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MESSAGE FROM THE PRESIDENT TOM L. STRINGFELLOW, CFA®, CFP®, CPA, CIC

President and Chief Investment Officer

The following has been compiled from information and comments provided by the investment professionals of Frost Investment Advisors:

Markets Revalued…

Until today, markets ignored the growing headline concerns about the spread of coronavirus (COVID-19). Against this backdrop, price multiples were still widening, with growth-centric stocks benefitting from passive fund inflows and rising investor enthusiasm. We saw the market take a breather last week, but this morning’s sell-off seems to signal a reversal in the market’s course with the sudden onset of investor pessimism.

Through last week, the major domestic benchmarks, equity and fixed, continued to hold on to their year-to-date gains as corporate earnings ticked positive for the Q4 reporting season. Investors were counting on improving earnings to support the current market multiples (last week equities hit 19 times 2020 S&P 500 earnings), which up to this point have been dependent on central banks, share- buy-backs, an improving economic outlook and investor optimism.

At this writing, markets, investors and obviously the general public are increasingly more nervous over the possible spill-over of COVID-19 into broader populations, and the economic disruption that could bring, as evidenced by the flight to safety into the fixed income and gold markets. In this environment, investors are punishing stocks, especially those that are directly or even theoretically tied to those economies, markets or supply channels most impacted by the virus. This activity has contributed to the sell-off in energy stocks, as crude prices have fallen in anticipation of a drop-off in oil demand.

An uneasy sentiment has carried over in a number of other sectors as well, including materials (slowing growth prospects) and consumer discretionary (fewer cruises, retail sales, etc.). It has also resulted in investors flooding into fixed income assets, pushing yields even lower. It has also furthered the notion that the economy is quickly moving into risk-off territory and that interest rate hikes and inflation concerns are off the table for now. This renewed surge to fixed-income assets has not only pushed U.S. corporate yields to or near historic lows, but it also reflects one of the largest weekly inflows into bond funds historically.

Whether investors are proven correct or incorrect with the move today remains to be seen. Assuming the base case for investor fears is the spread of COVID-19, past history highlights that market sell-offs in the face of past contagions have generally proven to be buying opportunities. The country and population most at risk today is working around the clock to isolate the virus, while the Chinese central bank is pushing liquidity to support the markets and economy with rate cuts, tax cuts, increased government spending and credit easing. The risks posed from the virus are not lost on other global central banks either, including the Fed here. Although last week’s comments from the Fed don’t suggest any near term change in monetary policy, the markets are beginning to price in a rate cut or two before year-end.

From a fundamental, economic perspective, the backdrop is still reasonably positive. We see concerns bubbling up as the ongoing political debate evolves into state-wide primaries, but it is still too early to discern any real economic impact from today’s rhetoric. News from the job markets continues to support a strengthening economy, despite an unexpected decline in the December jobs openings rate (-5.4 percent). This is also still the case with the housing markets, as housing permits rose in January to a new cycle high. Single family permits rose for their ninth consecutive month, with multi-family permits pushing a 5-year high. One more positive supporting the housing market recovery is the move lower in bond yields, which in turn drives mortgage rates and demand.

M A R K E T N E W S & V I E W S W E E K O F F E B R U A R Y 2 4 , 2 0 2 0

M A R K E T C O M M E N T A R Y

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At a macro- level, business sentiment is improving, with the National Federation of Independent Business (NFIB) reporting a stronger than expected outlook from its survey respondents. This outlook was also mirrored in the Fed’s recent Business Leaders Survey (New York, New Jersey and Connecticut), as the survey respondents pushed the headline business activity index to its highest level in six months. Probably most relevant was the six month outlook which was positive in terms of the future business climate. This survey might also help explain February’s New York Empire Manufacturing Index hitting its best level since last May, despite the COVID-19 virus fears, and reflecting strong outlooks for inventory rebuild, shipments and new orders. Also positive was the Philly Fed Business Conditions Index which revisited a high from February of 2017 and reflected improved confidence in new orders and shipments.

Obviously, the market open is a trying time for investors, but market sell-offs (corrections) are part of the narrative. Whether or not this particular occurrence develops into something more lasting remains to be seen, but it does remind investors to be aware of their long-term objectives and not to let emotions sway their decisions.

Today, the U.S. economy is solid, corporate earnings are slowly turning- around, and candidly, the markets are becoming a little more fairly valued (sell-offs). Despite the virus issues overseas, the International Monetary Fund has reiterated its view of a global growth rebound later in 2020, while global governments and central banks are closely watching the developments and stepping in where they can to provide liquidity and, hopefully, calm. We also need to be mindful that, according to a comment from Bespoke Investment Group, “While 2 percent plunges at the open are of course bad news for investors, on average they tend to lead to outperformance versus all periods.” Of course, this time could be different, but as a reminder, investing by the headlines seldom leads to success.

The past week in charts.

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MARKET PERFORMANCE

Key Market Indices Last Chg % Chg 1 Week

Chg 1 Week % Chg

1 Mth % Chg

YTD % Chg

12 Mth % Chg

52 Wk High

52 Wk Low

S&P 500 3,337.75 -35.48 -1.05 -42.41 -1.25 0.51 3.31 20.28 3,393.52 2,722.27 Bloomberg Barclays US Agg 107.77 0.24 0.27 0.52 0.57 1.61 2.47 10.29 107.77 100.44 Bloomberg Barclays Glbl Agg x US 113.29 0.18 0.46 0.46 -0.21 -0.55 -1.00 3.18 115.38 109.49 MSCI AC World Ex US 387.96 -2.22 -0.56 -3.17 -0.77 -0.82 1.04 12.44 394.37 344.69

WHAT WE ARE WATCHING

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About Frost Investment Advisors LLC

Frost Investment Advisors LLC, a wholly owned subsidiary of Frost Bank, one of the oldest and largest Texas-based banking organizations, offers a family of mutual funds to institutional and retail investors. The firm has offered institutional and retail shares since 2008.

Frost Investment Advisors' (FIA) family of funds provides clients with diversification by offering separate funds for equity and fixed income strategies. Registered with the SEC in January 2008, FIA manages more than $4.9 billion in mutual fund assets and provides investment advisory services to institutional, high net-worth clients, Frost Bank and its affiliates. As of December 31, 2019, the firm has over $5.2 billion in assets under management, including the mutual fund assets referenced above.

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This commentary is furnished for informational purposes only and is not investment advice, a solicitation, an offer to buy or sell, or a recommendation of any security to any person. Managers’ opinions, beliefs and/or thoughts are as of the date given and are subject to change without notice. The information presented in this commentary was obtained from sources and data considered to be reliable, but its accuracy and completeness is not guaranteed. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not indicators or guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification strategies do not ensure a profit and cannot protect against losses in a declining market. All indices are unmanaged, and investors cannot invest directly into an index. You should not assume that an investment in the securities or investment strategies identified was or will be profitable.

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