANGE
Senate REPUBLICAN DEMOCRAT REPUBLICAN DEMOCRAT Democrat + 8
White House Democrat + 3
247 188 239 196
54 46 51 49 ???

Democrat ???

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Concluding Thoughts

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2016 Outlook

1. Overweight equities (but could be bumpy)
2. Underweight bonds (all has to go right for bonds to win)
3. Fed raises rates two or three times
4. Dollar moves unevenly higher
5. Commodities reach a bottoming process at best
6. Keep a careful eye on U.S. inflation
7. Overall returns should be mediocre

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The U.S. Has Had Successes, Despite Tough Sledding

1. Housing and banks healed
2. Household net worth returned to all-time high
3. Corporate and household debt refinanced at low rates
4. Unemployment dropped from 10% to 5%
5. U.S. government passed a budget for the first time in years
6. U.S. federal deficit cut from 10% to 2% of GDP
7. Fed has begun exit from monetary experiment

Adapted from BofA Merrill Lynch.

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Current Thoughts on Portfolio Construction

ASSET ALLOCATION OVERWEIGHT NEUTRAL UNDERWEIGHT COMMENT

Cash X X Near zero return
Bonds X X Struggles to continue
Stocks X Muddle through, but best choice
Commodities X Volatile, trendless

EQUITIES BY GEOGRAPHY

U.S. Multi-Nationals Domestic Companies Further along in normalization process
Europe Multi-Nationals Domestic Companies Modest growth, bifurcated
Japan Cyclical market, and cheap
Emerging Markets Very bumpy

U.S. EQUITIES BY COMMON FACTORS

Capitalization Big Small
Style Growth Value

SECTOR PREFERENCES

1. Information Technology Good growth, reasonable valuations
2. Financials Loan growth improving, rising dividends
3. Telecommunication Services Cheap with good risk/reward characteristics
4. Consumer Discretionary Better employment fundamentals; ability to spend
5. Health Care Good fundamentals but political headwinds
6. Industrials OK prospects; somewhat dependent on non-U.S. growth
7. Consumer Staples Slow growth; fully valued
8. Energy Fundamentals still difficult
9. Materials Need rising prices to win
10. Utilities Expensive, mediocre fundamentals

The information provided herein is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be prepared to bear. There is
no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes.

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Think About the Long-Term and Remain Diversified

10-YEAR RETURN FORECAST BY ASSET CLASS FORECASTED RETURN RANGE
EQUITIES 6 – 8%
6 – 8%
U.S. 4 – 6%
Non-U.S. Developed Markets 8 – 10%
Emerging Markets
2 – 4%
BONDS 0 – 2%
U.S. Government 2 – 4%
U.S. Investment Grade 4 – 6%
U.S. High Yield 5 – 7%
Emerging Market Sovereign
1 – 2%
CASH
2 – 3%
INFLATION

DIVERSIFIED PORTFOLIO 4 – 6%

Data source: MRB Partners, Nuveen Asset Management as of December 2015. The forecast data reflects the opinion of the author, Bob Doll, and not the firm. The information provided herein is not intended to be a forecast or
guarantee of future events or results. It is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be
prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result
in significantly different outcomes.

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