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BMO Financial Group

Macro Strategy ChartbookMarch 2016

February 21, 2016

Jack Ablin, CFAChief Investment Officer312-461-7756

BMO Financial Group

Executive Summary 2

Macro Strategy Chartbook - Updated as of February 19, 2016

The Federal Reserve has signaled to investors that they will no longerprotect risk-taking. While the likelihood to several Fed rate hikes havediminished the chance of Fed easing is off the table.

Notwithstanding the recent pullback, the S&P remains expensive relativeto revenues and earnings. Analysts anticipate a six percent earningscontraction in the fourth quarter on a three percent revenue decline. Thiswould represent the third consecutive quarter of declining earnings andthe fourth consecutive quarter of contracting revenues.

Longer-maturity bond yields fell over the last month as the Fed hikedshort-term interest rates. The 10-year note slipped below two percent,reflecting bond investors’ belief that global growth and inflation willremain subdued. The “secular stagnation” view is becoming morepopular.

International equities, particularly large caps, continue to trade at avaluation discount to U.S. equities. Europe and Japan data have improvedin recent weeks. Europe’s economy will come under stress, however, asthe Continent copes with political tension.

Declining oil prices are putting pressure on global equities and credit.We would like to see some stabilization in the bellwether commodity tosuggest credit concerns are contained.

BMO Financial Group

Table of Contents 3


Slide Page Slide PageConsumers 4 Energy and the Markets 17

Housing 5 Demographics 18

Financial Engineering 6 China 19

Foreign Exchange 7 Eurozone 20

The Millennials 8 Asset Classes 21

Public Opinion 9 U.S. Equities 22

Liquidity 10 International Equities 23

Manufacturing 11 Emerging Market Equities 24

Real Estate 12 Commodities 25

Psychology 13 REITs 26

Central Bank Policy 14 Fixed Income 27

Technology and Jobs 15 Technicals 28

U.S. Labor Market 16 Disclosures 29

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Consumers

• Low pump prices are fueling consumer confidence. Retail sales growth should follow.

• Internet retailers continue to steal share from their brick and mortal brethren.

• With the exception of student loans, credit conditions are stable.

4


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Housing

• The supply of unsold homes is pushing a cyclical low, suggesting a strong housing market.

• Relative to household wealth, housing looks fairly priced.

• U.S. residential real estate appears cheap internationally. The trend should continue to support NYC, MIA, SF.

5


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Financial Engineering

• Financial engineering is going out of style. M&A volume is off.

• IPO activity is virtually nonexistent. No deal brought in January

• Buybacks have magnified EPS growth as net income has grown at about half the rate.

6


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Foreign Exchange

• Most currencies are now cheap to the U.S. dollar. What does that say about the dollar?

• Canadian dollar remains caught in the commodity maelstrom.

• Race to the bottom: Most currencies are cheap relative to gold.

7


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Millennials

• Millennials are not as interested in homeownership as Baby Boomers were at their age.

• Labor participation among young people is falling as more women move back home.

• More women are living with their parents since the 1940s.

8


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Public Opinion

• Fiscal confidence among Americans is on the rise.

• The economy remains the most important issue this election year. Education is not far behind.

• Most Americans are against laws limiting handguns.

9


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Liquidity 10


• Credit conditions continue to tighten.

• Energy is tightening the most, but other sectors are following suit.

• European and Japanese short-term rates have slipped into negative territory.

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Manufacturing

• Services are expanding while the goods economy contracts.

• Only eurozone manufacturing is expanding on the back of a cheap euro.

• More than half of the world’s economies are experiencing a manufacturing contraction.

11


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Real Estate

• Chinese and Canadian housing expenditures continue to exceed U.S. “housing bubble” levels.

• Interestingly, Houston has experienced office price growth year-over-year.

• Real estate loan volume is picking up from a low base.

12


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Psychology

• Investor bullishness has improved from last month, but remains low.

• Confidence in Northern Europe is improving while the South stagnates.

• Similarly, price-to-NAV discounts have improved but remain below median levels, suggesting more sellers than buyers.

13


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Central Bank Policy

• Despite Fed actions, the U.S. savings rate continues to climb.

• The German two-year yield implies further easing.

• Fed Fund futures have marked down chances for further tightening.

14


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Technology and Jobs

• Technology is now destroying more jobs than it creates.

• Innovation erodes the value of skills while it enhances the value of ideas.

• Good ideas can spread quickly nowadays.

15


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U.S. Labor Market

• January job growth was disappointing. The labor market is the only segment expanding beyond economists’ forecasts.

• Food service employment is poised to overtake manufacturing employment.

• The rising “quits rate” implies labor market tightness.

16


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Energy and the Markets

• Natural gas continues to lower the floor for crude.

• The most recent downdraft is the most severe oil rout in history.

• Only gold advances in weeks when crude falls by more than three percent.

17


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Demographics

• Only Illinois and Michigan have shrunk over the last five years.

• Japan, Germany and France have old and aging populations.

• Higher dependency ratios equate to elevated public debt levels.

18


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China

• China’s bank debt has expanded past U.S. bank debt levels.

• Yuan devaluation has equated to Shanghai deterioration.

• China’s fixed investment is slowing with their economy.

19


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Eurozone

• Europe’s economic data have been falling short of economists’ expectations.

• Loan growth is steadily improving.

• Although expectations of growth continue to make lower highs.

20


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Asset Classes

• U.S. Midcap and Emerging are trading below their median price-to-sales ratio medians.

• Gold, TIPs, bonds and High Yield are delivering returns at least commensurate with their risk.

• PEs look reasonable across most markets.

21


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U.S. Equities

• Despite the pullback, large caps remain marginally overvalued.

• Small caps have pulled back to its valuation median.

• Our forecast model is predicting 5% annualized S&P return over the next three year.

22


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International Equities

• Developed large caps look like a better value than their U.S. counterparts.

• Their estimated return projection looks better too.

• Fundamentally, international stocks are challenged.

23


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Emerging Market Equities

• Emerging market equities have looked relatively cheap since 2011.

• Relative strength remains poor.

• Fundamentally, Mexico looks relatively strong compared to the rest of the emerging world.

24


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Commodities

• Commodity momentum broke down in 2014.

• The cure of cheap commodity prices is cheap commodity prices. Agricultural commodities are trading below their production costs.

• Commodity correlation to equities has been on the rise.

25


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REITs

• Like last year, defensive REITs are the best performers this year.

• REITs are no longer trading in tandem with interest rates.

• Valuations remain above their historical 75th percentile.

26


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Fixed Income

• Corporate bonds have broken down relative to Treasurys as spreads have widened.

• High yield municipals continues to outpace corporate high yield. Energy may be to blame.

• Investors are paying for interest rate risk while they shun credit risk.

27


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Technicals

• The Fed forestalled the correction from August to January.

• “Smart Money” is wading back into the market.

• High yield bonds have broken down relative to Treasury notes.

28


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29

Disclosure


BMO Private Bank is a trade name used by various financial service providers within BMO Financial Corp. Banking products and services offered through BMO Private Bank are provided by BMO Harris Bank N.A., and its bank affiliates. Member FDIC. Not all products and services are available in every state and/or location.

BMO Private Bank is a brand name used in the United States by BMO Harris Bank N.A. Member FDIC. Not all products and services are available in every state and/or location.

Investment products offered are: NOT A DEPOSIT – NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY – NOT GUARANTEED BY ANY BANK – MAY LOSE VALUE.

Securities, investment advisory services and insurance products a re offered through BMO Harris Financial Advisors, Inc. Member FINRA/SIPC. SEC-registered investment adviser. BMO Harris Financial Advisors, Inc. and BMO Harris Bank N.A. are affiliated companies. Securities and insurance products offered are: NOT A DEPOSIT – NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY – NOT GUARANTEED BY ANY BANK – MAY LOSE VALUE.

BMO Private Bank may have a material fiduciary, lending, or other banking relationship with any Company mentioned above or any of their affiliates, however, applicable laws, regulations and policies prohibit the disclosure of such relationship to employees who are not directly involved, as well as external disclosure without client consent.

The research analysts who contributed to this report do not know if BMO Harris Bank N.A. or its affiliates have any significant relationship with any Company mentioned above. BMO Capital Markets, an affiliate of BMO Harris N.A., may from time-to-time engage in underwriting, making a market, distributing or dealing in securities mentioned herein.

Please consult with your advisor for your own personal situation. The research analysts contributing to the report have certified that –

All the views expressed in the research report accurately reflect his/her personal views about any and all of the subject securities or issues; and

No part of his/her compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by him/her in this research report.

The information and opinions expressed herein are obtained from sources believed to be reliable and up-to-date; however, their accuracy and completeness cannot be guaranteed. Opinions expressed reflect judgment current as of publication and are subject to change.

Past performance is not indicative of future results. International investing, especially in emerging markets, involves special risks, such as currency exchange and price fluctuations, as well as political and economic risks. There are risks involved with investing in small cap companies, including price fluctuations and lower liquidity. Commodities may be subject to greater volatility than investments in traditional securities and pose special risks. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes, and international economic and political developments.

HIS 0297 ADV BD 08/15

BMO and BMO Financial Group are trade names used by Bank of Montreal.

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