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Monthly Investment Perspective April 2013

Summary: • The US economy continues to show signs of accelerating (albeit modest) growth, while most of Europe (as

expected) is exhibiting negative economic growth and Asia (lead by China) is beginning to show signs of an economic recovery (after several quarters of slowdown).

• U.S. stocks continued to move higher in March, while international stocks traded in a range and finished flat for the month. U.S. stocks have significantly outperformed international stocks since the start of the year. U.S. bonds finished up slightly in March but continue to show slight losses so far this year.

• Cyprus became the fifth country in the Eurozone to seek a rescue since the region’s debt crisis began in 2009.

However, it became the first nation to implement a levy on bank depositors to fund part of its bailout. The events in Cyprus indicate that significant risks remain in the Eurozone as the region’s debt crisis is far from over.

• The U.S. Federal Reserve (the Fed) acknowledged that the U.S. economy is improving, but not fast enough to

warrant a change in its current policies (i.e., keeping interest rates low for the foreseeable future). However, the Fed has introduced some “caveats” that could allow it to change its low rate policy sooner rather than later.

• The U.S. sequester ($85B in forced government spending cuts in 2013) began on March 1st. The economic effects

of the cuts are likely to be felt in the later quarters of the year. Despite the sequester, a government shutdown was avoided as Congress approved the continued funding of government operations through September.

• We continue to believe investors are best served with diversified, balanced portfolios with a tilt toward higher quality, larger cap stocks, and higher income yielding and inflation hedging asset classes.

AEPG Wealth Strategies Portfolio: • AEPG’s investment philosophy is that market risk-adjusted returns can be enhanced by constructing diversified,

balanced, low-cost, valuation-focused portfolios, combined with disciplined rebalancing. AEPG’s portfolios have an overriding objective of achieving long-term market returns with less risk than the markets.

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• Short-term market volatility caused by events such as the banking crisis in Cyprus should remind investors why they are better served by maintaining balanced and diversified portfolios of uncorrelated assets classes to help protect during short-term market corrections and stay invested for the long term.

• Our view is that global economic growth will likely continue to be sluggish throughout most of 2013, with the potential for it to increase gradually in the latter part of the year and into 2014. Given this economic backdrop, along with high levels of political and policy uncertainty that increases the potential for a material market correction, we continue to believe investors are best served with diversified, balanced portfolios with a tilt toward higher quality, larger cap stocks, and higher income yielding and inflation hedging asset classes.

Markets Month in Review: U.S. stocks continued to move higher in March (Mar: +3.92% | YTD: +11.03%). Stocks advanced strongly up until the middle of the month as investors digested better than expected U.S. employment, consumer retail sales and industrial production data, along with strong readings in service sector activity and capital goods orders. Stocks took a breather in the second half of the month as news surfaced about a potential banking system collapse in Cyprus. The events in Cyprus indicate that significant risks remain in the Eurozone as the region’s debt crisis is far from over.

International stocks traded in a range and finished flat for March (Mar: +0.39% | YTD: +3.63%). Stocks based overseas have significantly lagged U.S. stocks so far this year, mainly due to investor concerns about the financial and political problems in Europe (Cyprus being the flavor of the month) as well as lackluster economic growth in China which has led to negative market returns so far this year for most emerging market stocks. International stock returns have also been subdued for US investors due to appreciation of the dollar versus other major international currencies (particularly the Euro) so far this year. The underperformance of international stocks relative to U.S. stocks over the last three months is an indication of potential further economic weakness and higher risks faced abroad particularly in the Eurozone.

U.S. bonds finished up slightly in March (Mar: +0.08% | YTD through Mar: -0.08%). Hence, bond yields, which move in the opposite direction of bond prices, edged slightly lower; the yield on 10-year US Treasury notes decreased slightly from 1.88% in the beginning of March to 1.85%. Bonds started the month in the red (with the yield on the 10-year US Treasury up to 2.07%), however the events in Cyprus made investors nervous which resulted in the proverbial “flight to quality” throughout the second half of the month as investors moved back into bonds for protection. While future bond returns are likely to be modest, bonds still play a critical role of dampening risk (“volatility”) of a diversified portfolio, particularly during uncertain market conditions.

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Economic Data Month in Review: • Cyprus secured a €10B ($13B) bailout from the ECB after Cypriot officials agreed to shut down the

country’s second-largest bank and aggressively downsize its largest, raising €5.8B by imposing steep losses on depositors with more than €100,000. The country’s banks have been in financial trouble ever since the Greek debt crisis hit, due to their exposure to Greek bonds which lost significant value. Despite its small economy, Cyprus has received outsized headline attention because this is the first time that depositors are shouldering the costs of a bailout, in addition to Cyprus potentially being the first country to exit the euro. Investors generally become worried about such precedents, as they could end up being the resolutions for much larger troubled countries in Europe (e.g., Spain and Italy) potentially sending them into much deeper and protracted recessions. For now, the situation in Cyprus remains contained, ultimately due to the ECB backstop. Material problems remain in Europe.

• Despite the sequester of $85 billion (for 2013) in automatic spending cuts that began March 1st, the U.S. federal government avoided shutting itself down. Congress approved a resolution to continue funding of government operations through September, This resolution allows Congress to now focus on the bigger issues that need to be addressed in the coming months including the debt ceiling and budget plans to reduce the deficit. Thus far, U.S. stocks have not reacted negatively to the $85B sequester, which economists estimate to reduce 2013 GDP by roughly 0.5%. It appears the forced sequestration had been expected by the markets with no material declines.

• The Federal Reserve (the Fed) released its economic and employment outlook (as part of its monthly monetary policy meeting) which acknowledged that the U.S. economy is improving (particularly in the key housing market), but not fast enough to warrant a change in its current policies. Minutes from the meeting showed that the Fed remains set on its policy of keeping short-term interest rates steady and buying additional bonds ($85B/month – to keep longer-term rates low) for the foreseeable future. This was no big surprise to us and the markets. While it appears that the Fed is being completely transparent with its policy in terms of what would be done and when, the Fed hinted that adjustments to its stated bond buying program could be made depending on their view of the economy. Markets could be surprised in the future because of the Fed’s “we’ll know it when we see it” strategy.

• US Jobless Claims continued the trend lower. Jobless Claims data, which quantify the number of people who file for unemployment benefits in a given week, seen as an indicator of the health of the US job market, fell the first two weeks in March but increased more than expected in the last two weeks of the month.

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However, since the short term spike after Hurricane Sandy, the trend in US jobless claims (as measured by the 4-week moving average) has been gradually declining (and continued so in March), a sign of an improving job market – although structural unemployment issues remain with less unemployed people actively seeking jobs.

• The latest U.S. housing market data suggests that the housing recovery continued to take shape in February with continued growth in building permits, housing starts and home homes sales which has led to increases in overall housing prices. The Standard & Poor's and Case-Shiller's 20-city home-price index rose more than expected, as housing prices increased over 8% on average nationally from one year ago. Continued strength in the housing sector will serve as a catalyst to US economic growth.

• U.S. retail sales rose much more in February (1.1%) than economists expected (0.5%). The latest report from the Commerce Department shows consumers are still spending, despite absorbing the combined strains of stagnant incomes, rising gasoline prices and a two-percentage-point increase in the payroll tax that went into effect at the start of the year. While this is a significant positive sign (as consumer spending accounts for approximately 70% of the U.S. economy), the latest reading of U.S. consumer confidence tumbled amid worries about federal government spending cuts and changes in tax rates. Despite better than expected retail sales data so far this year, U.S. consumer confidence could indicate a lag (declining) effect in retail spending that will likely be felt in the coming months.

• Various U.S. manufacturing indicators showed better than expected readings for February. These included gauges such as the ISM Manufacturing (a survey of over 300 manufacturing firms about employment, production inventories, new orders and supply deliveries) and Industrial Production (a measure of output from manufacturing, mining, electric and gas industries). This is a positive sign that increased spending by businesses and consumers, along with the housing recovery are helping U.S. factories.