Financial Markets Update – First Quarter 2017...Financial Markets Update – First Quarter 2017 1 Summary and Outlook Domestic equity markets continued their upward climb during

Financial Markets Update – First Quarter 2017

1

Summary and OutlookDomestic equity markets continued their upward climb during the first quarter of 2017, even as political risks intensified both here andabroad. From November 9th to the end of March, the S&P 500 appreciated more than 11% despite a more hawkish Federal Reserve,missteps by the new administration in Washington, and continued nationalistic and populist fervor across much of the world.

The stock market rally since election day has largely been driven by investor anticipation of the Trump administration's economicagenda. Legislative progress on White House proposals has been limited at best, however, given disunity between CongressionalRepublican factions and the party’s unwillingness to negotiate with Democrats. Normally, corporations and the equity markets wouldabhor such uncertainty, causing stock prices to retreat. Instead, in today’s markets, investors seem to be willing to give the benefit ofthe doubt to the White House and to the Republican controlled Congress, believing that eventually compromise will result in success.Dialed back economic prospects did stall equity prices during March, and economic sector leadership became more defensive.Financials which benefit from a stronger economy and higher interest rates retreated. Small and mid-cap stocks which are moresensitive to economic factors declined. It seems likely that investors will need higher confidence regarding the path to tax reform,infrastructure spending, and other economically simulative executive branch agenda items before rallying higher and rotating back tothose economic sectors which are likely to benefit.

The Federal Reserve Board anticipated an acceleration in economic growth when it raised the Fed Funds rate in December andwhen it did so again in March. The Fed clearly indicated that it would likely continue tightening and might soon start shrinking itsbloated balance sheet which had been used to support the economy. The fixed income market had also anticipated economicimprovement, as prices fell sharply following the election, but bond prices were basically unchanged during the first quarter as theeconomic outlook moderated. More recently during April, bond prices have risen, reflecting new concerns over economic growth.While forward looking indications of economic sentiment (“soft” data) have remained strong, actual calculations of economic change(“hard” data) have weakened, such as recently disappointing retail sales.

Compounding investor concerns, geopolitical risks have recently intensified, particularly with respect to U.S. interaction with Russia,Syria, China and in particular North Korea. Further, Europe is bracing for the April/May/June elections in France, and Septemberelections in Germany. The results may determine the future of the European Union, and will certainly influence the direction of itsfinancial markets.

More than ever, positioning portfolios in this increasingly uncertain environment requires sensitivity to client-specific issues, includingtime horizon, liquidity needs, and tolerance to drawdowns. Cash was raised by selling stocks during March, although more recentlyportfolio equity exposures have been increased as the Trump administration finally appears to be making some progress negotiatingwith Congress. Additionally, Japan and German equities has been selectively introduced. Holdings in REITs and MLPs have beenmaintained. Fixed income portfolios have favored preferred stocks, short-term high-yield securities, and corporate bonds.

645 Madison Avenue, 8th Floor, New York, NY 10022 (212) 582-4500www.solarisgroupllc.com


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6

12

18

24

30

2100

2150

2200

2250

2300

2350

2400

2450

12/30/16 1/5/17 1/11/17 1/17/17 1/23/17 1/29/17 2/4/17 2/10/17 2/16/17 2/22/17 2/28/17 3/6/17 3/12/17 3/18/17 3/24/17 3/30/17

S&

P V

ola

tility In

de

x (V

IX)

S&

P 5

00

In

de

x

S&P VIX

March 2nd:Snap Inc. makes market debut

January 20th:Donald Trump takes oath of office

Febrauary 3rd:U.S. exceeds expectations,

adds 227,000 jobs

March 21st:Market pulls back as confidence in

the President's agenda begin to waiver

February 9th:Trump signals new plan

to lower taxes

March 15th:Fed raises rates; two additional

rate hikes expected in 2017

January 25th:Dow tops 20,000 for first time

Anticipation of Trump Economic Growth Initiatives Continued During the First Quarter of 2017, with the U.S. Stock Market (blue line) Gaining +6.1% and Price Volatility (red line) Remaining Low

Source: Bloomberg, WSJ.com.

645 Madison Avenue, 8th Floor, New York, NY 10022 (212) 582-4500www.solarisgroupllc.com


3

Global Stock Market Valuations Compared to 10-Year Averages: Emerging Market Opportunities?

U.S. Economic Sector Stock Valuations Compared to 10-Year Averages: Selective Opportunities and Risks

Source: Bloomberg. Price to earnings is price divided by Bloomberg consensus forward 12 month earnings estimate

Source: Bloomberg. Price to earnings is price divided by Bloomberg consensus forward 12month earnings estimate

2x

4x

6x

8x

10x

12x

14x

16x

18x

20x

22x

MSCI ACWorld

MSCIEAFE

MSCI EM US Canada UK Germany France Japan Russia China Brazil India Korea

Current P/E 10 Yr Avg

MSCI AC World = 16.6

4x

8x

12x

16x

20x

24x

28x

32x

S&P 500 Financials Technology Health Care Industrials Energy Cons. Discr. Cons.Staples

Telecom Utilities Materials

Current P/E 10 Yr Avg

S&P 500 = 18.3


4

US Dollar vs. Mexican Peso (Inverted)Source: Bloomberg

Copper to Gold Ratio

Source: Bloomberg

Source: BloombergSource: Bloomberg

Large Cap Stocks vs. Small Cap Stocks Consumer Cyclicals vs. Banks

Security Price Indicators of the “Trump Trade” Beginning to Unwind: Stalling Markets and Weaker Dollar

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00S&P 500

Russell 2000

Pre-Election

-10.00

0.00

10.00

20.00

30.00

40.00Consumer Cyclicals

Banks

Pre-Election

18

19

20

21

22

Pre-Election

0.15

0.16

0.17

0.18

0.19

0.2

0.21

0.22

0.23

0.24

0.25

Pre-Election

Note: Total Return (%) Note: Total Return (%)


5

U.S. Corporate Operating Earnings for are Forecast to Dramatically Accelerate

Corporate Profitability is Turning Modestly Higher

Source: Bloomberg

Source: S&P Dow Jones Indices

Source: S&P Dow Jones Indices

Companies Allocating More Income for Internal Use

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Estimates

0%

20%

40%

60%

80%

100%

120%

140%

1Q 10 1Q 11 1Q 12 1Q 13 1Q 14 1Q 15 1Q 16

100%

7%

8%

9%

10%

11%

12%

13%

14%

15%


6

-1.5

-1

-0.5

0

0.5

1

1.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Economic Data: Spread Between Soft Projections vs. Actual Hard Data is the Greatest in Years

Source: Bloomberg

20

45

70

95

120

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Mar

-16

Sep-

16

Mar

-17

U.S. Consumer Confidence Gaining Strength

Source: Bloomberg

U.S. Consumer Spending is Strong But Exports Are Weak

Source: Federal Reserve, Bloomberg

Note: Data represents the spread between the Bloomberg indices of “soft data” (business and consumer surveys) and “hard data” (housing, industrial, labor, household and retail data).

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

US Real PCE % Change YoY (LHS) US Exports: Real $ Goods % change YoY (RHS)


7

U.S. Stock Returns Relative to European Equity Returns: Pending Opportunity

Sources: Bloomberg; Morgan Stanley.

The Value of the Dollar is High, Making U.S. Exports Expensive, and May Appreciate Further

Source: BIS

90

100

110

120

130

140

150

'73 '75 '77 '79 '81 '83 '85 '87 '88 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17

Note: Adjusted for inflation

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

'73 '75 '77 '79 '81 '83 '85 '87 '88 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17

-1 Std. Dev.

Average

+1 Std. Dev.

+2 Std. Dev.

+3 Std. Dev.


8

Source: Bloomberg

European Central Bank Bond Buying Program

French Election Odds and European Stock Market Volatility

Source: Oddschecker Betting Odds; Bloomberg

0

200

400

600

800

1000

1200

1400

1600

Mar-15 June-15 Sep-15 Dec-15 Mar-16 June-16 Sep-16 Dec-16 Mar-17

Cum

ulat

ive

Ano

unt P

urch

ased

(EU

R b

illio

ns)

10

12

14

16

18

20

22

24

0

10

20

30

40

50

60

70

80

1/20 1/24 1/28 2/1 2/5 2/9 2/13 2/17 2/21 2/25 3/1 3/5 3/9 3/13 3/17 3/21 3/25 3/29 4/2 4/6 4/10

Vol

atili

ty (%

)

Fren

ch E

lect

ion

Odd

s (%

)

Le Pen Win Probability Macron Win Probability EuroSTOXX 50 Volatility Index (RHS)

Nonperforming Bank Loans as a Percentage of Total Gross Loans: Risks in the European Union

47.0%

37.0%

18.0%

12.2%9.0%

6.1%3.9% 3.5% 3.3% 2.5% 3.9%

1.5%5.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Source: The World Bank. Data as of 12/31/2016.


9

‐2.00%

‐1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

3 month 2 year 5 year 7 year 10 year 30 year

Yield %

US 1Q17 vs. 1Q16 US United Kingdom Italy Germany Japan

Global Sovereign Bond Yields at Various Maturities: U.S. Bonds Yields Remain Relatively Attractive

Source: Bloomberg

Yields on Investment Grade Corporate Bonds and High Yield Bonds, Relative to U.S. Treasury Bonds

0

200

400

600

800

1000

Mar‐12 Mar‐13 Mar‐14 Mar‐15 Mar‐16 Mar‐17

bps

HY Spread IG Spread Median HY Spread Median IG Spread

Source: Bloomberg

10-Year Treasury Inflation-Protected Securities (TIPS) Remain Below the Forecast for 2017 Consumer Inflation

Source: Federal Reserve, BloombergNote: Breakeven inflation is the difference between the nominal yield of a fixed-rate investment and the real yield (fixed spread) on an inflation-linked investment of similar maturity and credit quality

-0.5%

0.5%

1.5%

2.5%

3.5%

2003 2005 2007 2009 2011 2013 2015 2017

Consensus Forecast: 2017 CPI


10

U.S. Energy Rig Use has Expanded, and Crude Oil Inventories Have Risen

Source: Bloomberg, Baker Hughes, U.S. Department of Energy.

World Oil Market: Supply Modestly Above Demand Has Softened Prices

Source: International Energy Agency

* OPEC output assumed steady as 32.7mb/d and Iranian production expected to reach 600/kb/d by end of year 2017

200

400

600

800

1000

1200

1400

1600

1800

2000

300

350

400

450

500

550

600

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

Num

ber o

f Oil

Rig

s (U

S)

Cru

de O

il In

vent

ory

(MM

Bar

rels

)

Crude Inventory (LHS) Rig Count (RHS)

30

40

50

60

70

80

90

100

110

120

90

92

94

96

98

100

Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17

Pric

e of

Oil

Mill

ion

Bar

rels

Per

Day

Supply* (LHS) Demand (LHS) Price of Oil** (RHS)

IEA Forecast


11

Source: The World Bank. Data as of 12/31/2015.

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%Exports by Country as a Percentage of GDP

0

50

100

150

200

250

300

350

400

450

Impo

rts/

Expo

rts

(Bill

ion

$)

Imports Exports

United States Trade Partners: Abundance of Deficits

Source: United States Census Bureau


12

Shanghai (China) Stock Market Prices Have Stabilized as the Rate of Economic Growth May Have Bottomed

Source: Bloomberg

China Foreign Exchange ReservesChinese Yuan: Onshore vs. Offshore

Source: Bloomberg Source: Bloomberg

2000

2500

3000

3500

4000

4500

5000

5500

$‐

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

FX Reserves (Trillio

n $)

6

6.2

6.4

6.6

6.8

7

Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17

Yuan

per

Dol

lar

CNY (Onshore) CNH (Offshore)

Important Disclosures

13

Solaris Asset Management, LLC (“SAM”) is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940. SAM is a wholly owned subsidiary of The Solaris Group, LLC.

This report and the proprietary work product of Solaris is being provided on a confidential basis for informational purposes only, solely forthose persons to whom it is transmitted. Solaris believes that the information contained in this report is accurate and complete, but it makesno representation as to its accuracy or completeness, and it should not be relied on as such. This information is provided 'as is' and the userassumes the entire risk of any use it may make or permit to be made of this information. Neither Solaris nor any of its affiliates or any otherperson or entity involved in compiling, computing, creating, reporting or providing this information makes any express or implied warrantiesor representations, and they expressly disclaim all warranties including, without limitation, all warranties of originality, accuracy,completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose. Without limiting any of the foregoing, in noevent shall Solaris have any liability for any direct, indirect, special, incidental, punitive, consequential or any other damages (including,without limitation, lost profits) even if notified of, or if it might otherwise have anticipated the possibility of such damages.

The views expressed in this report represent the opinions of Solaris Asset Management, are based on information the firm considers to bereliable, and are subject to change without notice. There is no guarantee that the forecasts and opinions expressed in this report will berealized. The statistical data is obtained from Bloomberg, WSJ.com, Russell, Credit Suisse Hedge Fund Indices, Morningstar, National Bureauof Statistics of China, Barclays, MSCI, Schwab, Federal Reserve Bank of New York, Bureau of Labor Statistics, U.S. Energy and InformationAdministration, Bureau of Economic Analysis, U.S. Energy Information Administration, Oxford Economics Ltd., EuroStat, Standard & Poor's,Chicago Board Options Exchange, Dow Jones – UBS, Financial Times of London Stock Exchange, S & P Dow Jones, JPMorgan, Oppenheimer,U.S. Census Bureau, International Monetary Fund, Bank of Japan, European Central Bank, and JPMorgan Asset Management, sourcesbelieved to be trustworthy, but accuracy cannot be assured. The global capital markets are represented by index returns. Sources includeRussell (U.S. equity markets); Barclays Aggregate (fixed income bond markets); and Morgan Stanley (EAFE and Emerging Markets). Theperformance of the global capital markets does not represent the current or future performance of The Solaris Group entities which cansubstantially differ from the performance of those markets.

Index returns are derived principally from market indices on Bloomberg and other third party proprietary databases such as Morningstar,HFRI and CS Tremont, sources that are believed to be reliable and trustworthy but the accuracy of which cannot be assured. The followingfour broad-based indices are examples of indices used in this report to reflect various market performances and for comparative purposesonly and have been selected as they are well known and may be easily recognizable by investors. The Russell Index includes all U.S equitiesand is weighted by market value, and its performance is thought to be representative of the U.S. stock market as a whole. The BarclaysAggregate Bond Index comprises government securities, mortgage-backed securities, asset-backed securities and corporate securities, andis a broad measure of the taxable, investment grade U.S. bond market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada. Itcomprises 21 MSCI country indexes. With respect to these and other indices used in this report, a complete description of each benchmark isavailable upon request. Please note that these indices are comprised of securities which for the most part are dissimilar to the positions helddirectly or indirectly by managers or funds, and these indices do not have similar risk/return profiles to them. Additionally, index returnshave no investment management fees. Most market indices such as the Russell and Barclays Aggregate are unmanaged and cannot beinvested in directly.

Past Performance is No Guarantee of Future Results

Documents

Financial Markets Update – First Quarter 2017...Financial Markets Update – First Quarter 2017 1 Summary and Outlook Domestic equity markets continued their upward climb during