Advisory Solutions Monthly Update August 2018

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Advisory Solutions Monthly Update August 2018 ASSET ALLOCATION UPDATE •

We recommend a neutral weight to Global Equities and Fixed Income across models.

•

Within the equity allocation, we recommend an overweight to U.S. Equities versus International Developed Equities. Additionally, our equity recommendations are weighted more heavily to value versus growth segments.

•

Within the fixed income allocation, we recommend a neutral weight to U.S. Aggregate Fixed Income.

EQUITY HIGHLIGHTS

FIXED INCOME HIGHLIGHTS

•

Global equities, as defined by the Russell Global Index, rose 2.76% in July. Positive economic data and strong second quarter earnings growth were key developments that helped push equities higher during the month. U.S. equities continued to lead the market higher, but international equities also posted positive results during the month. Market leadership from a style perspective reversed course during the month, as value stocks outperformed growth.

•

Actively-managed equity performance has been mixed so far in 2018. While active managers in U.S. mid-cap growth and U.S. small-cap growth have been stand-outs year-to-date, U.S. large-cap and U.S. small-cap value managers have struggled to keep pace with their benchmarks. However, higher levels market volatility and falling equity correlations have generally been tailwinds for active managers year-to-date.

•

U.S. growth equities have outperformed value by a wide margin since the global financial crisis, driven partially by a prolonged low economic growth environment and significant outperformance from large-cap technology and consumer discretionary companies. Stretched growth valuations and accelerating economic growth are conditions that could lead to an improvement in value relative performance.

Stock Indexes

Russell Global Russell 3000 S&P 500 MSCI EAFE MSCI EM

YTD

2.52% 6.64% 6.47% -0.36% -4.61%

Bond Indexes

Barclays US Aggregate Barclays Gbl Treas xUS Hdg Barclays US TIPS Barclays US High Yield Barclays EM Aggregate

YTD

•

Fixed income markets had mixed results during the month of July, as credit markets broadly outperformed government-related securities. Emerging market debt was the top performing asset class within the opportunity set, up 1.65%, which was a reversal from the two previous months where the asset class had been the worst performer. The corporate credit market strengthened over the month with high yield returning 1.09% and investment grade returning 0.72%. Government-related securities were the bottom performers as TIPS returned -0.48% and nominals (as represented by the Bloomberg Barclays U.S. Government) returned -0.41%. The Bloomberg Barclays U.S. Aggregate Bond Index was slightly positive in July, returning 0.02%.

•

Over the month, select foreign developed 10-year government bond yields moved higher, led by Germany, France, Italy and the U.K. Domestic rates, as represented by the yield of the 10-year Treasury, moved higher by 11 bps from 2.85% to 2.96%.

•

Municipal/Treasury yield ratios moved lower in July with ratios remaining below historical averages.

Other Indexes

-1.59% 60% LgShort-40% MktNeutral 1.55% DJ Equity All REIT -0.51% Bloomberg Commodity 1.25% -2.25%

YTD

U.S. Treasury Yields

0.85% 6-month 1.86% 1-year -2.14% 3-year 5-year 10-year 30-year

Data as of 07.31.2018; Source: Morningstar, FactSet, Russell Investments, Barclays, U.S. Department of Treasury

2.21% 2.44% 2.77% 2.85% 2.96% 3.08%

Rates/Commodities

Prime Rate LIBOR (3 Mo) Oil Price ($/barrel) Gold ($/t oz)

5.00% 2.35% $68.76 $1,233.60

YOY Real GDP Growth ($U.S.)

20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 -15.00 -20.00

U.S.

Eurozone

YoY U.S. Industrial Production and Productivity

5.00 3.00 1.00 -1.00 -3.00 -5.00 -7.00

U.S. Industrial Production (LHS)

Japan

Data as of 03.31.2018 for Japan, 06.30.2018 for the U.S. and the Eurozone; Source: FactSet

U.S. Labor Productivity (RHS)

Industrial Production data as of 06.30.2018, Labor Productivity data as of 03.31.2018; Source: FactSet

Core Consumer Price Index (YoY Growth)

U.S. - Unemployment Rate

4.00

12.00

3.00

10.00

2.00

Percent (%)

1.00 0.00 -1.00

8.00 6.00 4.00 2.00

Aug-98 Mar-99 Oct-99 May-00 Dec-00 Jul-01 Feb-02 Sep-02 Apr-03 Nov-03 Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep-16 Apr-17 Nov-17 Jun-18

-2.00

U.S.

Eurozone

Japan

Data as of 06.30.2018; Source: FactSet; The sudden increase in Japan CPI growth in 2014 coincided with an increase in national sales tax that impacted final price levels.

0.00 Aug-98 Apr-99 Dec-99 Aug-00 Apr-01 Dec-01 Aug-02 Apr-03 Dec-03 Aug-04 Apr-05 Dec-05 Aug-06 Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12 Apr-13 Dec-13 Aug-14 Apr-15 Dec-15 Aug-16 Apr-17 Dec-17

Percent (%)

7.00

Aug-98 Apr-99 Dec-99 Aug-00 Apr-01 Dec-01 Aug-02 Apr-03 Dec-03 Aug-04 Apr-05 Dec-05 Aug-06 Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12 Apr-13 Dec-13 Aug-14 Apr-15 Dec-15 Aug-16 Apr-17 Dec-17

Percent (%)

8.00 6.00 4.00 2.00 0.00 -2.00 -4.00 -6.00 -8.00 -10.00

Sep-98 May-99 Jan-00 Sep-00 May-01 Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18

Percent (%)

Global Economic Snapshot

Data as of 07.31.2018; Source: FactSet

•

GDP growth in Europe and Japan has moderated recently while U.S. growth has remained strong.

•

Year-over-year U.S. productivity growth of 1.3% as of the end of the first quarter is an improvement over recent years. Sustained productivity growth is essential to drive long-term real growth. Year-over-year industrial production growth is near multi-year highs.

•

Inflation has continued to move slowly higher in the U.S. and has stabilized above 1% in Europe. Japan inflation has moderated to a current reading of 0%.

•

U.S. Employment growth remained solid in July, and unemployment dropped back down to a very low rate of 3.9%.

Note: Please see Appendix for important definitions.

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Coincident

Leading

U.S. Economic Indicators

Initial Jobless Claims

• In the week ending July 27, the four-week moving average of Initial Jobless Claims was 214,500 a decrease of 3,500 from the previous week's revised average of 218,000.

Manufacturing

• ISM Manufacturing registered 58.1% in July a -2.1 percentage point decrease over the previous reading. A reading below 50.0% indicates contraction. • ISM Manufacturing New Orders registered 60.2% in July, a -3.3 percentage point decrease over the previous reading. • ISM Non-Manufacturing registered 55.7% in July a -3.4 percentage point decrease over the previous reading.

Housing/Construction

• Building permits decreased -0.7% in June and have fallen -1.5% over the past year.

Consumer Confidence

• The Consumer Confidence Index increased slightly in July to 127.4 compared to 127.1 in June.

Nonfarm Payrolls

Industrial Production

Personal Income

Lagging

Ratio of Consumer Installment Credit to Personal Income

Source: FactSet

Inflation

• Total nonfarm payroll employment gained 157,000 in July while the unemployment rate fell -0.1% to 3.9%.

• Industrial Production rose 0.62% in June and is up 3.8% over the past year.

• Real Disposable Personal Income increased 0.3% in June and is up 3.1% over the past year.

• This ratio rose 0.1% in June and is up 0.5% year-over-year. Consumer borrowing tends to lag improvements in personal income by many months because people remain hesitant to take on new debt until they are sure that their improved income level is sustainable.

• CPI (All Items) rose 0.1% in June and is up 2.8% over the trailing one year period. • CPI (Core) rose 0.2% in June and is up 2.2% over the trailing one year period.

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Currency

Nominal Trade-Weighted U.S. Dollar Major Currencies

Euro per U.S. Dollar 1.00

100.60 0.95

95.60

0.90

90.60

0.85

85.60

Jul-18

Dec-17

May-17

Oct-16

Mar-16

Aug-15

Jan-15

Jun-14

Nov-13

Apr-13

Sep-12

Feb-12

Jul-11

Dec-10

May-10

Oct-09

Mar-09

Jul-18

Dec-17

May-17

Oct-16

Mar-16

Aug-15

Jan-15

Jun-14

Nov-13

Apr-13

Sep-12

0.60

Feb-12

60.60 Jul-11

0.65

Dec-10

65.60

May-10

0.70

Oct-09

70.60

Mar-09

0.75

Aug-08

75.60

Aug-08

0.80

80.60

• The Trade-Weighted U.S. Dollar Index (Major Currencies) declined -0.5% through July and the index is up 2.8% year-to-date. The dollar declined -0.2% versus the euro in July.

Data as of 07.31.2018; Source: FactSet

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Global Equity Markets Equity Market Performance As of 07.31.2018

30.00 20.00

•

Global equities, as defined by the Russell Global Index, rose 2.76% in July. Positive economic data and strong second quarter earnings growth were key developments that helped push equities higher during the month. U.S. equities continued to lead the market higher, but international equities also posted positive results during the month. Market leadership from a style perspective reversed course during the month, as value stocks outperformed growth.

•

Actively-managed equity performance has been mixed so far in 2018. While active managers in U.S. mid-cap growth and U.S. small-cap growth have been stand-outs year-to-date, U.S. large-cap and U.S. small-cap value managers have struggled to keep pace with their benchmarks. However, higher levels market volatility and falling equity correlations have generally been tailwinds for active managers year-to-date.

•

U.S. growth equities have outperformed value by a wide margin since the global financial crisis, driven partially by a prolonged low economic growth environment and significant outperformance from large-cap technology and consumer discretionary companies. Stretched growth valuations and accelerating economic growth are conditions that could lead to an improvement in value relative performance.

10.00 0.00

Russell Global

Russell Top 200 Value

Russell Top 200 Growth

Russell Mid Cap Value

Russell Russell Russell MSCI MSCI MSCI MSCI EM MSCI EM Mid Cap 2000 Value 2000 World Ex World Ex World Ex IMI Value IMI Growth Growth Growth USA Value USA USA Small Growth Cap

1-Month

1-Year

Source: Morningstar, Russell Investments

Active vs. Passive As of 07.31.2018 20.00 10.00

12.62 11.58

8.98 7.66

5.84 7.00

5.01

2.96 2.56

7.31

0.00 -0.91 -0.28

-10.00

U.S.Large Blend U.S. Mid-Cap Value

U.S. Mid-Cap Growth

U.S. Small Cap Value

U.S. Small Cap Growth

Median Fund YTD

Foreign Large Blend

-5.45 -4.89 Diversified Emerging Mkts

Russell Index YTD

Source: Morningstar, Russell Investments Median return of Morningstar open-end fund category (institutional share class). Russell return of U.S. categories.

Rolling 5-Year Return Differential Russell 3000 Growth minus Russell 3000 Value

8.00 6.00 4.00 2.00 0.00 -2.00

Data as of 07.31.2018; Source: Morningstar

Apr-18

Dec-17

Apr-17

Aug-17

Dec-16

Apr-16

Aug-16

Dec-15

Apr-15

Aug-15

Dec-14

Apr-14

Aug-14

Dec-13

Apr-13

Aug-13

Dec-12

Apr-12

Aug-12

Dec-11

Apr-11

Aug-11

Dec-10

Apr-10

Aug-10

Dec-09

Apr-09

Aug-09

Dec-08

Apr-08

Aug-08

Dec-07

-4.00

5

Fixed Income Markets Bond Market Performance As of 07.31.2018

4.00

•

Fixed income markets had mixed results during the month of July, as credit markets broadly outperformed government-related securities. Emerging market debt was the top performing asset class within the opportunity set, up 1.65%, which was a reversal from the two previous months where the asset class had been the worst performer. The corporate credit market strengthened over the month with high yield returning 1.09% and investment grade returning 0.72%. Government-related securities were the bottom performers as TIPS returned -0.48% and nominals (as represented by the Bloomberg Barclays U.S. Government) returned -0.41%. The Bloomberg Barclays U.S. Aggregate Bond Index was slightly positive in July, returning 0.02%.

•

Over the month, select foreign developed 10-year government bond yields moved higher, led by Germany, France, Italy and the U.K. Domestic rates, as represented by the yield of the 10-year Treasury, moved higher by 11 bps from 2.85% to 2.96%.

•

Municipal/Treasury yield ratios moved lower in July with ratios remaining below historical averages.

2.00 0.00 -2.00 Barclays US Barclays US Barclays US Agg Bond Government Credit

Barclays US Barclays Barclays US MBS Global Trsy Ex Corp High US TR Hdg Yield 1 Mo

Barclays US TIPS

Barclays EM USD Agg

1 Yr

Source: Morningstar, Barclays

10-Year Government Bond Yields

8.00% 6.00% 4.00% 2.00%

Germany

7/01/18

5/01/17

12/01/17

3/01/16

Italy

10/01/16

8/01/15

1/01/15

6/01/14

4/01/13

France

11/01/13

9/01/12

2/01/12

7/01/11

5/01/10

12/01/10

3/01/09

10/01/09

8/01/08

1/01/08

6/01/07

4/01/06

U.S.

11/01/06

9/01/05

2/01/05

7/01/04

5/01/03

12/01/03

3/01/02

10/01/02

8/01/01

1/01/01

0.00%

U.K.

Data as of 07.31.2018; Source: FactSet, U.S. Department of Treasury

Municipal/Treasury Yield Ratios Over The Last 5 Years As of 07.31.2018

Percent

180 150

Maximum 139

Current

122

120

102

99

Average 107

90 60

57

55

66

71

2 Year Maturity

3 Year Maturity

5 Year Maturity

7 Year Maturity

30

Source: Thompson Reuters; Sterling Capital Management Analytics.

82 10 Year Maturity

6

10-Year TIPS Breakeven

2000

3.50

1600

3.00

Oct-17

Jun-18

Feb-17

Oct-15

Jun-16

Feb-15

Oct-13

Jun-14

Feb-13

Oct-11

Jun-12

Feb-11

Oct-09

Jun-10

Feb-09

Oct-07

Jun-08

Feb-07

Oct-05

Jun-06

Feb-05

Oct-03

Jun-04

Feb-03

Feb-99

Breakeven

Average

Data as of 07.31.2018; Source: Federal Reserve Board of Governors

EM Debt OAS

1400 1200 1000 800 600 400 200 0

Oct-01

0.00

U.S. Corporate High Yield (RHS)

Data as of 07.31.2018; Source: FactSet

Percent (%)

3.00

Blended Treasury Spread

Data as of 07.31.2018; Source: Barclays

Yield Spread of Barclays U.S. Treasury Index to Global Ex-U.S. Treasury Index

2.00 1.00 0.00 -1.00 -2.00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18

May-96 Dec-96 Jul-97 Feb-98 Sep-98 Apr-99 Nov-99 Jun-00 Jan-01 Aug-01 Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18

Basis Points

1.00 0.50

0

U.S. Corporate Investment Grade (LHS)

1.50

Jun-02

400

2.00

Feb-01

800

2.50

Oct-99

1200

Jun-00

20-Year U.S. Corporate OAS

Percent (%)

700 600 500 400 300 200 100 0

Feb-98 Oct-98 Jun-99 Feb-00 Oct-00 Jun-01 Feb-02 Oct-02 Jun-03 Feb-04 Oct-04 Jun-05 Feb-06 Oct-06 Jun-07 Feb-08 Oct-08 Jun-09 Feb-10 Oct-10 Jun-11 Feb-12 Oct-12 Jun-13 Feb-14 Oct-14 Jun-15 Feb-16 Oct-16 Jun-17 Feb-18

Basis Points

Fixed Income Spreads and TIPS Breakeven

Average

Yield Spread

Average

Data as of 07.31.2018; Source: Barclays

•

Investment grade and high yield credit spreads moved significantly lower in July. Credit spreads are below long-run averages, particularly for high yield bonds.

•

Market inflation expectations as measured by TIPS breakeven rates moved slightly lower in July and are close to long run averages.

•

After five consecutive months of widening, emerging market spreads moved lower in July. The yield spread of U.S. to Global Treasuries increased in July and is above the historical average.

Note: Please see Appendix for important definitions.

7

U.S. Treasury Yield Curve

3.5% One Month Ago 3.0%

One Year Ago 8/03/2018

2.5%

Yield

2.0%

1.5%

1.0%

0.5%

0.0% 3-Month

6-Month

1-Year

2-Year

5-Year

7-Year

10-Year

30-Year

• Month-over-month, the yield curve moved higher, as front-end rates increased by 6 bps and long-end rates rose by 11 bps.

Data as of 08.03.2018; Source: FactSet

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Global Equity Market Fundamentals Revenue to Firm Value

U.S. Cyclically Adjusted Earnings Yield

1881 1884 1888 1892 1896 1899 1903 1907 1911 1914 1918 1922 1926 1929 1933 1937 1941 1944 1948 1952 1956 1959 1963 1967 1971 1974 1978 1982 1986 1989 1993 1997 2001 2004 2008 2012 2016

Data as of 07.31.2018; Source: Online Data Robert Shiller “US Stock Markets 1871-Present and CAPE Ratio”

U.S. 3 Year Real Revenue Growth – Russell 3000 Non-Financials 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00%

Russell 3000

MSCI EAFE

Jan-18

Jun-18

Aug-17

Oct-16

Mar-17

May-16

Jul-15

Dec-15

Feb-15

Apr-14

Sep-14

Nov-13

Jan-13

Jun-13

Aug-12

Oct-11

Mar-12

May-11

Jul-10

Dec-10

Feb-10

Apr-09

Sep-09

Nov-08

0%

Jan-08

May-06

5%

Jun-08

10%

Aug-07

15%

Oct-06

20%

Mar-07

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

25%

MSCI Emerging Markets Index

Data as of 07.31.2018; Source: Russell, MSCI

Dividend Yield 6.00 5.00 4.00 3.00 2.00 1.00

Data as of 07.31.2018; Source: FactSet, Russell, Bureau of Labor Statistics, Sterling Capital Analytics

May-96 Jan-97 Sep-97 May-98 Jan-99 Sep-99 May-00 Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 May-18

Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

0.00

Russell 3000 Index

MSCI EAFE Index

MSCI Emerging Markets Index

Data as of 07.31.2018; Source: Russell, MSCI

•

The U.S. cyclically adjusted earnings yield remains well below long-term averages. Sales growth has picked up recently, but long-term real growth remains low.

•

Revenue to firm value in the U.S. is lower than International Developed Markets. The Emerging Markets’ ratio has increased recently on market weakness.

•

International Equity Markets provide a significant dividend yield advantage over the U.S.

Note: Please see Appendix for important definitions.

9

Appendix

Definitions Core Consumer Price Index: Core inflation is a measure of inflation that excludes certain items, usually food and energy, that face volatile price movements. Option Adjusted Spread (OAS): A bond’s yield spread over comparable maturity government bonds, adjusted for any embedded options. Real GDP: Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices. Revenue to Firm Value: Total Index Revenues of the past 12 months divided by the sum of equity market value and the value of total debt. This is a measure of total sales generated on the total value (debt plus equity) of firms in the index. TIPS Breakeven: The inflation rate implied by the spread in yield between U.S. TIPS (Treasury Inflation Protected Securities) and nominal U.S. Government Bonds of equal maturity. U.S. 3 yr. Real Revenue Growth, Russell 3000 Non-Financials: For the Russell 3000 excluding financial firms, the percentage change in trailing 12-month inflation adjusted revenue over 12-month inflation adjusted revenue three years prior. U.S. Cyclically Adjusted Earnings Yield: The 10-year average of annual, inflation adjusted earnings divided by the current inflation adjusted price of the S&P 500 index. This measure is the inverse of the Shiller CAPE Ratio. YOY US Productivity Growth: The year-over-year growth in real U.S. output produced per hour worked for non-farm workers.

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Disclosures The opinions expressed herein are those of Sterling Capital Management and the Sterling Advisory Solutions Team, and not those of BB&T Corporation or its executives. The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Sterling Capital Management LLC does not assume liability for any loss which may result from the reliance by any person upon such information or opinions. Investment advisory services are available through Sterling Capital Management LLC, a separate subsidiary of BB&T Corporation. Sterling Capital Management LLC manages customized investment portfolios, provides asset allocation analysis and offers other investment-related services to affluent individuals and businesses. Securities and other investments held in investment management or investment advisory accounts at Sterling Capital Management LLC are not deposits or other obligations of BB&T Corporation, Branch Banking and Trust Company or any affiliate, are not guaranteed by Branch Banking and Trust Company or any other bank, are not insured by the FDIC or any other federal government agency, and are subject to investment risk, including possible loss of principal invested. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. The indexes are unmanaged and are shown for illustrative purposes only. Indexes do not represent the performance of any specific investment. An investor cannot invest directly in an index. The indexes selected by Sterling Capital Management to measure performance are representative of broad asset classes. Sterling Capital Management retains the right to change representative indexes at any time.

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