Before the Bell · 18.02.2020 · Asia-Pacific: Asian equities finished lower on Tuesday. On...

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recommendation of any securities mentioned. Charts depicted are from FactSet unless otherwise noted. ____________________________________________________________________________________________________________________________ © 2020 Ameriprise Financial, Inc. All rights reserved. of 12

Before the Bell Morning Market Brief

February 18, 2020

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

MONDAY MORNING MARKET STRATEGY: David M. Joy, Chief Market Strategist Abiding faith in the transitory nature and economic impact of the coronavirus continues to push global equity averages higher. The MSCI All Country World Index climbed 1.1 percent last week, bringing its year-to-gate gain to 2.3 percent, but more tellingly, it has risen 3.8 percent in the first two weeks of February despite the continued spread of the virus. The S&P 500 climbed 1.6 percent last week, bring its year-to-date gain to 4.6 percent, with 4.8 percent of that coming in February. It has been a similar story in Europe, despite abysmal fourth quarter economic data, especially industrial production and overall GDP. Even in China, the Shenzhen Composite index is higher by 14.1 percent since reopening on February 4th following the Lunar New Year holiday, while the Shanghai Composite is higher by 8.6 percent. Crude oil also rose last week, along with copper. Bond yields, in contrast, were unimpressed, as the yield on the ten-year treasury was unchanged at 1.58 percent.

And while U.S. markets were closed this Monday for the Washington’s Birthday holiday, global exchanges were once again generally positive, helped by newly announced stimulus measures in China. There were a few notable exceptions, however, including Japan which reported a 6.3 percent fourth quarter contraction in GDP, in large measure due to a consumption tax hike.

There are now a total of 72,000 confirmed cases of infection from the coronavirus, and 1,868 deaths. By comparison, two weeks ago, as China tentatively began to get back to work following the Lunar New Year holiday, the number of confirmed cases was 17,000 and 361 deaths. However, China reported that the number of new cases fell below 2,000 overnight for the first time since January, offering some hope that the number of infections is peaking.

The extent of the economic damage caused by the virus remains unclear. According to Bloomberg, consensus estimates for first quarter Chinese GDP average 4.0 percent, although estimates range between 1.4-6.0 percent. If 4.0 is the ultimate result, it would be the slowest growth rate in 30 years. G-20 finance ministers and central bank governors will meet this weekend in Riyadh, at which IMF managing Director Georgieva has indicated she hopes to have more data to share regarding the economic impact of the virus, especially on manufacturing, but stressed the uncertain nature of the situation, along with her desire for a coordinated G20 fiscal and monetary response, to insulate the global economy from “a more serious shock”.

This Friday will see the release of Markit’s flash manufacturing and service PMI indices, which should provide some telling insight into the virus’ impact on the U.S., Japan, UK and Eurozone, especially Germany. The Markit methodology is designed to provide insight from the middle of the month, so Friday’s release will cover activity from mid-January through mid-February, a period of time mostly impacted by the virus. The ISM U.S. manufacturing and service reports are designed to capture activity for a full month, although survey response dates vary. The next reports from the ISM

Before The Bell February 18, 2020 ____________________________________________________________________________________________________________________________

____________________________________________________________________________________________________________________________ © 2020 Ameriprise Financial, Inc. All rights reserved. of 12

for February, a month most assuredly impacted in its entirety by the virus, are scheduled for release on March 2nd. and March 4th.The JP Morgan February Global Manufacturing PMI report, also designed to capture activity for the full month, is scheduled for release on March 2nd.

MORNING MARKET COMMENTARY: Anthony M. Saglimbene, Global Market Strategist Quick Take: U.S. futures are pointing to a lower open; European markets are trading mostly in the red; Asia

ended lower overnight; West Texas Intermediate (WTI) oil trading at $51.26; 10-year U.S. Treasury yield up to 1.55%.

Stocks Clip Higher, That Is, Until Friday Roles Around: The S&P 500 Index is up over +4.5% this year on a price-only basis, while the NASDAQ Composite has gained +8.5% in 2020. Last week, we lamented (in a small way), markets appear complacent regarding the potential for slower-than-expected growth in the first quarter. Coronavirus impacts, while concentrated in Aisa and Europe thus far, are likely to also spillover into Q1’20 U.S. corporate profits the longer the virus hinders manufacturing activity overseas. Look no further than Apple’s first quarter profit warning on Monday.

However, below the markets’ surface, we see trading behavior that suggests investors have not completely ignored Covid-19 headlines. As the first chart below shows (sourced from Bespoke Investment Group data), the S&P 500 has seen its strongest median return on Mondays this year, following its worst performance day of the week on Fridays. Clearly, traders are less willing to stay long heading into a weekend this year, and considering the still uncertain contagion factors around a spreading virus.

In our view, the degree of difference between the S&P 500’s performance on Friday versus Monday is a rather telling indication of the current impact of the virus on markets. In the absence of hard data that can provide a clearer picture of the economic/profit impact of the virus, its mounting infection rate continues to be the key metric traders watch. Thus, traders lighten their stock holdings going into the weekend, expecting the infection count to rise. Yet, when Monday rolls around, and headlines show the virus is still mostly contained in China, traders hit the ‘buy button’ and resume the market's upward trend. As hard data starts to come in, however, we may see this trend start to change.

This trading dynamic has also rolled into the number of S&P 500 up days versus down days in 2020, as the second chart below illustrates (also sourced from Bespoke data). So far this year, Friday has produced the weakest number of positive finishes and heading into a large change in direction the following Monday. Particularly after the very strong stock performance on Wednesday and Thursday, the weaker Friday results standout, and in our view, are mostly due to coronavirus concerns.

0.70

0.01

0.34 0.33

-0.54

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

Monday Tuesday Wednesday Thursday Friday

S&P 500 Median % Change by Weekday: 2020

% Change



Interestingly, Monday was the worst trading day of the week between 1952 and 1989 (up just 44% of the time), according to the Stock Trader’s Almanac. But since the bottom of the financial crisis in 2009, Tuesday has produced the best S&P 500 daily results. Importantly, it is very common for traders to reduce risk heading into a weekend, particularly during events and crises when the impact is difficult to predict or discount. While we remain concerned investors are setting themselves up for some disappointment on the Q1 growth front, we take some comfort the market isn’t completely ignoring the virus headlines.

Coming off a long holiday weekend, news of an Apple profit warning and headlines showing China is facing difficulty reopening businesses due to the coronavirus, U.S. stock futures are pointing to a lower open this morning. Given the charts above, Tuesday has shown flat performance in the S&P 500 so far this year and produced a positive day of gains just half the time. At least at the open, it looks like the S&P 500 is tracing the back half of that 50% figure.

Asia-Pacific: Asian equities finished lower on Tuesday. On Monday, Apple warned it would not meet analysts' profit forecasts for the first quarter saying, “worldwide iPhone supply will be temporarily constrained” due to the coronavirus. Apple also said Chinese factories and suppliers have been slower to resume work than originally expected. In our view, Apple’s warning could be the start of several U.S. manufacturers and goods producers (small and large) warning of supply constraints as Beijing grapples with retuning production back to normal levels.

Europe: Markets across the region are trading mostly in the red at mid-day. German ZEW economic sentiment in January collapsed, as coronavirus fears rose. The survey showed German businesses are highly concerned the virus outbreak could damage global trade, which added to a considerable decline in sentiment regarding current conditions as well as expectations. On Friday, investors will get one of their first looks at how the coronavirus is starting to impact economic data in Europe. Preliminary February PMI data for the Eurozone, Germany, France, and the UK are all expected to trend lower this month. Investors will closely monitor manufacturing and services data against expectations as well as prior levels to assess how much impact Covid-19 is having on hard data.

U.S.: Equity futures are pointing to a weaker open this morning. According to Bloomberg, the Trump administration is considering new restrictions on exports of high-tech components, which could further dampen Huawei’s access to crucial semiconductor components. Per the report, senior White House officials could decide by the end of the month whether to block exports of jet engines made by General Electric. While these types of trade issues appear a backburner development for the market following a signed phase one trade agreement, U.S./China trade frictions did not go away. Reports have surfaced that Beijing may request a delay in its agriculture and energy purchases, and where amounts were agreed upon in the phase one deal. How much latitude the U.S. gives China concerning its roughly $200 billion in purchase agreements (due to the coronavirus) could set the tone on how each country engages each other this year.

Here in the U.S., investors will get a look at producer sentiment (Tuesday and Thursday), Housing starts (Wednesday), and existing home sales (Friday). On Friday, we expect investors to lock on to preliminary February Markit PMI data, which will provide one of our first looks at full month impacts from the coronavirus. Consensus estimates call for a slight tick lower in February manufacturing and services readings, with both measures remaining in expansionary territory.

80%

50%

83% 86%

14%

0%10%20%30%40%50%60%70%80%90%

100%

Monday Tuesday Wednesday Thursday Friday

S&P 500 by Weekday in 2020: % Up Days

% Up Days



WORLD CAPITAL MARKETS 2/18/2020 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 0.18% 4.87% 3,380.2 DJSTOXX 50 (Europe) -0.53% 2.63% 3,832.7 Nikkei 225 (Japan) -1.40% -1.95% 23,193.8 Dow Jones -0.09% 3.36% 29,398.1 FTSE 100 (U.K.) -0.89% -2.03% 7,367.0 Hang Seng (Hong Kong) -1.54% -2.31% 27,530.2 NASDAQ Composite 0.20% 8.63% 9,731.2 DAX Index (Germany) -0.74% 3.26% 13,681.6 Korea Kospi 100 -1.48% 0.51% 2,208.9 Russell 2000 -0.36% 1.26% 1,687.6 CAC 40 (France) -0.48% 1.48% 6,056.6 Singapore STI -0.51% -0.63% 3,196.6 Brazil Bovespa 0.81% -0.29% 115,309 FTSE MIB (Italy) 0.16% 7.04% 25,160.9 Shanghai Comp. (China) 0.05% -2.14% 2,985.0 S&P/TSX Comp. (Canada) 0.15% 4.95% 17,848.4 IBEX 35 (Spain) -0.19% 5.09% 10,003.1 Bombay Sensex (India) -0.39% -0.83% 40,894.4 Mexico IPC 0.04% 3.42% 45,017.0 MOEX Index (Russia) -0.98% 1.40% 3,079.5 S&P/ASX 200 (Australia) -0.16% 6.51% 7,113.7

Global % chg. % YTD Value Developed International % chg. %YTD Value Emerging International % chg. %YTD ValueMSCI All-Country World Idx -0.01% 2.81% 580.0 MSCI EAFE -0.10% -0.36% 2,026.9 MSCI Emerging Mkts 0.15% -0.53% 1,108.0 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 0.10% 5.70% 191.5 Equity Income Indices % chg. % YTD Value Futures & Spot (Intra-day) % chg. % YTD ValueConsumer Discretionary -0.17% 5.80% 1,042.5 JPM Alerian MLP Index 0.17% -7.57% 201.7 CRB Raw Industrials -0.17% 1.13% 456.9 Consumer Staples 0.28% 3.06% 665.4 FTSE NAREIT Comp. TR 1.06% 7.41% 22,934.3 NYMEX WTI Crude (p/bbl.) -1.94% -16.41% 51.0 Energy -0.81% -9.40% 409.8 DJ US Select Dividend -0.22% 0.48% 2,301.2 ICE Brent Crude (p/bbl.) -2.18% -14.53% 56.4 Financials 0.08% 1.24% 516.2 DJ Global Select Dividend -0.48% -0.03% 236.0 NYMEX Nat Gas (mmBtu) 5.77% -11.24% 1.9 Health Care 0.13% 2.02% 1,209.5 S&P Div. Aristocrats 0.22% 0.93% 3,096.2 Spot Gold (troy oz.) 0.35% 4.58% 1,586.7 Industrials -0.06% 3.88% 712.8 Spot Silver (troy oz.) 0.99% 0.09% 17.9

Materials 0.06% -1.46% 380.0 LME Copper (per ton) 0.80% -5.73% 5,796.8 Real Estate 1.11% 8.24% 259.7 Bond Indices % chg. % YTD Value LME Aluminum (per ton) -0.22% -4.98% 1,692.5 Technology 0.49% 11.19% 1,788.5 Barclays US Agg. Bond 0.15% 1.88% 2,266.9 CBOT Corn (cents p/bushel) 0.72% -2.53% 384.8 Utilities 0.65% 8.85% 356.3 Barclays HY Bond 0.00% 1.11% 2,207.1 CBOT Wheat (cents p/bushe 2.22% -1.47% 553.5

Foreign Exchange (Intra-day % chg. % YTD Value % chg. % YTD Value % chg. % YTD ValueEuro (€/$) -0.18% -3.53% 1.08 Japanese Yen ($/¥) 0.10% -1.06% 109.77 Canadian Dollar ($/C$) -0.19% -2.04% 1.33British Pound (£/$) 0.21% -1.67% 1.30 Australian Dollar (A$/$) -0.48% -4.83% 0.67 Swiss Franc ($/CHF) -0.11% -1.56% 0.98Data/Price Source: Bloomberg. Equity Index data is total return, inclusive of dividends, where applicable.

Ameriprise Global Asset Allocation Committee U.S. Equity Sector - Tactical View

S&P 500 GAAC GAAC S&P 500 GAAC GAAC

Index GAAC Tactical Recommended Index GAAC Tactical RecommendedSector Weight Tactical View Overlay Weight Sector Weight Tactical View Overlay Weight

1) Communication Services 10.5% Underweight - 2.0% 8.5% 6) Health Care 13.9% Equalweight - 13.9%

2) Consumer Discretionary 10.0% Overweight +2.0% 12.0% 7) Industrials 9.3% Equalweight - 9.3%

3) Consumer Staples 7.4% Equalweight - 7.4% 8) Information Technology 21.8% Overweight +2.0% 23.8%

4) Energy 4.6% Equalweight - 4.6% 9) Materials 2.7% Equalweight - 2.7%

5) Financials 13.1% Underweight - 2.0% 11.1% 10) Real Estate 3.2% Overweight +1.0% 4.2%

11) Utilities 3.5% Underweight - 1.0% 2.5%

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 9/20/19. Numbers may not add due to rounding.

Ameriprise Global Asset Allocation Committee Global Equity Region - Tactical View

MSCI All-Country GAAC GAAC MSCI All-Country GAAC GAAC

World Index GAAC Tactical Recommended World Index GAAC Tactical RecommendedRegion Weight Tactical View Overlay Weight Region Weight Tactical View Overlay Weight

1) United States 55.6% Overweight +7.3% 62.9% 5) Latin America 1.4% Equalweight - 1.4%

2) Canada 3.1% Equalweight - 3.1% 6) Asia-Pacific ex Japan 12.0% Equalweight - 12.0%

3) United Kingdom 4.8% Underweight - 2.0% 2.8% 7) Japan 7.3% Underweight - 2.0% 5.3%

4) Europe ex U.K. 14.5% Underweight - 2.0% 12.5% 8) Middle East / Africa 1.3% Underweight - 1.3% -

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 9/20/19. Numbers may not add due to rounding.



THE WEEK AHEAD: Russell T. Price, CFA, Chief Economist Housing dominates the economic release schedule, but the economic influence of the coronavirus response

will remain the dominant consideration for investors this week. The global economic implications of the coronavirus will likely to remain the over-riding economic consideration

over the near-term – as it should. From an economic perspective, this is very unusual territory. How should financial markets incorporate such an atypical economic situation? Certain areas of the globe are likely to see their economic growth rates slip into negative territory over the near-term, primarily due to the suspension of production and consumption resulting from actions taken to contain the virus’s spread. This is dramatically different than the normal ‘recessionary’ drivers whereby economic growth slows due to imbalances having built-up in an economy (most often, an over-extension of debt).

In the current situation, economic growth is likely to slow due to conscious human decisions (rightful ones, in our view) of a non-economic nature. Thus far, the response of financial markets has been tempered, though we would not be surprised to see the situation fuel a normal pull-back at some point over the intermediate-term. We believe markets are rightly reflecting the thought that economic activity is likely to rebound as the situation eventually passes. Of course, even for experts, this is a “known, unknown” at this time.

On Monday, markets will get their first look at manufacturing conditions in the month of February – though only for only a small area of the country. The New York Federal Reserve’s Empire Manufacturing Index is expected to show manufacturing activity in the district as maintaining a modest pace of expansion in the month. The Philadelphia Fed’s Manufacturing Index, due out on Thursday, is also forecast to see a modest month-over-month pace of expansion as well.

Manufacturing data has been volatile over the last several months, even offering some surprises of late. The sector faced serious pressure in the second half of 2019 due to weak export demand (amid trade disputes) and a month and a half long production shutdown at the nation’s largest auto-producer, General Motors (mid-September through the end of October) due to a labor strike. As a result, the nationwide ISM Manufacturing Index posted contractionary readings each month from August through December. (Note: the ISM measures are designed to reflect month-over-month changes in activity with numbers above 50 indicating expansion and numbers below 50, contraction). Manufacturing activity was widely expected to see another leg-down in January as Boeing halted production of its 737 MAX aircraft beginning January 1st. Much to the surprise of many, (including ourselves) the ISM Manufacturing Index re-entered expansionary territory in January with a reading of 50.9.

On Wednesday, New Housing Starts for the month of January are expected to see a decline from December’s exceptional and unsustainably strong pace. Over the winter months, construction data can experience heavy influences from seasonal adjustment factors. As was the case in December when mild weather conditions allowed construction activity across much of the nation to continue at a steady pace, during a month that usually sees a notable deceleration due to prohibitive weather. Weather conditions remained generally accommodative to home construction into January, but December’s building pace of 1.6 million units (at an annualized pace), representing a 17% month-over-month increase and a 41% gain over year-ago levels, was simply unsustainable.

On Friday, U.S. Existing Home Sales are expected to show a notable deceleration in the month of January. Forecasters estimate sales to have declined by about 2% from December’s annualized pace of 5.54 million. December’s sales rate represented a 3.6% increase over November levels and an 11% gain versus year-ago levels. Overall, housing demand accelerated in the second half of 2019 due to strong economic conditions and near-record low mortgage rates. Higher demand, however, has exacerbated the marketplace’s already overly tight supply constraints. At the end of December, the National Association of Realtors reported just 3.0 months’ supply of inventory available for sale versus the 6.0 months that has traditionally be viewed as a “balanced” market.



Where Market Fundamentals 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.

Consensus Earnings Estimates: Source: FactSet

S&P 500 Earnings Estimates 2015 2016 2017 2021

2/18/2020 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Est. Est. Est. Est. Est. Est.Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Quarterly $$ amount $38.78 $41.12 $42.88 $41.27 $38.85 $41.47 $42.18 $41.81 $39.66 $43.28 $46.07 $46.66

change over last week $0.09 -$0.05 -$0.03 $0.02 $0.03

yr/yr 25.4% 25.4% 27.8% 13.8% 0.2% 0.9% -1.6% 1.3% 2.1% 4.4% 9.2% 11.6%

qtr/qtr -1% 6% 4% -4% -6% 7% 2% -1% -5% 9% 6% 1%

Trailing 4 quarters $$ $118.67 $119.64 $133.50 $141.40 $149.72 $159.05 $164.05 $164.12 $164.47 $163.77 $164.31 $165.12 $166.93 $170.82 $175.67 $196.31

yr/yr -0.3% 0.8% 11.6% 22.9% 0.2% 6.9% 11.7%

Implied P/E based on a S&P 500 level of: 3380 20.6 20.5 20.2 19.8 19.2 17.2

2019 20202018



BY THE NUMBERS: ECONOMIC ACTUALS AND FORECAST:

ECONOMIC NEWS OUT TODAY: Economic Releases for Tuesday, February 18, 2020. All times Eastern. Consensus estimates via Bloomberg. Time Period Release Consensus Est. Actual Prior Revised to 8:30 AM FEB Empire Manufacturing Index +5.0 +12.9 +3.5 10:00 AM FEB NAHB Housing Market Index 75 75 Economic Perspective: Russell T. Price, CFA – Chief Economist Manufacturing activity was widely expected to decelerate in early 2020 as Boeing shutdown all production of its 737

MAX aircraft, and more recently, the coronavirus has hit production, consumption and supply chains across the globe. As is sometimes the case, the data has been going in a different direction. In January, the ISM manufacturing Index showed its first month-over-month expansion since August and each of the major monthly manufacturing measures from various Federal Reserve District Banks showed improvements as well.

Today, the New York Federal Reserve’s Empire Manufacturing Index for February continued that counter-intuitive trend. The Index came-in better than expected and showed its best rate of monthly growth since last May. The report’s New Orders and Shipment components were especially strong, posting readings of 22.1 and 18.9, respectively. In both cases, the numbers are the strongest they’ve been in many months (since October 2018, in the case of new orders).

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

Source: Bloomberg L.P.

Current Projections:Actual Actual Actual Actual Est. Est. Actual Actual Actual Est. Est.2016 2017 2018 2019 2020 2021 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q2-2020

Real GDP (YOY) 1.6% 2.4% 2.9% 2.3% 2.1% 2.0% 2.0% 2.1% 2.1% 1.5% 2.6%Unemployment Rate 4.7% 4.1% 3.9% 3.5% 3.4% 3.5% 3.7% 3.5% 3.5% 3.4% 3.4%CPI (YoY) 1.3% 2.1% 2.4% 1.8% 2.0% 2.1% 1.8% 1.8% 2.0% 2.3% 2.0%Core PCE (YoY) 1.7% 1.6% 1.9% 1.6% 1.7% 1.9% 1.6% 1.7% 1.6% 1.8% 1.8%

Sources: Historical data via FactSet. Estimates (Est.) via American Enterprise Investment Services, Inc.

YoY = Year-over-year, Unemployment numbers are period ending. GDP: Gross Domestic Product; CPI: Consumer Price Index

PCE: Personal Consumption Expenditures Price Index. Core excludes food and energy Last Updated:

Quarterly

February 10, 2020



Fed Makes Measured Retreat from Temporary Repo; Permanent Repo Support May be Necessary One of the factors we believe boosted bond prices late last year was the Fed’s September entry into repo markets

and subsequent announcement to purchase $60 billion T-bills per month. While the Fed saw repo support and T-bill purchases as returning bond market liquidity to normal, markets viewed the boost of liquidity as a sign of stimulus. The plan was to increase excess reserves, which peaked at $2.7 trillion in 2014 and declined to the Fed’s initial target of $1.25 trillion last October before the Fed put in place its T-bill purchase plans.

At the January Fed policy meeting, Fed Chairman Powell noted that repo activity would contract on a preannounced course from mid-January through April. The trailing-off of repo support dovetails with further T-bill purchases that should return excess bank reserves to $1.5 trillion where they stood prior to the Fed’s balance reduction program. The Fed’s overnight repo activity caps dropped from $120B to $100B, while term repo limits dipped from $25 billion at present to $20 billion beginning in March. T-bill purchases are scheduled to remain steady at $60 billion over the next month.

This is not a Lehman Brothers moment: Investors looking for a smoking gun, similar to the one that tripped up Lehman Brothers, are not going to find one in the current repo markets. The difficulty in our view is driven by large fiscal deficits ($1 trillion+) that prompt the U.S. Treasury to issue Treasury debt not only to refinance past debt, but also to fund future deficit spending and to maintain a roughly $500 billion cash balance at the Treasury to be sure sufficient operating cash to cover the timing mis-match between receipts and expenditures. Added Treasury liquidity effectively shifts bank reserves to the U.S. Treasury, and eliminates the funds as a support mechanism for short-term funding markets. Current and potentially on-going (yet to be announced) T-bill purchases are likely the Fed’s counterweight for deficits and Treasury liquidity in our view. Further, we see little room around a permanent Fed repo (yet to be announced) capacity that would step in when necessary and to serve as a buffer for the ebb and flow of U.S. Treasury liquidity needs.

An added risk: In the end, elevated deficits and ongoing dependence on debt markets to perpetually fund spending adds a risk that doesn’t exist for nations with balanced budgets. By pursuing deficits, especially so far beyond the previous recession opens the door to new risks when global bond markets face shocks. This is offset to a significant degree by the U.S. dollar as a global currency and U.S. Treasuries as a safe haven destination.

Impact for bond investors: First, we believe Fed actions resolve our concerns over repo market risk. Second, should short-term funding dynamics become disrupted in the future, we believe the Fed has established the lines of communication to anticipate a pinch and employ temporary repo market support though a persistently available repo facility. We see short term funding risk for high-quality assets like Treasuries as in tacked.

Given how tight credit spreads are heading into this year, and the continued drip of credit downgrades, we have been surprised at how resilient spreads have been. With the Fed balance sheet leveling off, we could see further weakness in credit spreads that would provide investors with more spread compensation to off-set more rating downgrades and rising defaults. In the near-term, the offset might be foreign flows into U.S. bond markets as global investors seek U.S. exposure amidst slowing global growth due to the coronavirus outbreak.

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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)

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 – Director

Energy/Utilities William Foley, ASIP – Director

Financial Services/REITs Lori Wilking-Przekop – Sr Director

Health Care Daniel Garofalo – Director

Industrials/Materials Frederick M. Schultz – Director

Technology/Telecommunication Curtis R. Trimble – Director

Quantitative Strategies/International Andrew R. Heaney, CFA – Director

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

Thomas Crandall, CFA, CMT, CAIA – Sr Director, Asset Allocation

Gaurav Sawhney – Research Analyst

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

Michael V. Jastrow, CFA – Vice President

Jeffrey R. Lindell, CFA – Director – ETFs & CEFs

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

Benjamin L. Becker, CFA – Director – International/Global Equity

Alex Zachman, CFA – Analyst – Core Equity

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

Steven T. Pope, CFA, CFP® – Director – Non-Core Fixed Income

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

Blake Hockert – 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 – Sr Director

Stephen Tufo – Director INVESTMENT DUE DILIGENCE

Justin E. Bell, CFA – Vice President

Kurt J. Merkle, CFA, CFP®, CAIA – Sr. Director

Kay S. Nachampassak – Director

Peter W. LaFontaine – Sr. Analyst

James P. Johnson, CFA, CFP® – Sr. Analyst

David Hauge, CFA – Analyst

Bishnu Dhar – Sr. Research Analyst

Parveen Vedi – Sr. Research Associate

Darakshan Ali – Research Process Trainee

INNOVATION AND DEVELOPMENT

Allen Rodrigues – Vice President

Nidhi Khandelwal – Director

Dan Burns – Sr. Manager

Matt Morgan – Sr. Manager

Natasha Wayland – Sr. Manager



The content in this report is authored by American Enterprise Investment Services Inc. (“AEIS”) and distributed by Ameriprise Financial Services, Inc. (“AFSI”) to financial advisors and clients of AFSI. AEIS and AFSI are affiliates and subsidiaries of Ameriprise Financial, Inc. Both AEIS and AFSI are member firms registered with FINRA and are subject to the objectivity safeguards and disclosure requirements relating to research analysts and the publication and distribution of research reports. The “Important Disclosures” below relate to the AEIS research analyst(s) that prepared this publication. The “Disclosures of Possible Conflicts of Interest” section, where applicable, relates to the conflicts of interest of each of AEIS and AFSI, their affiliates and their research analysts, as applicable, with respect to the subject companies mentioned in the report. Each of AEIS and AFSI have implemented policies and procedures reasonably designed to ensure that its employees involved in the preparation, content and distribution of research reports, including dually registered employees, do not influence the objectivity or timing of the publication of research report content. All research policies, coverage decisions, compensation, hiring and other personnel decisions with respect to research analysts are made by AEIS, which is operationally independent of AFSI. IMPORTANT DISCLOSURES As of December 31, 2019 The views expressed regarding the company(ies) and sector(s) featured in this publication reflect the personal views of the research analyst(s) authoring the publication. Further, no part of research analyst compensation is directly or indirectly related to the specific recommendations or views contained in this publication. A part of a research analyst’s compensation may be based upon overall firm revenue and profitability, of which investment banking, sales and trading, and principal trading are components. No part of a research analyst’s compensation is based on a specific investment banking transaction, nor is it based on sales, trading, or principal trading. A research analyst may have visited the material operations of one or more of the subject companies mentioned in this research report. No payment was received for the related travel costs. Additional information and current research disclosures on individual companies mentioned in this research report are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor. You may also submit a written request to Ameriprise Financial, Inc., 1441 West Long Lake Road, Troy MI, 48098. Independent third-party research on individual companies is available to clients at ameriprise.com/research-market-insights. SEC filings may be viewed at sec.gov. Tactical asset class recommendations mentioned in this report reflect The Ameriprise Global Asset Allocation Committee’s general view of the financial markets, as of the date of the report, based on then current conditions. Our tactical recommendations may differ materially from what is presented in a customized long-term financial plan or portfolio strategy. You should view our recommendations in conjunction with a broader long-term portfolio strategy. Not all products, services, or asset classes mentioned in this report may be available for sale at Ameriprise Financial Services, Inc. Please consult with your financial advisor. Diversification and Asset Allocation do not assure a profit or protect against loss. RISK FACTORS Dividend and interest payments are not guaranteed. The amount of dividend payment, if any, can vary over time and issuers may reduce or eliminate dividends paid on securities 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 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 dividing the market share price, as of a certain date, by the company’s sales per share over the most recent year.



INDEX DEFINITIONS An index is a statistical composite that is not managed. It is not possible to invest directly in an index. Definitions of individual indices mentioned in this report are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor. DISCLAIMER SECTION Except for the historical information contained herein, certain matters in this report are forward-looking statements or projections that are dependent upon certain risks and uncertainties, including but not limited to, such factors and considerations as general market volatility, global economic and geopolitical impacts, fiscal and monetary policy, liquidity, the level of interest rates, historical sector performance relationships as they relate to the business and economic cycle, consumer preferences, foreign currency exchange rates, litigation risk, competitive positioning, the ability to successfully integrate acquisitions, the ability to develop and commercialize new products and services, legislative risks, the pricing environment for products and services, and compliance with various local, state, and federal health care laws. See latest third-party research reports and updates for risks pertaining to a particular security. This summary is based upon financial information and statistical data obtained from sources deemed reliable, but in no way is warranted by Ameriprise Financial, Inc. as to accuracy or completeness. This is not a solicitation by Ameriprise Financial Services, Inc. of any order to buy or sell securities. This summary is based exclusively on an analysis of general current market conditions, rather than the suitability of a specific proposed securities transaction. We will not advise you as to any change in figures or our views. Past performance is not a guarantee of future results. Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. AFSI and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Ameriprise Financial Services, Inc. Member FINRA and SIPC.

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