before the bell - cdn.ameriprisecontent.com€¦ · 02/01/2019 · or inspiration for change, a...

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

recommendation of any securities mentioned. Charts depicted are from FactSet unless otherwise noted. ____________________________________________________________________________________________________________________________ © 2019 Ameriprise Financial, Inc. All rights reserved. of 12

Before the Bell Morning Market Brief

January 2, 2019

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

MONDAY MORNING MARKET STRATEGY: David M. Joy, Chief Market Strategist Take a hike, 2018: In fact, take four hikes. And with that, the Federal Reserve took its parting shot at 2018 and went home for the year, presumably not to be heard from at all in the new year, if markets are to be believed. We are not so sure. Expecting economic growth to remain above trend in 2019, we think the Fed will be back in the picture for 2019, taking two more rate hike shots at investor expectations. The Fed’s latest body blow on December 19th pummeled stocks, which were already staggering from the unexpected resolve of an opponent long viewed as a pushover. On Christmas Eve, stocks appeared ready to be counted out, with the S&P 500 down 19.8 percent from its September 20th high, on the verge of a bear market. But stocks had other ideas. Finding support at its 200-week moving average, a source of strength several times previously in this heavyweight bull market, the index managed to mount a furious comeback, rising 5.0 percent on the day after Christmas and followed that up with another 0.9 percent the next day. Volatility surged after the Fed’s December haymaker. The VIX index had been rising steadily ever since the Fed trash talked its opponent by saying fed funds were a long way from neutral on October 3rd. Back then the VIX was trading in a range between 11-15, well below its ten-year average of 19.6. But quickly, volatility then began to rise. By the time the Fed raised the overnight rate for the fourth time in mid-December, the VIX had climbed to 25 and subsequently peaked at 36 on Christmas Eve, as stocks were taking a standing eight count, just below the February high of 37. As we closed 2018, the VIX had settled back to still elevated reading of approximately 27 and stocks were well behind on the card, down 7 percent for the year. If stocks are truly going to mount a comeback, they are going to need some help. Unless conditions are so strong they cannot be ignored, the Fed will likely need to go into rope-a-dope mode, remaining on the sidelines until at least June. But neither can conditions moderate to the extent that corporate earnings fall significantly short of expectations, currently 7.6 percent according to FactSet. The trade war with China will also need to do its part. At the very least, stocks likely can ill afford any escalation in tensions, and more likely will need some evidence of progress to push higher. Over the weekend President Trump tweeted that progress was, indeed, being made, but trading on tweets is a perilous endeavor. Credit conditions will need to stabilize, and the EU needs to keep things together. The stamina needed by stocks to continue the fight has been restored to a certain extent by the significant improvement in valuations during the selloff. The unsustainable mid-year surge in momentum was stopped in its tracks, but has so far failed to deliver a knockout blow. Stocks will continue to be tested, but don’t count them out just yet.

Before The Bell January 2, 2019 ____________________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________________ © 2019 Ameriprise Financial, Inc. All rights reserved. of 12

MORNING MARKET COMMENTARY: Anthony M. Saglimbene, Global Market Strategist • Quick Take: U.S. futures are pointing to a weaker open on the first day of trading in 2019; Europe is trading

lower; Asia finished weaker overnight; West Texas Intermediate (WTI) oil trading at $44.70; 10-year U.S. Treasury yield at 2.65%.

• Markets Face a Challenging Start to the New Year: Out with the old, in with the new. New year resolutions. A renewed promise to accomplish what was left previously undone. No matter the reason for a revitalized outlook or inspiration for change, a turn in the calendar offers an opportunity to look ahead and put the past in the rearview mirror. No doubt, most investors are happy to put a difficult 2018 to rest finally. However, investors will need to see more than hope and inspired will to push asset prices higher this year. Although the calendar says it's 2019, a flip of a page does not end the current U.S. government shutdown, alleviate trade tensions, ease monetary policy concerns, or solve fears of slowing economic and corporate profit growth. For asset prices to end their slide lower, we believe investors will need more resolution on each of these fronts, or at the very least, see a more visible path on the direction of each. Based on today’s pre-market activity, U.S. stocks are set to open 2019 in the red.

• As such, there is a range of possible scenarios that could challenge markets in the year ahead. Considering these risks, the macro environment is likely to influence asset prices in a variety of ways, and investors should be flexible to changes in circumstances this year. If you haven’t done so already, please check out our 2019 Investment Themes report for our year-end targets and further insight on what may shape the investment landscape this year.

• The Ameriprise Global Asset Allocation Committee believes there are compelling cases to be made by both the bulls and the bears. Therefore, our Q1’19 tactical positions reflect a more neutral starting point versus strategic positioning and/or comparative benchmarks. In our view, a more neutral allocation approach allows time for the market to digest eventual developments in the uncertainties highlighted above without leaving investors over or underexposed to risk in their portfolios.

• In summary, the Committee shifted tactical allocations as follows: • Moved U.S., Developed and Emerging Equity to equalweight • Decreased U.S. Treasury underweight and moved U.S. Investment-Grade Corporate to overweight • Decreased Overweight to Alternative Strategies

• The Committee also adjusted its tactical sector and region recommendations for the current quarter, including initiating a sector overweight to Health Care and reducing its regional overweight to the U.S. For more detail on asset allocation recommendations and the Global Asset Allocation Committee’s latest tactical views to start 2019, please refer to the Asset Allocation Tables report.

• Asia-Pacific: Asian equities closed lower on Wednesday. Stock markets across the world are starting the year like they finished the last -- under pressure. Overnight, data points in the world’s second-largest economy showed that growth contracted in December, raising fears that slower global growth in 2019 is a real issue for markets and investors. Caixin/Markit manufacturing PMI in China fell to 49.7 last month from 50.2 in November, marking the first contraction for the data point since May 2017. (See chart at right as sourced from FactSet.) This follows on the heels of Beijing’s official manufacturing PMI reading, which also contracted in December for the first time since July 2016. Note, PMI readings above 50 show expansion in activity, while readings below 50 demonstrate a contraction in activity. As Reuters highlighted, new orders in China fell for the first time in two and a half years, while new export orders contracted for the ninth month in a row. Although several policy initiatives over recent months have tried to ease economic burdens on China’s local business community, we believe Chinese officials are finding it more difficult to



combat slowing growth and trade frictions. Outside of more meaningful progress on U.S./China trade talks, which are scheduled to ramp up over the next week or so, investors appear more comfortable reducing risk in the current environment. On a related note, The New York Times noted that U.S. Trade Representative Robert Lighthizer wants President Trump to avoid any deal with China that accepts empty promises and settles for temporary increases in soybean and beef purchases. Lighthizer is still very skeptical of Beijing and has warned the President that he may have to exert more pressure through additional tariffs to see any real and lasting concessions from China.

• Europe: Markets in the region are trading lower at midday. Final Eurozone manufacturing PMI in December came in at 51.4, matching the estimate and a few ticks lower than the 51.8 seen in November. Additionally, business confidence across the Eurozone fell to a fresh six-year low last month. Interestingly, UK manufacturing PMI expanded last month to 54.2 from 53.6, likely due to stockpiling ahead of Brexit. IHS Markit said that stocks of purchases and finished goods both rose to survey-record rates in December, as customer stockpiling activity brought new order growth to a 10-month high.

• U.S.: Equity futures are pointing to a weaker open this morning. In addition to slowing global growth concerns, we believe market pressure is being exasperated by the U.S. government shutdown and falling earnings estimates. The U.S. government entered a partial shutdown on December 21st and little progress on either side of the aisle has been made in closing the gap for security funding, namely President Trump’s border wall. According to Bloomberg, Trump has invited Congressional leaders to the White House for a Wednesday briefing on border security. The meeting may open a door for Democrats and Republicans to restart negotiations and find a compromise to end the shutdown. However, the President is thus far unwilling to relent on his border wall, while House Democrats plan to pass two separate bills that would reopen most of the government but not include funding for the President’s wall. On a related note, the 116th Congress will be sworn in on Thursday, where Democrats will control the House of Representatives and Republicans maintain their control of the Senate. Separately, analysts cut their 2019 earnings per share (EPS) estimates for more than half the companies in the S&P 500 during December, according to FactSet. This marks the largest number of EPS cuts in two years. Currently, analysts expect S&P 500 EPS to grow +7.8% y/y in 2019, down for +10.1% at the end of the third quarter. As we highlighted in our 2019 Investment Themes report, this is a notable downtick from the 20% plus earnings growth seen last year -- largely due to the corporate tax law changes. Interestingly, CFRA recently highlighted, annual growth estimates for S&P 500 earnings have been on average 5.5 points lower at the end of the year than initially estimated in January. This would imply a rather flat earnings growth environment this year, which we believe markets started to price into expectations last month. As we highlighted in our headline comments, the challenges that tripped up markets in 2018 remain stumbling blocks in 2019. Slower growth, potentially higher interest rates, and trade friction all pose headwinds for investors and asset prices. We believe White House uncertainty, Brexit, and a more volatile environment only add to the stew of current worries. With that said, the S&P 500 Index fell more than 6.0% in 2018, its worst performance since the financial crisis and first down year since 2015. As a result, market conditions are very oversold at the moment, and negativity among investors is high. In our view, this is the time to have a solid game plan in place, summon a little fortitude, and stay focused on the longer-term. The new year is likely to start like the last ended – volatile and unpredictable from day-to-day. We believe investors are best served by avoiding the temptation of getting too caught up in all the noise of the day.

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

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

S&P 500 0.85% 0.00% 2,506.9 DJSTOXX 50 (Europe) -0.71% -0.71% 2,980.2 Nikkei 225 (Japan) Closed 0.00% 20,014.8 Dow Jones 1.15% 0.00% 23,327.5 FTSE 100 (U.K.) -0.68% -0.68% 6,682.6 HK Hang Seng ( H. Kong) -2.77% -2.77% 25,130.4 NASDAQ 0.77% 0.00% 6,635.3 DAX Index (Germany) -0.14% -0.14% 10,544.6 Korea Kospi 100 -1.52% -1.52% 2,010.0 Russell 2000 0.79% 0.00% 1,348.6 CAC 40 (France) -1.31% -1.31% 4,668.6 Singapore STI -0.97% -0.97% 3,038.9 Brazil Bovespa 0.40% 0.40% 88,241.8 FTSE MIB (Italy) -0.63% -0.63% 18,208.6 Shanghai Comp. (China) -1.15% -1.15% 2,465.3 S&P/TSX Comp. (Canada) 0.71% 0.00% 14,322.9 IBEX 35 (Spain) -0.71% -0.71% 8,479.0 Bombay Sensex (India) -1.00% -0.49% 35,891.5 Mexico IPC 0.44% 0.00% 41,640.3 Russia TI Closed 0.00% 4,186.9 S&P/ASX 200 (Australia) -1.57% -1.57% 5,557.8

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

MSCI All-Country World Idx 0.00% 0.00% 455.7 MSCI EAFE 0.00% 0.00% 1,719.9 MSCI Emerging Mkts 0.03% 0.03% 965.9 Note: International market returns shown on a local currency basis. Equity index data is total return, inclusive of dividends.

S&P 500 Sectors % chg. % YTD Value Equity Income Indices % chg. % YTD Value Commodities Consumer Discretionary 1.09% 0.82% 781.5 JPM Alerian MLP Index 0.00% 0.00% 22.3 Futures & Spot (Intra-day) % chg. % YTD ValueConsumer Staples 0.40% -8.39% 521.9 FTSE NAREIT Comp. 0.22% 0.00% 16,595.7 CRB Raw Industrials -0.24% -6.61% 480.4 Energy 0.45% -18.10% 424.1 DJ US Select Dividend 0.61% 0.00% 1,860.4 NYMEX WTI Crude (p/bbl.) -1.39% -1.39% 44.8 Financials 0.98% -13.04% 395.9 DJ Global Select Dividend -1.06% -1.06% 204.6 ICE Brent Crude (p/bbl.) -1.12% -1.12% 53.2 Real Estate 0.03% -2.23% 192.4 S&P Div. Aristocrats 0.78% 0.00% 2,397.0 NYMEX Nat Gas (mmBtu) 0.75% 0.75% 3.0 Health Care 1.39% 6.47% 1,001.2 Spot Gold (troy oz.) 0.20% 0.21% 1,285.2 Industrials 1.01% -13.32% 542.2 Spot Silver (troy oz.) -0.58% -0.48% 15.4 Materials 0.80% -14.70% 316.6 Bond Indices % chg. % YTD Value LME Copper (per ton) -0.63% -17.46% 5,949.0 Technology 0.95% -0.29% 1,088.3 Barclays US Agg. Bond 0.25% 0.00% 2,046.6 LME Aluminum (per ton) 0.32% -17.43% 1,862.8 Communication Services 0.28% -12.53% 138.8 Barclays HY Bond 0.16% 0.00% 1,909.4 CBOT Corn (cents p/bushel) -0.13% -4.64% 375.0 Utilities 0.19% 4.11% 268.6 CBOT Wheat (cents p/bushel) -1.61% 2.03% 503.3

Foreign Exchange (Intra-day) % chg. % YTD Value % chg. % YTD Value % chg. % YTD ValueEuro (€/$) -0.7% -0.7% 1.14 Japanese Yen ($/¥) 0.63% 0.59% 109.05 Canadian Dollar ($/C$) -0.2% -0.1% 1.37 British Pound (£/$) -0.9% -1.0% 1.26 Australian Dollar (A$/$) -0.94% -0.88% 0.70 Swiss Franc ($/CHF) -0.5% -0.4% 0.99 Data/Price Source: Bloomberg; Equity Index data is total return, inclusive of dividends where applicable.

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

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

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

1) Communication Services 10.2% Underweight - 2.0% 8.2% 6) Health Care 15.5% Overweight +2.0% 17.5%

2) Consumer Discretionary 9.8% Equalweight - 9.8% 7) Industrials 9.2% Equalweight - 9.2%

3) Consumer Staples 7.5% Underweight - 2.0% 5.5% 8) Information Technology 20.2% Equalweight - 20.2%

4) Energy 5.3% Overweight +2.0% 7.3% 9) Materials 2.6% Equalweight - 2.6%

5) Financials 13.3% Equalweight - 13.3% 10) Real Estate 3.0% Overweight +1.0% 4.0%

11) Utilities 3.4% Underweight - 1.0% 2.4%

Index weighting represents relative weightings based on the regional market capitalization balance of the MSCI All-Country World Index; may not add due to rounding. The GAAC Tactical Overlay, as well as Recommended Tactical Weights, is derived from the Ameriprise Global Asset Allocation Committee (GAAC).Views are expressed relative to the Index and are provided to represent investment conviction in each region. Tactical Allocations are designed to augment Index returns over a 6-12 month time horizon. Index weights as of 12/20/18. Numbers may not add due to rounding.

Ameriprise Global Asset Allocation Committee Global Equity Region - Tactical View

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

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

1) United States 54.1% Overweight +3.1% 57.2% 5) Latin America 1.4% Equalweight - 1.4%

2) Canada 3.0% Equalweight - 3.0% 6) Asia-Pacific ex Japan 12.5% Equalweight - 12.5%

3) United Kingdom 5.4% Underweight - 1.0% 4.4% 7) Japan 7.6% Equalweight - 7.6%

4) Europe ex U.K. 14.9% Underweight - 1.0% 13.9% 8) Middle East / Africa 1.1% Underweight - 1.1% -

Index weighting represents relative weightings based on the regional market capitalization balance of the MSCI All-Country World Index; may not add due to rounding. The GAAC Tactical Overlay, as well as Recommended Tactical Weights, is derived from the Ameriprise Global Asset Allocation Committee (GAAC).Views are expressed relative to the Index and are provided to represent investment conviction in each region. Tactical Allocations are designed to augment Index returns over a 6-12 month time horizon. Index weights as of 12/20/18. Numbers may not add due to rounding.



THE WEEK AHEAD: Russell T. Price, CFA • New year, same problems. Aside from the economic data releases as discussed below, markets will also be eager

to hear the comments of Fed Chair Jerome Powell on Friday as he is scheduled to participate in a forum with former Fed Chair Yellen. Meanwhile, the 116th Congress of the United States is seated tomorrow. Nancy Pelosi is widely expected to have the votes necessary of her party to secure the Speaker role in the House of Representatives.

• After a day to get settled, the economic calendar offers some prominent releases this week, with the ISM measure of manufacturing activity on Thursday, and the Employment Report on Friday, figuring prominently. Still in limbo due to the ongoing government shutdown are the Commerce Department reports on New Home Sales for November and International Trade (also for November). These releases would likely be released soon after the partial government shutdown concludes. We note, however that the Labor Department is not part of the current shutdown, so Friday’s Employment Report should be released as scheduled.

• On Wednesday, automakers are schedule to release their sales results for the month of December. The industry is expected to see another solid month of demand with forecasters expecting a fourth straight month of auto sales of approximately 17.4 to 17.5 million on a seasonally adjusted annualized selling rate (SAAR). Sales are also expected to continue their pattern of sales increasingly skewed to trucks and SUVs. In November, the average new vehicle transaction price hit an all-time high of $33,697 (according to J.D. Powers) as truck and SUV sales hit an all-time high SAAR of 12.1 million.

• On Thursday, payroll processor ADP will give investors their first look at national employment conditions in the month of December. The ADP estimate and the Labor Department’s nonfarm payrolls number both decelerated in November (to 179k and 155k, respectively), however, it was unclear as to the message the slower employment growth numbers. Was the deceleration a recoil from strong post-hurricane numbers in October or were they reflective of cooling demand due to growth concerns or simply evidence of an increasingly tight labor market. All three factors likely played a role, but we continue to expect nonfarm payroll growth to slow in the months and quarters ahead due to a combination of these later two factors.

• Forecasters expect Thursday’s ADP report for December to show 180,000 net new jobs to have been created in the private sector of the economy. This would be modestly better than the 179,000 net new jobs reported in November but not far off from the report’s three and six-month averages, or about 190k to 200k.

• The Institute of Supply Management’s (ISM) Manufacturing Index is also out on Thursday at 10 AM ET. The report is seen as a bellwether for manufacturing activity given its national coverage, number of participating companies and long history. It takes on added significance this month, given the relatively poor performance of the Federal Reserve’s various surveys of regional manufacturing conditions. Each of the Fed’s five primary manufacturing surveys decelerated in December with two of the five (Richmond and Dallas) even showing some month-over-month contraction in general business conditions. The well-respected Chicago Purchasing Manager’s Index, however, held up much better than the Fed surveys as it registered a very strong reading of 65.4.

• On Friday, the Labor Department is scheduled to release the results of its Employment Situation report for the month of December. Forecasters expect the report to show nonfarm payroll growth of 180,000 while the unemployment rate is expected to remain steady for a fourth straight month at +3.7%. Average Hourly Wages, which have posted better than +3.0% year-over-year growth the last two months, is expected to see another monthly gain of 0.3% but the year-over-year rate could slip below the 3.0% level due to a stronger year-ago comparison.

December 31 January 1 2 3 4Dallas Fed. Mfg. Survey New Years Day U.S. Auto Sales Initial Jobless Claims Employment Report

Manufacturing PMI - China Markets Closed Unemployment - Euro Zone Construction Spending Inflation - Euro Zone

Trade - Brazil ISM Manufacturing Index Employment - Canada

Challenger Layoff Notices

ADP Employment Estimate



Where Market Fundamentals Stand Heading into The Week:

S&P 500 Trailing and Forward P/E valuations: Source: FactSet Please note: Although we try to maintain consistency as much as possible, Price to Earnings (P/E) ratios may differ modestly from once source to another. Most notably, P/E numbers can often show their most notable differences during an earnings release season as some sources may still use the last full ‘actual’ earnings number (for instance, currently Q2 trailing 12-month earnings per share) while others use earnings per share that are updated for Q3 using a combination of actual and estimated earnings per share. The calculation of earnings (operating earnings versus ‘as reported’ or GAAP) also often differs modestly from one data source to another due to the proprietary use of calculation methodologies. The “average” shown in the charts below represent averages for the period shown.

Consensus Earnings Estimates: Source: FactSet

S&P 500 Earnings Estimates 2014 2015 2016 20201/2/2019 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Est. Est. Est. Est. Est. Est.

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

Quarterly $$ amount $30.87 $32.80 $33.54 $36.29 $38.71 $41.03 $42.85 $40.94 $40.22 $43.00 $44.79 $45.70 change over last week -$0.22 -$0.39 -$0.40 -$0.31 -$0.27 yr/yr 13.9% 10.7% 6.7% 15.9% 25.4% 25.1% 27.8% 12.8% 3.9% 4.8% 4.5% 11.6% qtr/qtr #DIV/0! 6% 2% 8% 7% 6% 4% -4% -2% 7% 4% 2%

Trailing 4 quarters $$ $119.02 $118.67 $119.64 $123.25 $126.42 $128.53 $133.50 $141.34 $149.57 $158.88 $163.53 $165.04 $167.01 $168.95 $173.71 $193.00 yr/yr 6.8% -0.3% 0.8% 11.6% 22.5% 6.2% 11.1%Implied P/E based on a S&P 500 level of: 2507 15.3 15.2 15.0 14.8 14.4 13.0

2018 20192017



ECONOMIC NEWS OUT TODAY: Economic Releases for Wednesday, January 02, 2019. All times Eastern. Consensus estimates via Bloomberg. Time Period Release Consensus Est. Actual Prior Revised to NA DEC U.S. Auto Sales (annualized) 17.5M 17.5M FIXED INCOME NEWS & VIEWS: Brian M. Erickson, CFA, Fixed Income Research & Strategy

Bond Market Recap • Year-end 2018: Treasury yield tumbled lower in the last two weeks of trading last year, falling from early sharply from

2018 highs reached in November. Two-year Treasury yields fell to 2.49% at year-end from 2.96% on November 8 (see chart below left), collapsing on top of the fed funds upper bound, and reflecting market expectations for no further Fed hikes ahead (see chart below right). While the market tends to over shoot, we see 2-year Treasury yields as a gauge of just how pessimistic markets have become. In addition to the signal in 2-year yields, fed fund futures reflect no further hikes in 2019 and prospects for rate cuts in 2020. Further out the curve, 10-year Treasury yields dropped from the 2018 high on November 8 to 3.23% to 2.68% on the final day of trading last year. The drop in Treasury yields in the final 8 weeks of the year sharply impacted 2018 performance and prospects for 2019 in our view. See more on the context below.

• This morning, German 10-year Bund yields dropped sharply this morning, falling 8 basis points to yield 0.16% ahead of the open to U.S. equity trading this morning. Contracting manufacturing sectors in Italy and France undercut expansion across the broader Eurozone based on Markit PMIs. Fragile Eurozone growth and prospects further softness led investors to buy sovereign debt overnight and carrying into a Treasury bid this morning. Ten-year Treasury yields declined three basis points to 2.65% this morning as U.S. equity futures point to a lower open in the first session of 2019.

• Credit markets: The price of Nymex crude oil futures fell below $50 on December 18 falling to $42.83 at the close of business on December 24 on prospects for slower demand growth than previously foreseen. Falling crude prices dialed up pressures on the energy sector, particularly within high yield. Credit spreads for the Bloomberg Barclays Investment Grade Index and Bloomberg Barclays High Yield Index ended 2018 at or very near the widest level seen in two years of +153 and +531 basis points, respectively. See chart below right. Recall, that high yield credit markets were effectively closed through December. The risk-off sentiment this morning likely restrains issuance activity today, carrying over difficult credit markets into the start of this year. Beyond the near-term, we believe credit markets may become more constructive based on continued U.S. economic strength, but the best days for corporate borrowers are likely in the past.

• The week ahead: Friday is jobs day offering a picture of how labor markets ended 2018. Also, bond markets are likely to dial into comments from Fed Chairman Powell at a conference Friday, especially given the disparity between Fed forecasts and what is priced into Treasury markets here at the start of the year. Treasury coupon supply returns next week with 3-year, 10-year, and 30-year auctions.

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2-Yr 5-Yr 7-Yr 10-Yr 30-Yr

U.S. Treasury YieldsYield in Percent

12/31/2018

11/8/2018

12/29/2017

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Two-year Treasury Yields Lead Fed FundsYield in percent

Fed Funds Upper Bound 2-year Treasury



Source: Bloomberg, Bloomberg Barclays Indices

2018 Fixed Income Performance • High quality core fixed income benefitted from the fourth quarter flight to quality that took the edge off of full year

performance. The Bloomberg Barclays U.S. Aggregate Index (U.S. Aggregate) posted a -0.2% total return in 2018, wrapping up a difficult year for fixed income with a fourth quarter rally. A 1.6% fourth quarter total return, nearly wiped the slate clean from a -1.6% total return through the first three quarters.

• The Bloomberg Barclays Investment Grade Bond Index mustered a -0.1% total return in the fourth quarter, and -2.7% on the full year failing to erase the negative performance in the first quarter of 2018. Investment grade spreads ended the year at +153 basis points, out from +93 basis points at the end of 2017 on what we see as a 30 to 40 basis point flight to quality in 10-year Treasury yields in the last 8 weeks of last year.

• Beyond core fixed income, the Bloomberg Barclays U.S. High Yield Index (High Yield) returned -4.5% in the fourth quarter led by a -10.0% total return in the energy sector. On a full year basis, high yield posted a -2.0% total return. The JPMorgan Emerging Market Bond Index underperformed the U.S. Aggregate and High Yield with a -4.6% total return.

Year-end Rally Narrows Fixed Income Loss for 2018, Sets up 2019 • While the 10-year yields may have shed 30 to 40 basis points of yield in the fourth quarter flight to quality, it may

have coiled a spring within Treasury yields in our view. Should dire pessimism moderate or even shift to risk-on in coming weeks, we believe Treasury investors could see a sharp rise, effectively shifting negative performance from 2018 into this year. We remain underweight U.S. Treasuries and recommend shorter than benchmark duration for total return portfolios.

• Wider investment grade corporate bond spreads, and more stable yields suggests high quality corporates may sidestep negative performance should pessimism abate. This supports our shift to an overweight on U.S. Investment Grade Bonds.

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300

400

500

600

75

100

125

150

Bloomberg Barclay's Index Credit SpreadsOption adjusted spread (OAS), in basis points

IG Corp (LHS) HY Corp (RHS)



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

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

Kirk D. Dedenbach – Senior Manager

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

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

Energy/Utilities Justin H. Burgin – Vice President

Financial Services/REITs Lori Wilking-Przekop – Sr Director

Health Care Daniel Garofalo – Director

Industrials/Materials Frederick M. Schultz – Director

Technology/Telecommunication Curtis R. Trimble – Director

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

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

Thomas Crandall, CFA, CAIA – Director, Asset Allocation

Daniel Balter, CFA – Analyst – Quantitative, Asset Allocation

Gaurav Sawhney – Research Analyst

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

Michael V. Jastrow, CFA – Vice President

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

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

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

Alex Zachman – Analyst – Core Equity

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

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

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

Blake Hockert – Associate – Reporting & Analytics

FIXED INCOME RESEARCH & STRATEGY

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

Stephen Tufo – Director, Credit Analyst INVESTMENT DUE DILIGENCE

Justin E. Bell, CFA – Vice President

Kurt J. Merkle, CFA, CAIA – Sr Director

Kay S. Nachampassak – Director

Peter W. LaFontaine – Sr Analyst

James P. Johnson, CFA, CFP® – Analyst

David Hauge, CFA – Analyst

Bishnu Dhar – Sr. Research Analyst

Parveen Vedi – Sr. Research Associate

Darakshan Ali – Research Process Trainee



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

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

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

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



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

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