Quarterly Investment Briefing May 8, 2014

1. QuarterlyInvestment BriefingMay 8, 2014 Clayton T. Bill, CFA Stephen J. Nilles, CFP

2. Agenda Source: Russell

3. Capital Market Returns Period Ending March 31, 2014 Source: Russell 3

4. As a Round-Trip, Current Bull Returns Not Overextended The U.S. stock rally has outlasted the historical average of other bull markets, with higher returns. However, the preceding bear market was much steeper than average, and round-trip gains are currently near the median and below the average. Previous bulls that survived to a sixth year posted much larger gains. Source: Fidelity 4

5. Valuation Has Become A Mixed Picture Source: J.P. Morgan 5

6. Corporate Profits And Leverage Equities 6 Source: J.P. Morgan

7. Falling compensation and interest expense more than account for the 4.7% increase in margins since 4Q’08…but where do we go from here? Equities 7 Source: J.P. Morgan

8. Economy and Financial Markets Mixed Signals Positive Momentum… • U.S. inflation • Interest rates • U.S. headline unemployment rate • Federal deficit • Productivity • Business lending and loan demand Negative Factors • Low money velocity • Narrower-than-average spreads • U.S. labor force participation rate • Federal debt • Low corporate capital spending • Mortgage lending 8

9. Fed Taper: Slower Global Liquidity Growth, Flatter Curve The Federal Reserve (Fed) began tapering its quantitative easing program, which contributed to the trend of slowing global liquidity growth, however, central banks in Japan and Europe remain inclined toward additional easing. Despite a modest rise in short-term rates and a drop in long-term rates, the yield curve for Treasury bonds has remained historically steep. 9 Source: Fidelity

10. Prolonged Economic Cycle May Extend Length of Rally Economic expansion during the current bull market has been more muted than in previous rallies, and the slow pace of growth has likely extended the current business cycle. With the economy firmly in mid-cycle expansion, this part of the cycle may last longer than usual, potentially providing fundamental support for the stock market run to outlast historical averages. 10 Source: Fidelity

11. International Equities: The Case for Diversification A portfolio consisting of 70% U.S. and 30% international equities has provided higher returns, lower volatility, and higher risk-adjusted returns than the S&P 500 over the long run. Correlations between U.S. and international equities have trended back downward toward pre-recession levels, signaling increased diversification benefits from a diversified global portfolio. Source: Fidelity 12

12. High-Quality Bonds Provide Diversification Benefits Bond correlations with stocks remain negative on a rolling 24-month basis, suggesting that bonds continue to provide important portfolio diversification benefits, especially when equity volatility rises. Equity-to-bond correlations have historically tended to be lower during times of low and stable inflation, which is consistent with our medium-term outlook. Source: Fidelity 11

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