Advisory Solutions Monthly Update May 2019

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Advisory Solutions Monthly Update May 2019 ASSET ALLOCATION UPDATE •

We recommend an overweight to Global Equities versus Fixed Income across models.

•

Within the equity allocation, we recommend a mild overweight to U.S. Equities and corresponding underweight to International Developed Equities. We also recommend an overweight to Small Cap versus Mid and Large Cap Equities.

•

Within the fixed income allocation, we recommend an overweight to Short U.S. Government Bonds. EQUITY HIGHLIGHTS

FIXED INCOME HIGHLIGHTS

•

Global equities continued a strong start to 2019 with positive returns in April, as the MSCI ACWI IMI rose 3.31% during the month. U.S. equities again outperformed emerging markets and international developed markets in April, led by relative strength in the large- and mid-cap growth segments. Over the past year, U.S. Equities have been strongly positive – Russell 3000 Index returned 12.68% - while Developed ex-U.S. and Emerging Markets have posted negative absolute returns. Information Technology and Communication Services were the top performing sectors domestically in April, while Health Care and Real Estate lagged.

•

The rally in credit continued throughout the month of April with risk assets domestically and abroad producing positive returns. High yield, which was the top performer in the first two months of the year was again a top returning asset class in April, up 1.42%. Investment grade corporates (+0.49%) and emerging market debt (+0.40%) also produced positive results. Government related securities were negative for the month, down 0.27%. Foreign sovereign bonds were also down 0.11%. The Bloomberg Barclays U.S. Aggregate Bond Index, a proxy for the overall bond market, returned 0.03% in March.

•

After a challenging 2018, the performance of actively-managed equity strategies has improved during 2019.

•

•

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 information technology, communication services and consumer discretionary companies. Stretched growth valuations could lead to improvement in value relative performance.

In a reversal from the previous month, 10-year government bond yields in select foreign markets moved higher in April, led by yields in the United Kingdom which increased by 20 bps. Yields on the 10-year German Bund moved back into positive territory (+0.03). Domestic rates, as represented by the yield of the 10-year Treasury, increased by 10 bps from 2.41% to 2.51%.

•

Municipal/Treasury yield ratios moved higher on the front-end of the curve while longer-dated ratios moved lower. Ratios remain below historical averages.

Stock Indexes

MSCI ACWI IMI Russell 3000 S&P 500 MSCI EAFE MSCI EM

YTD

16.01% 18.60% 18.25% 13.07% 12.23%

Bond Indexes

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

YTD

2.97% 2.70% 3.54% 8.78% 5.85%

Other Indexes

US Fund Multialternative DJ Equity All REIT Bloomberg Commodity

Data as of 04.30.2019; Source: Morningstar, FactSet, Russell Investments, Barclays, U.S. Department of Treasury

YTD

5.30% 16.93% 5.88%

U.S. Treasury Yields

6-month 1-year 3-year 5-year 10-year

2.46% 2.39% 2.24% 2.28% 2.51%

30-year

2.93%

Rates/Commodities

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

5.50% 2.58% $63.91 $1,285.70

Eurozone

1.00 -1.00 -3.00 -5.00 Apr-18

Jul-16

Jun-17

Sep-15

Dec-13

Nov-14

Apr-12

Feb-13

Jul-10

May-11

Oct-08

Sep-09

Feb-07

Dec-07

Mar-06

Jul-04

May-05

Oct-02

Aug-03

Jan-01

Dec-01

-7.00

U.S. Labor Productivity (RHS)

Data as of 03.31.2019; Source: FactSet

U.S. and Eurozone data as of 03.31.2019, Japan data as of 12.31.2018; 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

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 Sep-18

-2.00

U.S.

Eurozone

Japan

Eurozone data as of 04.30.2019. U.S. and Japan data as of 03.31.2019; 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 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 Sep-18

Percent (%)

3.00

U.S. Industrial Production (LHS)

Japan

7.00 5.00

May-99

Percent (%) U.S.

YoY U.S. Industrial Production and Productivity

20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 -15.00 -20.00 Mar-00

YOY Real GDP Growth ($U.S.)

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

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 Oct-18

Percent (%)

Global Economic Snapshot

Data as of 04.30.2019; Source: FactSet

•

Year-over-year GDP growth in the U.S. increased following a strong first quarter and has moved further above growth in Europe and Japan.

•

Year-over-year U.S. productivity growth continued to improve in the first quarter and is at a multi-year high. Industrial production growth has moderated in recent months.

•

U.S. inflation has leveled out at a little above 2% while European inflation has stabilized near 1%. Japan inflation remains very low but positive.

•

April employment growth numbers were solid and the unemployment rate moved down to a forty-five year low of 3.6%.

Note: Please see Appendix for important definitions.

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Leading

U.S. Economic Indicators

Initial Jobless Claims

Coincident

Manufacturing

• Building permits fell 0.5% in March and have fallen 6.5% over the past year.

Consumer Confidence

• The Consumer Confidence Index rose in April to 129.20 compared to 124.20 in March.

Nonfarm Payrolls

Personal Income

Ratio of Consumer Installment Credit to Personal Income Lagging

• ISM Manufacturing registered 52.8% in April a 2.5 percentage point decrease over the previous reading. A reading below 50.0% indicates contraction. • ISM Manufacturing New Orders registered 51.7% in April a 5.7 percentage point decrease over the previous reading. • ISM Non-Manufacturing registered 55.5% in April a 0.6 percentage point decrease over the previous reading.

Housing/Construction

Industrial Production

Source: FactSet

• In the week ending April 26th the four-week moving average of Initial Jobless Claims was 212,500 an increase of 6,500 from the previous week's revised average of 206,000.

Inflation

• Total nonfarm payroll employment gained 263,000 in April while the unemployment rate fell to 3.6%.

• Industrial Production fell 0.10% in March and is up 2.77% over the past year.

• Real Disposable Personal Income fell 0.19% in March and is up 2.34% over the past year.

• This ratio was 0.2% in March and rose 1.1% 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 0.4% in March and is up 1.9% over the trailing one year period. • CPI (Core) rose 0.1% in March and is up 2.0% over the trailing one year period.

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Currency

Nominal Trade-Weighted U.S. Dollar Major Currencies

Euro per U.S. Dollar

120.60

1.00 0.95

110.60

0.90 100.60

0.85

90.60

0.80 0.75

80.60

0.70 70.60

0.65

Apr-19

Sep-18

Feb-18

Jul-17

Dec-16

May-16

Oct-15

Mar-15

Aug-14

Jan-14

Jun-13

Nov-12

Apr-12

Sep-11

Feb-11

Jul-10

Dec-09

May-09

Apr-19

Sep-18

Feb-18

Jul-17

Dec-16

May-16

Oct-15

Mar-15

Aug-14

Jan-14

Jun-13

Nov-12

Apr-12

Sep-11

Feb-11

Jul-10

Dec-09

0.60 May-09

60.60

• The Trade-Weighted U.S. Dollar Index (Major Currencies) rose 0.8% through April and the index is up 1.0% year-to-date. The dollar rose 0.2% versus the Euro in April.

Data as of 04.30.2019; Source: FactSet

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Global Equity Markets Equity Market Performance As of 04.30.2019

20.00

•

Global equities continued a strong start to 2019 with positive returns in April, as the MSCI ACWI IMI rose 3.31% during the month. U.S. equities again outperformed emerging markets and international developed markets in April, led by relative strength in the large- and mid-cap growth segments. Over the past year, U.S. Equities have been strongly positive – Russell 3000 Index returned 12.68% - while Developed ex-U.S. and Emerging Markets have posted negative absolute returns. Information Technology and Communication Services were the top performing sectors domestically in April, while Health Care and Real Estate lagged.

•

After a challenging 2018, the performance of actively-managed equity strategies has improved in 2019. With the exception of U.S. Large Blend, all categories displayed on graph have seen higher returns from active management (in relation to passive) YTD in 2019.

•

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 information technology, communication services and consumer discretionary companies. Stretched growth valuations could lead to improvement in value relative performance.

10.00 0.00 -10.00

MSCI ACWI Russell IMI 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 04.30.2019

30.00 20.00

23.55 22.30 17.05 17.73

17.53

21.65 16.58 16.18

16.02

16.57

13.76

12.41

12.85

10.60

10.00 0.00

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

U.S. Mid-Cap Growth

Active YTD

U.S. Small Cap Value

U.S. Small Cap Growth

Foreign Large Blend

Diversified Emerging Mkts

Passive YTD

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

Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19

8.00 6.00 4.00 2.00 0.00 -2.00 -4.00 -6.00

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

Data as of 04.30.2019; Source: Morningstar

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Fixed Income Markets Bond Market Performance As of 04.30.2019

7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 -1.00

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

•

The rally in credit continued throughout the month of April with risk assets domestically and abroad producing positive returns. High yield, which was the top performer in the first two months of the year was again a top returning asset class in April, up 1.42%. Investment grade corporates (+0.49%) and emerging market debt (+0.40%) also produced positive results. Government related securities were negative for the month, down 0.27%. Foreign sovereign bonds were also down 0.11%. The Bloomberg Barclays U.S. Aggregate Bond Index, a proxy for the overall bond market, returned 0.03% in March.

•

In a reversal from the previous month, 10-year government bond yields in select foreign markets moved higher in April, led by yields in the United Kingdom which increased by 20 bps. Yields on the 10-year German Bund moved back into positive territory (+0.03). Domestic rates, as represented by the yield of the 10-year Treasury, increased by 10 bps from 2.41% to 2.51%.

•

Municipal/Treasury yield ratios moved higher on the front-end of the curve while longer-dated ratios moved lower. Ratios remain below historical averages.

Barclays EM USD Agg

1 Yr

Source: Morningstar, Barclays

10-Year Government Bond Yields

8.00% 6.00% 4.00% 2.00%

01/31/01 07/31/01 01/31/02 07/31/02 01/31/03 07/31/03 01/30/04 07/30/04 01/31/05 07/29/05 01/31/06 07/31/06 01/31/07 07/31/07 01/31/08 07/31/08 01/30/09 07/31/09 01/29/10 07/30/10 01/31/11 07/29/11 01/31/12 07/31/12 01/31/13 07/31/13 01/31/14 07/31/14 01/30/15 07/31/15 01/31/16 07/31/16 01/31/17 07/31/17 01/31/18 07/31/18 1/31/2019

0.00%

U.S.

Germany

France

Italy

U.K.

Data as of 04.30.2019; Source: FactSet, U.S. Department of Treasury

Municipal/Treasury Yield Ratios Over The Last 5 Years As of 04.30.2019

Percent

130 110

Maximum 108

110

102

Current

Average 107

97

90 70 50 30

57

2 Year Maturity

55

3 Year Maturity

66

69

74

5 Year Maturity

7 Year Maturity

10 Year Maturity

Source: Thompson Reuters; Sterling Capital Management Analytics.

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10-Year TIPS Breakeven

20-Year U.S. Corporate OAS

3.50

2000

3.00

1600 1200 800 400

Percent (%)

700 600 500 400 300 200 100 0

U.S. Corporate Investment Grade (LHS)

2.00 1.50 1.00 0.00 Feb-99 Oct-99 Jun-00 Feb-01 Oct-01 Jun-02 Feb-03 Oct-03 Jun-04 Feb-05 Oct-05 Jun-06 Feb-07 Oct-07 Jun-08 Feb-09 Oct-09 Jun-10 Feb-11 Oct-11 Jun-12 Feb-13 Oct-13 Jun-14 Feb-15 Oct-15 Jun-16 Feb-17 Oct-17 Jun-18 Feb-19

U.S. Corporate High Yield (RHS)

Breakeven

EM Debt OAS

1400

Average

Data as of 04.30.2019; Source: Federal Reserve Board of Governors

Data as of 04.30.2019; Source: FactSet

1200

3.00

1000

2.00

Percent (%)

800 600 400 200 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 Feb-19

0

Blended Treasury Spread

Data as of 04.30.2019; Source: Barclays

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

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 Sep-18 Apr-19

Basis Points

2.50

0.50

0 Feb-98 Nov-98 Aug-99 May-00 Feb-01 Nov-01 Aug-02 May-03 Feb-04 Nov-04 Aug-05 May-06 Feb-07 Nov-07 Aug-08 May-09 Feb-10 Nov-10 Aug-11 May-12 Feb-13 Nov-13 Aug-14 May-15 Feb-16 Nov-16 Aug-17 May-18 Feb-19

Basis Points

Fixed Income Spreads and TIPS Breakeven

Average

Yield Spread

Average

Data as of 04.30.2019; Source: Barclays

•

Investment grade and high yield credit spreads moved significantly lower in April, continuing their strong performance this year.

•

Market inflation expectations as measured by TIPS breakeven rates moved higher in April.

•

Emerging Market credit spreads were little changed in April and remain well below both December highs and the long run average. The yield spread of U.S. to Global Treasuries moved mildly higher in April and remains above the historical average.

Note: Please see Appendix for important definitions.

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U.S. Treasury Yield Curve

3.5% One Month Ago 3.0%

One Year Ago 5/02/2019

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 shifted higher with key rates beyond five-years increasing between six and eight basis points. Three-month yields continue to trade higher than five-year yields, keeping that section of the curve inverted.

Data as of 05.02.2019; Source: FactSet

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Global Equity Market Fundamentals Revenue to Firm Value

U.S. Cyclically Adjusted Earnings Yield 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

25% 20% 15% 10%

May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Nov-18 Apr-19

5%

1881 1884 1888 1891 1895 1898 1902 1905 1909 1912 1916 1919 1923 1926 1930 1933 1937 1940 1944 1947 1951 1954 1958 1961 1965 1968 1972 1975 1979 1982 1986 1989 1993 1996 2000 2003 2007 2010 2014 2017

0%

Data as of 04.30.2019; 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

MSCI Emerging Markets Index

Data as of 04.30.2019; Source: Russell, MSCI

Dividend Yield 6.00 5.00 4.00 3.00 2.00 1.00

Data as of 04.30.2019; Source: FactSet, Russell, Bureau of Labor Statistics, Sterling Capital Analytics

May-96 Feb-97 Nov-97 Aug-98 May-99 Feb-00 Nov-00 Aug-01 May-02 Feb-03 Nov-03 Aug-04 May-05 Feb-06 Nov-06 Aug-07 May-08 Feb-09 Nov-09 Aug-10 May-11 Feb-12 Nov-12 Aug-13 May-14 Feb-15 Nov-15 Aug-16 May-17 Feb-18 Nov-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 Jan-19

0.00

Russell 3000 Index

MSCI EAFE Index

MSCI Emerging Markets Index

Data as of 04.30.2019; Source: Russell, MSCI

•

In April, the U.S. cyclically adjusted earnings yield drifted slightly lower on equity price increases and remains well below long-term averages. Long-term real U.S. sales growth remained at solid levels in April.

•

Revenue to firm value ratios continued to drift lower in April following continued equity price increases.

•

Dividend yields declined in both the US and International Markets. International Developed yields continue to provide a significant income advantage over the U.S.

Note: Please see Appendix for important definitions.

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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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