Before the Bell€¦ · sharply as well. The EuroStoxx 5 0 index climbed 2.5 percent in euro terms,...

Notations:

• 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. ____________________________________________________________________________________________________________________________ © 2018 Ameriprise Financial, Inc. All rights reserved. of 13

Before the Bell Morning Market Brief

November 5, 2018

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

MONDAY MORNING MARKET STRATEGY: David M. Joy, Chief Market Strategist After establishing a new closing low for the current downturn last Monday, U.S. equities staged a strong three day rebound, pushing the S&P 500 to a 2.4 percent gain for the week, and back into positive territory for the year, up 1.9 percent. It was the best weekly gain for the index since March and could have been even better if not for a modestly disappointing earnings report from Apple that triggered a tech led selloff on Friday. Beyond the rise in equities there were other signs of a tentative rise in risk appetites last week, including a drop-in volatility. After rising to an intraday high of 27.8 on Monday, the VIX index fell back to 19.5 at week’s end, although that remains elevated relative to its average for the year of 15.7. The yield on the ten-year note surged higher by 13 basis points to close at 3.21 percent, just below its previous cycle high of 3.23 percent on October 5th. The two-year note traced a similar path, rising 12 basis points from the previous week’s close to end the week at 2.92 percent, also a cycle high. And high yield spreads narrowed after widening sharply the previous week. Overseas equity markets rose sharply as well. The EuroStoxx 50 index climbed 2.5 percent in euro terms, the Nikkei jumped 5.0 percent in yen, and the MSCI EM index surged 5.4 percent, including a 3 percent gain the Shanghai Composite index. No doubt some of last week’s rebound came in response to oversold conditions that prompted some bargain hunting. Third quarter earnings continue to exceed expectations as well. Three quarters of S&P 500 companies have now reported, and the expected aggregate growth rate has climbed to 24.9 percent according to Factset. But also contributing to the better tone were reports that UK and EU had reached a tentative agreement on the status of financial services after Brexit, giving a boost to the pound. And talks between Presidents Trump and Xi offered at least a flicker of hope regarding the trade dispute with China, although the White House later in the week downplayed the extent of any progress. And a speech by Xi on Monday of this week contained little hint progress either. The October jobs report showed ongoing strength in the labor market. The economy created 250,000 new non-farm jobs, a strong rebound from the September revised total of 118,000 putting the three-month average gain at a solid 218,000. At the same time, the participation rate climbed to 62.9 percent, leaving the unemployment rate unchanged at 3.7 percent. Year-over-year growth in average hourly earnings rose to 3.1 percent, its highest since April 2009. But the extent of the rise was taken in stride because the modest 0.2 percent monthly increase in October replaced a 0.2 percent decline from last October in the calculation. And earlier in the week the core PCE deflator showed a steady 2.0 percent year-over-year increase in September. Overseas, the economic data was less encouraging, however. Growth in the Eurozone disappointed in the third quarter, in China the pace of manufacturing activity just barely managed to remain above the growth line, and industrial production declined in Japan. This week’s domestic economic calendar includes flash PMIs, ISM services, producer prices, and consumer sentiment. The Fed also meets, although little change is expected. And another roughly 15 percent of S&P 500 companies report earnings.

Before The Bell November 5, 2018 ____________________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________________ © 2018 Ameriprise Financial, Inc. All rights reserved. of 13

All of that will, of course, take a back seat to Tuesday’s midterm elections. Polls and prediction markets suggest that control of the Senate will remain Republican, while Democrats are expected to regain control of the House. But neither of these outcomes are a foregone conclusion, especially given the high degree of interest expressed by registered voters in general and among those considered likely to vote, suggesting a higher than typical turnout for a midterm election. The outcome will have implications for the likelihood of legislation regarding tax policy, healthcare, prescription drug pricing, infrastructure spending, and immigration policy among others. History tells us that the president’s party typically, although not always, loses seats in Congress in the midterm election. Losing seats, however, is not necessarily the same as losing control of one or both houses of Congress. And as we have learned with recent experience, polls are not always accurate predicters of results. The Democrats would need to gain 23 seats out of approximately 75 that are considered competitive to take the House. In the Senate, 35 seats are up for election, including two special elections. Democrats would need to gain two seats to take control, but that is not considered likely. There are also a number of elections at the state level, including 36 governorships, important in part due to the upcoming congressional redistricting following the 2020 census.

MORNING MARKET COMMENTARY: Anthony M. Saglimbene, Global Market Strategist • Quick Take: U.S. futures are pointing to a flat open; Europe is trading mostly in the green; Asia finished lower

overnight; West Texas Intermediate (WTI) oil at $63.15; 10-year U.S. Treasury yield at 3.20%.

• November Seasonality Trends: In October, the average stock lost 7.2%, with the 50 largest U.S. stocks shedding $1.3 trillion of their value in aggregate. According to Bespoke Investment Group, since its peak, Technology lost the most market capitalization last month ($758 billion). Only the Utilities segment has enjoyed a rise in its market cap since September 20th as investors rotated out of cyclical issues and into defensive stocks. In October, the S&P 500 Index went 28 consecutive days without back-to-back gains — the longest streak since December 2015 and tied for the longest of any streak going back to WWII. To say it simply, October was terrible to investors.

• However, the calendar has shifted to November, and the change may offer a better historical lens to view returns and seasonality trends through. In last Friday’s Before The Bell, we highlighted the bull and bear case for stocks going forward, helping paint the fundamental and technical picture we believe could shape returns over the next few months and into 2019.

• From a historical perspective, November tends to be a good month for stocks. As the embedded FactSet charts show, stocks have averaged a 1.4% return in November over the last twenty years. The S&P 500 Index has also finished November positively the last six years. Over the last ten years, the Index has finished lower in November just three times — which includes 2008 and the start of the financial crises.



• Nevertheless, the best November performance has historically happened when stocks are already seeing robust gains and are higher by 10.0% or more coming into the month. According to Bespoke, in the last seventeen prior years that the S&P 500 was higher by 10.0% or more, the Index experienced an average November gain of +2.6% and was positive fifteen of seventeen times. Unfortunately, the worst November performance typically comes when stocks have been up year-to-date but by less than 10.0%. In the last eleven such periods, the S&P 500 declined on average 0.7% in November and was higher less than half the time.

• In our view, October’s correction helped recalibrate expectations and stock prices to the reality of the current environment—which can be healthy for markets longer-term. As Bespoke also pointed out last week, the S&P 500’s total return over the last twelve months is +7.3% following October’s rout, which is below the historical average of 11.8%. Although returns over the last two, five, and ten years are still above the historical average, they are only in the 62nd percentile, according to Bespoke’s data. From our perspective, this tells us that stock returns have not been unreasonable compared to history or the current fundamental conditions on the ground.

• As recent data suggests, the economy and earnings continue to grow at a solid pace. Combined with October’s stock declines, better valuations in November may finally offer the entry point that investors have been waiting for since late spring. While stocks have endured quite a bit of technical damage over recent weeks and are not out of the woods yet, we believe now is the time to start putting your shopping lists together. If you have cash levels that are higher than you are comfortable carrying or allocations need to be rebalanced following a volatile few weeks, we suggest now might be an appropriate time to start squaring those imbalances.

• Asia-Pacific: Equities finished lower on Monday. According to Bloomberg, if there is any breakthrough on trade between the U.S. and China at this month’s G20 summit, it would likely be a temporary truce and not something more substantive. For instance, President Trump and China President Xi Jinping could decide to hold off on the next round of tariffs and put in place a temporary truce while they work through high-level negotiations. Outside of Trump’s political motivations for striking a more conciliatory tone on China, any real breakthrough with Beijing could be difficult without Xi giving some ground on intellectual property rights, tech transfers or the ‘Made in China 2025’ strategy. Nevertheless, Xi criticized the U.S. strategy on trade overnight calling it a “law of the jungle” approach. According to his speech in front of an international import fair, the Chinese President tried to cast himself as a champion of multilateral trade agreements and repeated pledges to open the Chinese economy to foreign investment. In our view, investors should keep their expectations low heading into this month’s G20 meeting between the two countries, as trade tensions between the U.S. and China are unlikely to be resolved quickly. Lastly, Caixin services PMI in China fell to 50.8 in October from 53.1 the previous month. This marks the lowest reading for the economic indicator since September 2017. The new business component fell to its weakest level since November 2008.



• Europe: Markets across the region are trading mostly higher at mid-day. According to the London Times, UK Prime Minister Theresa May has won concessions from the European Union (EU) that would keep all of Britain in a customs union and avoid a hard border on Northern Ireland. As the article points out, May keeps alive the prospects for a Canada-like free trade agreement with an ‘exit clause’ that should signal to Euro-sceptics the UK will not be in the EU customs union forever. Nevertheless, May’s office has dismissed the London Times report as speculation, according to Reuters.

• U.S.: Equity futures are pointing to a flat open this morning. This week, the main market event for investors will be the U.S. mid-term elections on Tuesday. Three scenarios, with varying odds, are all in play heading into the home stretch – a Republican sweep of both Congressional chambers, a Democratic sweep, or a split government. Most polling odds suggest that the Democrats will gain control of the House of Representatives following Tuesday’s results, while the GOP will keep its control of the Senate. A Democratic sweep or even a split government in Washington could stall President Trump’s agenda over the next two years, including fiscal policy. Although markets tend to do well during divided governments, Wall Street may view the lack of clarity on fiscal matters and economic policy as less supportive for asset prices compared to the last two years. Although the chances are small, if the GOP were to keep its control of the House and Senate, Republican agenda items on taxes, regulation, and other fiscal policies could remain intact. Politics aside, we believe markets may be more receptive to a Republican-controlled Congress. Regardless election results, the S&P 500 has always been higher 12 months after the mid-term elections since WWII, with gains generally stronger versus non-voting years. Separately, 75% of S&P 500 companies have reported Q3’18 earnings results, with the blended earnings per share (EPS) growth rate higher by nearly +25% y/y. Although peak earnings have become a growing concern among investors, the strong Q3 results are on pace for the second-best earnings performance for S&P 500 companies since Q3’10. However, as tax tailwinds fade, S&P 500 companies are expected to grow EPS by just +6.0% over the first two quarters of 2019. This is down from +7.0% seen in early October, and much lower than the +25.0% EPS growth experienced in Q1 and Q2 of 2018. Additionally, while companies have been able to shield profits from tariff headwinds and a stronger U.S. dollar this year, that may become more difficult in 2019. If tariffs are seen as a larger threat to profits next year, we believe S&P 500 2019 EPS estimates have room to decline further. Current estimates for full-year 2019 EPS growth stands at +9.2% but is down from +10.1% at the end of September. Lastly, the Federal Reserve is universally seen leaving interest rate policy unchanged on Thursday, while Friday’s preliminary U of M consumer sentiment for October is expected to edge higher.

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WORLD CAPITAL MARKETS 11/5/2018 As of: 8:30 AM ET

Americas % chg. % YTD Value Europe (Intra-day) % chg. %YTD Value Asia/Pacific (Last Night) % chg. %YTD ValueS&P 500 -0.63% 3.45% 2,723.1 DJSTOXX 50 (Europe) 0.29% -5.00% 3,223.8 Nikkei 225 (Japan) -1.55% -2.12% 21,899.0 Dow Jones -0.43% 4.05% 25,270.8 FTSE 100 (U.K.) 0.44% -3.98% 7,125.7 Hang Seng (Hong Kong) -2.08% -10.36% 25,934.4 NASDAQ Composite -1.04% 7.48% 7,357.0 DAX Index (Germany) 0.18% -10.66% 11,540.2 Korea Kospi 100 -0.91% -15.36% 2,076.9 Russell 2000 0.19% 1.82% 1,548.0 CAC 40 (France) 0.19% -1.05% 5,112.0 Singapore STI -1.79% -6.93% 3,060.6 Brazil Bovespa 0.06% 15.80% 88,476.4 FTSE MIB (Italy) -0.42% -11.65% 19,307.9 Shanghai Comp. (China) -0.41% -19.40% 2,665.4 S&P/TSX Comp. (Canada) -0.20% -4.41% 15,119.3 IBEX 35 (Spain) 0.61% -6.93% 9,047.8 Bombay Sensex (India) -0.17% 3.78% 34,950.9 Mexico IPC Closed -6.34% 45,446.8 Russia TI Closed 9.53% 4,254.5 S&P/ASX 200 (Australia) -0.53% 0.42% 5,818.1

Global % chg. % YTD Value Developed International % chg. %YTD Value Emerging International % chg. %YTD ValueMSCI All-Country World Idx 0.10% -2.45% 490.0 MSCI EAFE 0.59% -7.74% 1,837.0 MSCI Emerging Mkts 2.60% -11.90% 996.7 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 Commodities Communication Services -0.82% -5.68% 149.9 Equity Income Indices % chg. % YTD Value Futures & Spot (Intra-day) % chg. % YTD ValueConsumer Discretionary 0.41% 9.86% 854.0 JPM Alerian MLP Index -0.86% -7.97% 25.3 CRB Raw Industrials -0.07% -6.21% 482.5 Consumer Staples -0.27% -0.91% 567.9 FTSE NAREIT Comp. TR -0.89% -1.40% 17,052.7 NYMEX WTI Crude (p/bbl.) -0.22% 4.27% 63.0 Energy -0.11% -3.92% 501.0 DJ US Select Dividend -0.18% 0.49% 1,987.6 ICE Brent Crude (p/bbl.) 0.14% 9.06% 72.9 Financials 0.01% -4.16% 437.9 DJ Global Select Dividend 0.13% -9.37% 225.3 NYMEX Nat Gas (mmBtu) 6.39% 18.32% 3.5 Health Care -0.66% 9.53% 1,033.3 S&P Div. Aristocrats 0.02% 1.84% 2,509.7 Spot Gold (troy oz.) -0.15% -5.51% 1,231.0 Industrials -0.28% -5.13% 596.0 Spot Silver (troy oz.) -0.04% -13.16% 14.7 Materials -0.30% -9.57% 337.6 LME Copper (per ton) 3.55% -12.32% 6,319.0 Real Estate -0.93% -0.46% 197.4 Bond Indices % chg. % YTD Value LME Aluminum (per ton) 0.58% -13.10% 1,960.5 Technology -1.89% 10.22% 1,207.0 Barclays US Agg. Bond -0.37% -2.65% 1,992.1 CBOT Corn (cents p/bushel) -0.20% -3.52% 370.5 Utilities -0.51% 3.65% 269.5 Barclays HY Bond 0.10% 1.11% 1,971.7 CBOT Wheat (cents p/bushe -0.15% 5.39% 508.0

Foreign Exchange (Intra-day % chg. % YTD Value % chg. % YTD Value % chg. % YTD ValueEuro (€/$) -0.17% -5.30% 1.14 Japanese Yen ($/¥) -0.07% -0.52% 113.28 Canadian Dollar ($/C$) 0.09% -4.02% 1.31British Pound (£/$) -0.02% -4.04% 1.30 Australian Dollar (A$/$) -0.04% -7.93% 0.72 Swiss Franc ($/CHF) -0.30% -3.20% 1.01Data/Price Source: Bloomberg. Equity Index data is total return, inclusive of dividends, where applicable.

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 55.1% Overweight +5.0% 60.1% 5) Latin America 1.2% Equalweight - 1.2%

2) Canada 3.0% Underweight - 1.0% 2.0% 6) Asia-Pacific ex Japan 11.8% Equalweight - 11.8%

3) United Kingdom 5.5% Underweight - 1.0% 4.5% 7) Japan 7.6% Underweight - 1.0% 6.6%

4) Europe ex U.K. 14.8% Underweight - 1.0% 13.8% 8) Middle East / Africa 1.0% Underweight - 1.0% -

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 9/26/18. Numbers may not add due to rounding.

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 10.0% Equalweight - 10.0% 6) Health Care 15.0% Equalweight - 15.0%

2) Consumer Discretionary 10.3% Overweight +2.0% 12.3% 7) Industrials 9.7% Overweight +2.0% 11.7%

3) Consumer Staples 6.7% Underweight - 3.2% 3.5% 8) Information Technology 20.9% Equalweight - 20.9%

4) Energy 6.0% Overweight +2.0% 8.0% 9) Materials 2.5% Equalweight - 2.5%

5) Financials 13.5% Equalweight - 13.5% 10) Real Estate 2.6% Equalweight - 2.6%

11) Utilities 2.8% Underweight - 2.8% 0.0%

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 9/26/18. Numbers may not add due to rounding.



THE WEEK AHEAD: Russell T. Price, CFA • The Q3 reporting season. Forward estimates finally seeing negative adjustments. • Corporate America has been reporting very strong financial results for the just completed third quarter with sales

and earnings each out-performing estimates by a wider than normal range. Aggregate guidance for the quarters ahead, however, is finally starting to reflect growing headwinds – mostly due to ongoing trade tensions, in our view.

• Through Friday, 379, or 75%, of the S&P 500’s constituent 505 companies had reported their Q3 results. According to FactSet, earnings per share (EPS) for the group are now expected to post year-over-year (yr/yr) growth of +24.8%. Sales per share are now seen as growing by 9.0% yr/yr. Both numbers are considerably better than where estimates stood at the close of the quarter (+19% yr/yr EPS growth was forecasts on September 30th). A strong 78% of companies have reported better than expected EPS growth and 61% have reported better than expected sales growth.

• Despite the good Q3 results, the various headwinds we have talked about over recent weeks: trade tensions, tariffs, a stronger dollar, weaker international growth and rising costs, are all starting to have a more pronounced negative influence on analyst expectations for the quarters ahead. 2019 Full-year EPS have fallen by $1.45 over the last few weeks and now reflect growth of 8.8% versus +9.5% at quarter’s end.

• The chart at right is sourced from American Enterprise Investment Services, Inc. based on date provided by FactSet.

• The economic calendar, meanwhile, is steady this week. On Monday, the Institute of Supply Management (ISM) releases its Non-Manufacturing Index for the month of October, providing investors with a snap-shot of service-sector health. The Index is expected to show another month of strong month-over-month expansion, but the pace of expansion is likely to slow. Forecaster’s as surveyed by Bloomberg expect the Index to drop to 59.5 from the very strong 61.6 reported for September. In fact, the September reading was the strongest reading in more than 20 years for the Index and the second strongest in the report’s history dating back to mid-1997.

• On Tuesday, the Labor Department will release more data on the job market via its Job Openings and Labor Turnover report. The is no question that the job market is exceptionally strong. There were a record number of Job openings in August, according to the report, and it would be little surprise to see another record in this week’s release for the month of September. Given this backdrop, the JOLTs report has largely become a study of labor shortages. Forecasters will also be looking to the report’s “quits rate” as it often indicates some guidance on wage growth.

• On Thursday, the Federal Reserve will release its latest decision on interest rates. No change in monetary policy is expected at this week’s meeting (and there is no press conference scheduled for afterward) but investors will closely monitor the language used in the statement for any changes. Officials are very widely expected to hike rates at their meeting in December, but there are growing calls for the Fed to pause after the December move to re-evaluated conditions in light of interest rate hikes already instituted and the potential for trade disruptions to slow the economy. In its last set of projections, officials indicated a view that three further hikes of a quarter of a percent were seen as prudent in 2019, which would leave the fed funds rate at approximately 3.1%. Officials also indicated via their September projection materials that a terminal fed funds rate as likely. Market consensus seems to be turning against this outlook as potentially too aggressive – a view that we agree with. With only modest



evidence that the inflation pressures seen in certain categories are actually making it down to core consumer inflation pressures, combined with signs of slower growth and rising headwinds, we believe the greatest risks are to the growth side of the equation over the intermediate-term.

Where Markets 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.

November 5 6 7 8 9ISM Services Index Job Openings Report Consumer Credit Initial Jobless C laims Producer Price Index

Home Building - Canada Retail Sales - Euro Zone FOMC Monetary Policy Wholesale Inventories

Industrial Production - Germany Inflation - China U of M Cons. Sentiment

Machinery Orders - Japan Inflation - Mexico GDP - U.K.

Trade - China Industrial Production - Spain Industrial Production - France

Manufacturing Activity - Canada Industrial Production - Mexico

Inflation - Brazil



Consensus Earnings Estimates: Source: FactSet

ECONOMIC NEWS OUT TODAY: Economic Releases for Monday, November 5, 2018. All times Eastern. Consensus estimates via Bloomberg. Time Period Release Consensus Est. Actual Prior Revised to 10:00 AM OCT ISM Non-Manufacturing Index 59.5 61.2

FIXED INCOME NEWS & VIEWS: Brian M. Erickson, CFA, Fixed Income Research & Strategy

Wage Growth and Stock Rally Enable Result in a 3.21% 10-year Close Friday • Treasury yields end Friday higher on a week over week basis (see chart below left) with a modest steepening (see

chart below right) following a 3.1% year over year rise in October average hourly earnings and continued strong 250k increase in nonfarm payrolls released on Friday. Growth in the economy led to 2 million new jobs through October, further tightening labor markets and supporting somewhat higher wages.

• Treasury markets responded by selling off across the curve, sending yields six to eight basis points higher across the curve Friday. For the week, 2-year Treasury yields rose nine basis points to 2.90%, and 10-year Treasury yields rose 13 basis points to 3.21% reaching for the year to date high of 3.23% set on October 5. We see the sharp rise in Treasury yields as a broad retreat of safe-haven buyers as the President Trump suggests he may be in a deal making mood on trade ahead of the November elections, and from labor market strength.

• This morning, U.S. equity markets point to a lower open supporting a modest bid for Treasuries once again. Ten-year Treasury yields inched lower to 3.19% ahead of the open to U.S. equity markets

Source: Bloomberg

S&P 500 Earnings Estimates 2013 2014 2015 201911/5/2018 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Est. Est. Est.

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

Quarterly $$ amount $27.10 $29.63 $31.42 $31.32 $30.87 $32.80 $33.54 $36.29 $38.71 $41.03 $42.44 $41.89 change over last week $0.72 -$0.41 yr/yr -5.2% -1.3% 3.8% 7.1% 13.9% 10.7% 6.7% 15.9% 25.4% 25.1% 26.5% 15.4% qtr/qtr -8% 9% 6% 0% -1% 6% 2% 8% 7% 6% 3% -1%

Trailing 4 quarters $$ $111.41 $119.02 $118.67 $116.57 $116.24 $117.49 $119.64 $123.25 $126.42 $128.53 $133.50 $141.34 $149.57 $158.47 $164.07 $177.21 yr/yr 5.8% 6.8% -0.3% 0.5% 11.6% 22.9% 8.0%Implied P/E based on a S&P 500 level of: 2733 19.3 18.3 17.2 16.7 15.4

20182016 2017

0

5

10

15

20

2yr 3yr 5yr 7yr 10yr 30yr

U.S. Treasury Yield Change (As of Yesterday's Close, in basis points)

1-Day 1-Week0.5%

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

11/2/2018

10/26/2018

12/29/2017



Inflation expectations – Break-evens diverge from Treasuries • Though it would be easy to frame up the rise in Treasury yields over the past week as pricing in a quickening pace of

inflation, this is not apparently the case. TIPs break evens, which reflect the markets expectation for Consumer Price Inflation (CPI), remain at the lowest levels in 6 months, and near the lows for the year. This suggests that the rise in Treasury yields over the past week were a rise in real yield compensation as flight to quality buyers retreated.

• We see the potential divergence as noteworthy in that the further Fed hikes over the next year are likely anchored in expectations that inflation will persist above 2%. If they do not, or if bond market expectations signal that they may not persist at higher levels, then the Fed may need to heed the signal and slow the pace of increases. We fall on the other end of the spectrum, viewing inflation as present at the margin, and at risk of further increase. We attribute this to continued tightening in labor markets and the potential for trade tariffs tensions to persist conveying a potentially higher level of costs.

• Our conclusion is that bond investors are largely pricing in a faster pace of Fed hikes and a potentially higher trajectory for Treasury yields, without a substantial follow-through from inflation. Though this is certainly possible, especially given the pragmatic tone from recent Fed member comments, we believe bond markets are underweighting inflation potential in the economy from further growth, tight labor market conditions, and tariff-led inflation as well. We indicated a short TIPs position may be a could positioning on Wednesday last week and still see merit in the approach for the short-run.

Source: Bloomberg

The Week Ahead – Fed and Treasury Issuance • Fed ahead meeting Wednesday: The Fed is scheduled to hold its seventh Federal Open Market Committee (FOMC)

policy meeting of the year Wednesday. We anticipate the Fed holds steady with a 2.00% to 2.25% target range for Fed Funds and continues its slow $50 billion balance sheet unwind each month. Fed Future still suggest a 15% chance of a quarter point hike Wednesday and a 70% chance of a hike at the December 19 meeting, based on Bloomberg calculations. With bond markets anticipating an active approach to Fed hikes going forward we will key in on any further changes to the policy statement and reserve much of the tea leaf reading to the release of meeting minutes on November 29. The Fed meeting wrapping up on Wednesday afternoon is expected to be the last FOMC meeting without a press conference with Chairman Powell based on his decision to add a press conference following each FOMC meeting in 2019. In addition, the December meeting

• We discussed growing Treasury issuance quite a bit in our commentary. This week, Treasury is scheduled to issue $37 billion 3-year notes today, $27 billion 10-year notes on Tuesday, and $19 billion 30-year bonds on Wednesday on top of a wave of T-bill issuance as well. Treasury markets have been receptive of higher issuance levels this year, but the torrent pace remains notable, as Treasury supply demand remain high for the foreseeable future.

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1.50

1.75

2.00

2.25

Treasury Inflation Protected Securities (TIPS) Breakeven rate vs. Inflation (%)

5-yr TIPs Breakeven 10-yr TIPs Breakeven

0.0%

1.0%

2.0%

3.0%

Inflation - Core CPI vs. Core PCE

Core PCE Core CPI



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 – Sr. Research Analyst

Energy/Utilities Justin H. Burgin – Vice President

Financial Services/REITs Lori A. Wilking-Przekop – Senior Director

Health Care Justin H. Burgin – Vice President

Industrials/Materials Frederick M. Schultz – Sr. Research Analyst

Technology/Telecommunication Curtis R. Trimble – Sr. Research Analyst Quantitative Strategies/International Andrew R. Heaney, CFA

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

Thomas Crandall, CFA, CAIA – Sr. Quantitative Analyst, Asset Allocation

Open – Research Analyst - Quantitative, Asset Allocation

Gaurav Sawhney – Research Analyst

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

Michael V. Jastrow, CFA – Vice President

Jeffrey R. Lindell, CFA – Sr. Research Analyst – ETFs & CEFs

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

Benjamin L. Becker, CFA – Sr. Research Analyst – International/Global Equity

Open – Research Analyst – Core Equity

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

Steven T. Pope, CFA, CFP® – Sr. Research Analyst – Non-Core Fixed Income

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

Blake Hockert – Research 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 – Senior Director

Stephen Tufo – Sr. 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. Due Diligence Manager

James P. Johnson, CFA, CFP® – Due Diligence Manager

David Hauge, CFA – Due Diligence Manager

Bishnu Dhar – Sr. Research Analyst



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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

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highlights. SEC filings may be viewed at sec.gov 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

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Before the Bell€¦ · sharply as well. The EuroStoxx 5 0 index climbed 2.5 percent in euro terms,...

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Transcript of Before the Bell€¦ · sharply as well. The EuroStoxx 5 0 index climbed 2.5 percent in euro terms,...