2016 Investment Outlook - CFA Institute Dinner... · 2016 Investment Outlook Ten Predictions | January 2016 NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Presentation By: Robert

2016 Investment Outlook

Ten Predictions | January 2016

NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE

Presentation By:

Robert C. Doll, CFASenior Portfolio Manager

Chief Equity Strategist

FOR FINANCIAL ADVISOR OR INSTITUTIONAL INVESTOR USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

FOR FINANCIAL ADVISOR OR INSTITUTIONAL INVESTOR USE ONLY. NOT FOR PUBLIC DISTRIBUTION. 2

2015 Recap

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.

2015 RETURNS

90-Day Treasury Bills 0.1%

10-Year U.S. Treasury 1.5%

U.S. Bonds 0.6%

High Yield Corporate Bonds −4.4%

S&P 500 1.4%

MSCI World ex U.S. −2.6%

MSCI Emerging Markets −14.6%

Commodities −23.3%

2015 U.S. Returns

Stocks 1.4%

Bonds 0.6%

Cash 0.1%


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


2015 Ten Predictions – Scorecard

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.

Overall Scoring


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


One View of 2016

Ideas compiled from Nuveen Asset Management and Strategas Research Partners.

THE GOOD … A recession is unlikely

THE BAD … Difficult to see significant market gains

THE UGLY … Tactical moves may be required to make money


PREDICTION 1

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

7

Real and Nominal Growth Remain Subdued

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

-12.0%

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

16.0%

1945 1955 1965 1975 1985 1995 2005 2015

Per

cen

tag

e C

han

ge

(200

9 D

olla

rs)

Per

cen

tag

e C

han

ge

(Cu

rren

t D

olla

rs)

-12.0%

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

16.0%

1945 1955 1965 1975 1985 1995 2005 2015

_ _

Long-Term Average: 3% Long-Term Average: 5%

EstimatedEstimated


PREDICTION 1


8

Real and Nominal Growth to Be Modest Again

Data source: JPMorgan, Nuveen Asset Management estimates.

2015

ESTIMATED

2016

ESTIMATED

Consumption +2.1% +2.0% Healthy, but flat

Investment +0.8% +0.8% Mixed

Government — +0.4% Fiscal austerity over

Net Exports –0.4% –0.4% Drag

Inventory –0.1% –0.1% Slight drag

REAL GDP 2.4% 2.7%

GDP Deflator 1.1% 1.8%

NOMINAL GDP 3.5% 4.5%


PREDICTION 1


9

Employment Growth Remains Strong

Data source: Bloomberg, 1/1/11 − 11/30/15. 2015 reflects 1/1/15 − 11/30/15. Source for 2016 estimate is Nuveen Asset Management.

Monthly Average Change in Nonfarm Payrolls

173

188199

260

210

175

50

100

150

200

250

300

2011 2012 2013 2014 2015 to Nov30 2016 Estimate*2015 YTD

through November

2016

Estimate

No

nfa

rm P

ayro

ll Jo

bs

(In

Th

ou

san

ds)


PREDICTION 1


10

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


PREDICTION 1


11

The U.S. Consumer Is Spending, but Selectively

POSITIVES

1. Job growth: strong

2. Wage growth: accelerating

3. Housing starts: improving

4. Existing home sales: increasing

5. Auto sales: at high levels

6. E-commerce sales: increasing

7. “Experience spending”: positive

NEGATIVES

1. Borrowing rate: lower than normal

2. Savings rate: rising

3. Brick and mortar retail sales: weak

4. Gasoline sales (given decline in prices): weak


PREDICTION 1


12

Global Growth Appears Mixed, with Several Contributors and Detractors

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.

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.

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

■■■■

■ U.S.

■ U.K.

■ Euro Area

Contributing to Global Growth Detracting from Global Growth

3.8%

43.4%

56.6%

5.8%13.3%

16.7%20.8%

22.4%17.2%


PREDICTION 2

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

13

Bond Bear Market in Year Four

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

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

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2012 2013 2014 2015

Yie

ld (

%)

Yield Trough:1.43%

July 2012


PREDICTION 2


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

Inflation Is Experiencing Crosscurrents

HIGHER INFLATION

1. Tightening labor markets (rising wage growth)

2. Increasing rental rates

3. Rising health care insurance

LOWER INFLATION

1. Impact of stronger dollar

2. Low commodity prices

3. Competitive retail environment

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

3.50%

3.75%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Wage Growth Continues to Climb SteadilyChange Year-Over-Year

Yea

r-O

ver-

Yea

r

Per

cen

tag

e C

han

ge

(%

)

_ Average Hourly Earnings (All Employees)


PREDICTION 2


15

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

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.

MATURITY

(YEARS)

YIELD

AS OF

12/31/15

REQUIRED YIELDS

FOR ZERO RETURN

IN 1 YEAR

BASIS POINT

CHANGE

FORECAST

YIELD

FORECAST

RETURN

2 1.05% 2.11% 1.06% 1.50% 0.60%

5 1.76% 2.22% 0.46% 2.00% 0.84%

10 2.27% 2.56% 0.29% 2.75% −1.52%

30 3.02% 3.18% 0.16% 3.25% −1.38%


PREDICTION 2


16

Who’s Right? The Fed or the Market?

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.

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

-1%

0%

1%

2%

3%

4%

5%

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

Rat

e (

%)

Fed

Market


PREDICTION 2


17

Spreads Remain Attractive Given Low Default Rates

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.

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

_Barclays High Yield Spread

_Moody’s U.S. High Yield Default Rate

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-

500

1,000

1,500

2,000

2,500

Mo

od

y’s Defau

lt Rate

Hig

h Y

ield

Sp

read

(b

asis

po

ints

)

18 Year Default Rate Average = 4.6%

18 Year SpreadAverage = 581 bp

Current Spread 602 bp

Sep

1997

Sep

2000

Sep

2003

Sep

2006

Sep

2009

Sep

2012

Sep

2015

Current Defaults 2.5%


PREDICTION 3

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

18

2015 Earnings Revisions Were Negative

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.

_2015

_2016 (Estimated)

$115

$120

$125

$130

$135

$140

$145

Jan

2015

Feb

2015

Mar

2015

Apr

2015

May

2015

Jun

2015

Jul

2015

Aug

2015

Sep

2015

Oct

2015

Nov

2015

Dec

2015

S&

P 5

00 C

on

sen

sus

Exp

ecta

tio

ns

2015 2016

1/1/15 $126.49 $141.50

7/1/15 $118.93 $133.55

12/31/15 $117.26 $126.91


PREDICTION 3


19

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

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

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

40%

15%

6% 6%8%

-1%

9%

12%

-10%

0%

10%

20%

30%

40%

50%

2010 2011 2012 2013 2014 2015 2016 2017

Yea

r-O

ver-

Yea

r G

row

th (

%)

Consensus Consensus


PREDICTION 3


20

S&P 500 Earnings Could End Below Consensus in 2016

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

2015

ESTIMATED

2016

ESTIMATED

2016

CONSENSUS

Revenue –3.5% 3.0% 4.0%

Margins +0.6% –0.1% 1.8%

Share Repurchases +2.1% 2.0% 2.2%

Total –0.6% 5.0% 8.2%

S&P 500 Earnings Per Share

(2014: $118.78) $118 $124 $128


PREDICTION 3


21

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

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.

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

14%

86%

32%

68%

Share of Earnings in S&P 500 Service Industries

Share of U.S. Employment


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

22

Equity Market Building Blocks

CURRENT LIKELY DIRECTION

Fundamentals 0 +

Monetary Policy + –

Sentiment + 0

Valuation 0 0


PREDICTION 4


23

U.S. Equities Have Not Performed as Well When a 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.

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

-4.0%

7.0%7.5%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Election Years Where NewPresident MUST be Elected

All Presidential Election Years All Years

S&

P 5

00 In

dex

Ave

rag

e A

nn

ual

Per

form

ance

(%

)


PREDICTION 4


24

Equity Market Forecast1

1 Based on the S&P 500 Index.

Data source: Bloomberg, Nuveen Asset Management for all forecasted, estimated and target figures.

EARNINGS & RETURN

EXPECTATIONS

2015 OUTLOOK

12/31/14

2015 OUTLOOK

12/31/15

2016 OUTLOOK

12/31/15

Economy (Earnings) $128 $118 $124

P/E Target 17.3x 17.3x 17.3x

S&P 500 Target 2200 2044 2150

COMPONENTS OF RETURN

Earnings 8% –1% 5%

P/E ─ 0% ─

Yield 2% 2% 2%

Total Return 10% 1% 7%


PREDICTION 4


25

The Bull Market Is Not Over Yet

WHY SHOULD THE

BULL MARKET CONTINUE?

1. Several more years of economic, earnings

and dividend growth

2. Nearly ideal (“Goldilocks”) real growth rates

3. Ideal inflation (1.5% to 2.5%)

4. Accommodative monetary policy

5. Non-excessive valuation levels

6. Investor skepticism (climbing walls of worry)

WHAT ENDS A BULL MARKET?

1. Recession prospects

2. Accelerating inflation

3. Tight money

4. Excessive wage inflation

5. High interest rates

6. Investor euphoria


PREDICTION 4


26

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


PREDICTION 5

Stocks outperform bonds for the fifth consecutive year

27

Stocks Have a Recent History of Outperforming Bonds

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

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 ??? ???


PREDICTION 5


28

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

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.

Performance and Yields After First Fed Tightening

S&P 500 PERFORMANCE

DATE OF FIRST RAISE +12 MONTHS

3/31/1983 4.1%

1/5/1987 2.6%

3/30/1988 13.3%

2/4/1994 1.9%

6/30/1999 6.0%

6/30/2004 4.4%

AVERAGE 5.4%

Percent of Periods with Positive Returns 100.0%

10-YEAR U.S. TREASURY YIELD

START 1 YEAR LATER DIFFERENCE

10.62% 12.47% 1.85%

7.05% 8.72% 1.67%

8.55% 9.34% 0.79%

5.87% 7.50% 1.63%

5.78% 6.03% 0.25%

4.58% 3.91% –0.67%

AVERAGE 0.92%

Percent of Periods with Higher Yields 83.0%


PREDICTION 5


29

Expected Returns and Suggested Asset Mixes

Data source: Cornerstone Macro. Used with permission.

2015RETURNS

2016 EXPECTED RETURNS

SUGGESTED

ASSET MIX

Stocks +1.4% 7.0% +5% vs normal (was +10)

Bonds 0.6% –1.5% –10% vs normal (was –10)

Cash 0.0% 0.5% +5 vs normal (was 0)


PREDICTION 6

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

30

U.S. Markets Have Outperformed in Recent Years

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

EQUITIES BONDS

RUSSELL

1000® INDEX

MSCI WORLD

EX-U.S. INDEX

BARCLAYS U.S. AGGREGATE

BOND INDEX

BARCLAYS GLOBAL

AGGREGATE BOND

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%


PREDICTION 6


31

U.S. Assets Have Outperformedin Recent Years …

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

… But the U.S. May Underperform Going Forward

1. Improving global growth

2. Trade improvement

3. Commodity price stabilization

4. Diminished deflation risk

5. Dollar momentum slowing

6. Upturn in global profits

1. Global growth anxiety

2. Commodity price collapse

3. Surge in the dollar


PREDICTION 6


32

Alternate Prediction

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

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%


PREDICTION 7

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

33

OVERWEIGHTS

INFORMATION TECHNOLOGY

Superior organic growth

Strong balance sheets, cash flows, earnings growth

Valuation discount to market

Risk: Non-U.S. economies weaken

FINANCIALS

Loan growth improving

Positive revisions likely

Compelling valuations/ROE improving

Risk: Credit problems haunt

TELECOMMUNICATION SERVICES

Extraordinarily cheap

High yield compared to alternatives

Good free cash flow

Risk: Further price wars

UNDERWEIGHTS

ENERGY

Adverse supply-demand picture

Credit issues

Valuation not cheap relative to current fundamentals

Risk: Global growth accelerates

MATERIALS

In secular decline (prices falling)

Emerging markets weak

Dollar headwinds

Risk: Global growth accelerates/dollar falls

UTILITIES

Very low earnings and dividend growth

Bond-like stocks lag as rates rise

Not cheap even with 2015 underperformance

Risk: Very weak economy


PREDICTION 7

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

34

Theme and Common Factor Preferences

OVERWEIGHT

Mid-cycle cyclicals

Strong free cash flow

Energy users

Big cap

Growth style

Unit growth

UNDERWEIGHT

Deep cyclicals

Cash-consuming companies

Energy producers

Small cap

Value style

Pricing power


PREDICTION 8

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

35

Terrorism Is Experiencing a Bull Market

Why Is This Important?

But Has Produced Only Temporary Market Reactions

Proliferation of sophisticated weapons

Collapse of surveillance capabilities

American geopolitical disengagement (especially in Middle East)

9-11 attacks

2004 Madrid train bombings

2005 London bus bombings

2015 Paris attacks

Multiple attacks in Asia

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


PREDICTION 8


36

Perception of Cybersecurity Risk Is Increasing

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.

“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

1,000

1,500

2,000

2,500

3,000

Ind

ex o

f C

yber

Sec

uri

ty V

alu

e

Mar

2011

Jul

2011

Nov

2011

Mar

2012

Jul

2012

Nov

2012

Mar

2013

Jul

2013

Nov

2013

Mar

2014

Jul

2014

Nov

2014

Mar

2015

Jul

2015

Nov

2015


PREDICTION 8


37

Geopolitical Issues Exist in Many Places Around the Globe

1. Middle East oil

2. Russia

3. Iran

4. China

5. North Korea

6. Globalization


PREDICTION 9

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

38

The Era of Fiscal Austerity Is Over

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

2009

PEAK

2015

TROUGH

Federal Budget Deficit $1,413 B $439 B

Percent of GDP 9.8% 2.4%

What Are the Implications?


PREDICTION 9


39

The Deficit Should Rise from Here

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

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%


PREDICTION 9


40

Government Spending Will Contribute to GDP

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

Government Contribution to Real GDP (4 Quarter Average)

Co

ntr

ibu

tio

n t

o G

DP

(%

)

-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


PREDICTION 10

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

41

White House Senate

House

A political party has held the presidency for more than two terms only once

since FDR/Truman (Reagan/Bush)

Existing president's approval rating is key (Obama's is in the mid-40s)

Leading candidates (Clinton and Trump) have high negative ratings

Republicans must unify and improve support from women and minorities

Hillary Clinton is generally viewed as a relatively weak candidate

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

Senate will likely follow

the White House

Senate could remain

Republican if the

election is close

House will likely

remain Republican


PREDICTION 10

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

42

Election Projections

CURRENT PROJECTED

REPUBLICAN DEMOCRAT REPUBLICAN DEMOCRAT CHANGE

House 247 188 239 196 Democrat + 8

Senate 54 46 51 49 Democrat + 3

White House Democrat ??? ???


Concluding Thoughts


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


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

Adapted from BofA Merrill Lynch.

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


Current Thoughts on Portfolio Construction

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.

ASSET ALLOCATION OVERWEIGHT NEUTRAL UNDERWEIGHT COMMENT

Cash X Near zero return

Bonds X Struggles to continue

Stocks X Muddle through, but best choice

Commodities X Volatile, trendless

EQUITIES BY GEOGRAPHY

U.S. X Further along in normalization process

Europe Multi-Nationals Domestic Companies Modest growth, bifurcated

Japan Multi-Nationals Domestic Companies Cyclical market, and cheap

Emerging Markets X 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


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.

Think About the Long-Term and Remain Diversified

10-YEAR RETURN FORECAST BY ASSET CLASS FORECASTED RETURN RANGE

EQUITIES 6 – 8%

U.S. 6 – 8%

Non-U.S. Developed Markets 4 – 6%

Emerging Markets 8 – 10%

BONDS 2 – 4%

U.S. Government 0 – 2%

U.S. Investment Grade 2 – 4%

U.S. High Yield 4 – 6%

Emerging Market Sovereign 5 – 7%

CASH 1 – 2%

INFLATION 2 – 3%

DIVERSIFIED PORTFOLIO 4 – 6%


Large Cap Equity Series

One investment process is applied to nine strategies in U.S. large cap equities.

1 Positions for Retail Managed Accounts range from 45 to 60.

Data source: MorningstarDirect, as of 12/31/15. Active share is calculated by MorningstarDirect and represents the proportion of portfolio holdings that differ from those in the benchmark index. Active share is based on the mutual fund. Holdings are for informational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned or securities in the industries shown above.

BENCHMARK

HOLDINGS

RANGE

TRACKING

ERROR RANGE

TARGET ALPHA/

MARKET CYCLE

BETA RANGE

(TARGET)

ACTIVE

SHARE

TRADITIONAL

Large Cap Value R1000 Value 90 – 1201 3% – 6% 200 – 300 bp 73%

Large Cap Core R1000 90 – 1201 3% – 6% 200 – 300 bp 77%

Large Cap Growth R1000 Growth 90 – 1201 3% – 6% 200 – 300 bp 72%

SPECIALTY

Core Dividend R1000 90 – 1201 3% – 6% 200 – 300 bp 77%

Concentrated Core R1000 ~20 n/a 200 – 400 bp 90%

Stable Growth R1000 Growth 40 – 60 3% – 6% 200 – 300 bp 67%

ALTERNATIVE

Large Cap Core Plus R1000 ~100 long/~100 short 5% – 8% 300 – 500 bp 1.0 n/a

Equity Long/Short R1000 ~100 long/~100 short n/a 300 – 500 bp 0.4 to 1.0 (0.7) n/a

Equity Market Neutral T-bills ~100 long/~100 short n/a 400 – 600 bp -0.2 to +0.4 (0.1) n/a


Themes and Sector Highlights

Source: FactSet, as of 12/31/15.

Thoughts on Themes and Overweights

THEMES

Pro

- Free cash flow

- Unit growth

- U.S. sourced earnings

Con

- Bond-like equities

- Sectors requiring

pricing power

EXAMPLE OVERWEIGHTS

Technology - Apple

- Cisco Systems

Financials - Bank of America

- Discover Financial

Health Care - McKesson

- Gilead Sciences

Consumer - Lowe’s

- Target

Industrials - Boeing

- Delta Airlines


Important Disclosures

50

This presentation is for general information purposes only and should not be construed as specific tax or investment advice.

The statements contained in this presentation are the opinions of Nuveen Asset Management, LLC and data available at the time of publication, and is not intended to be

a forecast or guarantee of future events or results. It contains information from third party sources believed to be reliable but are not guaranteed as to accuracy and not

intended to be all inclusive. It does not constitute an offer, solicitation, or recommendation regarding securities or investment strategy and is not intended to predict or

depict performance of any investment. Past performance is no guarantee of future results.

A Word on Risk

Equity investments are subject to market risk, active management risk, and growth stock risk; dividends are not guaranteed. Foreign investments involve additional risks,

including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging

markets. The use of derivatives involves additional risk and transaction costs.

Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, derivatives risk, income risk, and

other investment company risk. As interest rates rise, bond prices fall. Credit risk refers to an issuer’s ability to make interest payments when due. Below investment

grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Foreign investments involve additional risks as noted above.

Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.


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