PNC S PERSPECTIVES ON THE MARKET: 2016 ELECTION INSIGHTS

Transcription

1 PNC S PERSPECTIVES ON THE MARKET: 2016 ELECTION INSIGHTS November 09, :00 PM EDT Operator: Ladies and gentlemen, I d like to welcome you to today s PNC Perspectives on the Market: 2016 U.S. Election Insights webinar. Before we get started, I would like to mention that today s session is being recorded, and you are currently in a listen-only mode. Now I d like to acquaint you with some of the ways you can participate today. The ON24 room you are in allows you to individually adjust and resize all available panels that appear on your screen. To resize any of the console panes, simply click on the lower right corner of that panel to adjust. You should see a little triangle down there. You can just move pane actually, just click on the triangle and then just drag diagonally outward, and you can adjust the panel to your liking. You can also move entire panels around. Just click anywhere on the top title bar of the pane and drag it to the desired location within your console. Also note we will have a Q&A session at the end of today s presentation. You may type your question into the Q&A panel that is available to you on the left-hand side of your screen. By typing your question into that window and hitting Submit, your question will be logged into queue, and we ll take as many questions as time allows. Finally, if you experience any technical difficulties today, first try refreshing your browser. And if that doesn t work, go ahead and enter a question into the Q&A panel, and I will do everything I can to assist. So now without further delay, let s begin today PNC Perspectives on the Market: 2016 U.S. Election Insights webinar. It s my pleasure to introduce your moderator for today, and that is Thomas Melcher, Chief Investment Officer with PNC. Tom, you have the floor. Greg, thanks very much. I will be brief in my opening comments, but I think we can all agree that we ve just witnessed one of the most remarkable elections with a very remarkable outcome. Those of you who stayed up at three o clock in the morning, we appreciate you being here at three o clock in the afternoon and listening in to this call. We ll try to shed some insight on both the economy and the markets. I m joined today, our two main presenters are my colleagues Stu Hoffman, Chief Economist for PNC, and Bill Stone, our Chief Investment Strategist for PNC. You re all well aware of Donald Trump winning the presidential election. You all by now are also well aware that the Republicans were able to maintain control of the House and have a small majority in the Senate. Perhaps more surprising even than the election results is the fact that as I sit here at this moment, the Dow Jones Industrial Average is up 282 points, or 1.5%. The 10-year Treasury is up above 2%. And those of you, again, who were up late last night know that the market was at one point predicting a severe rout, with futures down 600 points and the 10-year Treasury actually rallying to 1.7%. So with that as a backdrop, Stu, we re going to turn it to you to try to make some sense out of the economic landscape. Bill, we ll turn it to you to talk a little bit more about the markets. And then we ll open it up to all of you who have joined us this afternoon for your questions. And we ll do our best to get through as many of them as possible. So, Stu, the floor is yours. 1

2 Thank you and welcome, everyone. Has it really only been 12 hours since that three o clock in the morning when, as Tom said, we found out who was our president-elect, and the market has swung over 1,000 points, and the 10-year Treasury has swung almost, I guess, somewhere around almost 40 basis points, all in the last 12 hours. What I want to do is preface a little bit of my comments before we go to the charts. I ve listened to a lot of conference calls today and lots of people kind of comparing notes. I want to try to give you a distillation of our thoughts and how they relate to this. In terms of the outlook for the economy, I think our forecast is I ll give it to you and show you some numbers really isn t going to change all that much. We had a little above-consensus economic growth for next year, and I think clearly we re going to get some fiscal policy stimulus. We re going to get probably a big cut in personal and corporate tax rates, maybe not as big as in Trump s original proposals, but can probably line up with Ryan. We may likely get a repatriation. The numbers talked about around 10%, corporations bringing money from abroad home. They can use it for dividends, they can use it for buybacks. Hopefully, they d use it for some hiring and some investment. That will obviously provide some revenues. We re clearly going to get more government spending on infrastructure and probably defense spending. There s no numbers around that, but I think certainly economically significant and probably spread out over several years to, again, add some fiscal stimulus that we really haven t seen in quite a while. On the regulatory side, probably a repeal of Obamacare. Other regulations may be reduced. The biggest question mark in my mind are trade policies. Obviously, candidate Trump talked about some high tariffs on China and Mexico. I hope he won t pursue that and that his advisors and calmer heads will prevail, because I think that s probably a lose lose for maybe both trading partners and the world economy. In reaction to a lot of this, we ve seen, as Tom said, the big turnaround in the stock market. Clearly, as Bill will talk about, some of the stocks doing the best are basic industries and materials. We re seeing the drug stocks do a lot better. We re seeing financial do a lot better if there s talk about some regulatory relief on the financial industry. But the bond market, of course, has been hammered here, probably one of the worst days I can remember in the bond market in decades. I think the talk there is that fiscal stimulus could potentially be inflationary, that, one, you re going to have deficits, even if over time economic growth is stimulated from, say, 2%, where we ve been for years, up to 3% or 4%, and even that would be hopeful and take some time. You re going to have to have some deficit financing, so the supply of Treasury bonds is going to get very, very large, or larger. The Fed s not going to buy, probably, any more of them, so the markets are going to have to absorb that. Plus there is some, as I say, concern, I think, reflected in the Treasury market, about inflation moving up. Maybe that was, a little bit of that was already there, with oil prices, while they re off the boil, are still above, likely to be well above where they were the last two winters. And as a result, we re likely to see headline inflation move up. So I think some of the messages that the market is sending us. Then if I go to the charts, trying to catch up here, this first chart just shows you the faster economic growth we had last quarter. That certainly seems like very ancient history. Here s our forecast. I ll admit I put this together before three o clock tonight or, I guess, this morning, I should say. But as you can see, we had economic growth accelerating to something on the order of around 2.25% next year and another pretty solid increase in the fourth quarter, the unemployment rate continuing to come down. And while clearly there s a lot of uncertainty around the fiscal policy side and market reactions, right now I kind of still feel comfortable that moderate to maybe even a little faster economic growth is likely in the year ahead. This just shows some of the job numbers. We ve been running around 180,000 a month. We think next year that probably slows down to about 150,000 a month, 150,000, so something just shy of 2 million new jobs. The unemployment rate, we think, will move down closer to 4.5%. 2

3 One of the things we did in our business survey that we do, small business survey it s a little bit dated, but we did it. Certainly now maybe everything seems to be. But we did this a couple of months ago. Businesses were still kind of reluctant to hire. Their expectations for hiring have been pretty steady at around 20%. We re going to redo this again, probably, in February. We do this twice a year. I think it will be very interesting to see what our little survey, to the extent anybody believes in surveys anymore, about what small businesses are thinking in light of the election and some of the likely reduction in regulatory issues that they and, of course, larger business would be facing. This was just to show you that even in this environment, the U.S. economy looked a lot stronger than the rest of the world. We think that still remains the case. Europe is likely to grow maybe 1.5% next year, slower than we are. Asia, we think China looks like it s growing a little bit faster, but of course, the whole issue of what our relationship with China will be, at least on the trade front, will be very important to that. India should grow faster. South America, with it led by Brazil, maybe still in recession. So in a global context and the risk, of course, here, is trade protectionists and retaliations could slow the whole global growth down. We felt and still do that U.S. economic growth will probably be one of the best in the world. This shows a little bit of what s been going on in the trade deficit I m sorry, the trade balance. We had an improvement in the third quarter, but the trend has been against that, and we think our exports will probably be down. We ll see how much that could be stemmed by new trade deals. The dollar, interestingly enough, has gotten a little bit stronger in the last, I guess that s 12 hours now. It s gotten a little bit stronger, mostly against the yen, but a little bit against the euro. And, not surprisingly, against the Mexican peso, the dollar has soared to where the peso, I think, is the lowest level it s been in a very long time. This chart, of course, we talked about oil and gas exploration. Certainly, that s one of the areas that is benefiting, or expected to benefit, from a Trump presidency. And obviously, as Tom said earlier, it s a Republican sweep. I heard somebody say last night 1928 was the last time that happened. So that s why I think, as I said in my earlier comments, the tax cuts and the spending increase are likely to get passed. I don t know how they don t go through, and maybe in the first 90 days, whether they re retroactive to the beginning of the year, those kind of details, obviously, yet to be worked out. But I think we are going to see pretty much across the board some tax cuts going forward. But back to the trade, to the oil picture here. We think OPEC probably will live up to its agreement when they meet at the end of the month to apportion out the output production, maybe all the more important now. And that s why we think oil prices and natural gas prices maybe have hit bottom and could, while they re down around $45 or $44 per WTI, up at $50 a couple of weeks ago, this is the seasonal time that oil does tend to be a little weaker. Gasoline, of course, will come down. But as I say, I don t think we re going to see the $1.80 a gallon for national average gas price that we saw in February of this year. That was when oil was under $30.00 a barrel. We just don t think we re going there, which is good for the oil stocks. Not as good for consumers, but as I said, puts a little more upward pressure on inflation. We talked there about consumer spending still, to me, is where the heart of the economy is going to go. The holiday period is just about to get started. It was our view, and still is, that consumer spending would be up around 3% to 3.5% from a year ago. Given that there s very little inflation in that, maybe no more than 1%, that s still a good not robust, but still a good increase in consumer spending for the holiday period. And the income growth, the job growth, maybe now, of course, with the election uncertainty out of the way, we think we ll get some decent job numbers when the data are released for November and December. All of that will be aiding and helping consumers have a good holiday season and carry that over into next year, all the more so if we do get a fairly sizable across-the-board tax cut. We expect wage growth to pick up. It s been already picking up. We expect it to go faster now, especially if we are going to see more spending on infrastructure and more hiring in that area. That s probably going to put some more upward pressures on wages. That s another thing that is being very much talked about in the mix of the potential for somewhat higher inflation back up, at least, to the Fed s target of 2%. And I ll return to the Fed in a kind of minute to finish it up. 3

4 So we did grow. We re already seeing that, but expect to see even more, a little faster increases not in the minimum wage; that s not going to happen but in market-determined wages. Here you see longer-term rates. Of course, this hasn t been updated for those last 12 hours. But as Tom indicated, and I referenced, we ve seen a huge increase in Treasury rates, 10-year at now 2.07%, the 30-year at 2.87%. These are up, as I say, almost 50 basis points, just in the last 12 hours, and I think do reflect the fact that, as I said, that thoughts about a stronger growing economy, potential more inflation, more deficit financing, is contributing to that. Which also means mortgage rates are going to move up, probably, from where they ve been, almost a record low for weeks and weeks or years and years. Likely to move back up a little bit over the winter months, but to me, not to the point that threatens the housing market. And as you see here, we think there s a lot of room for improvement in housing. The demographics are suggesting housing should be more like 1.3 million to 1.4 million starts. We re at about 1.1 million to 1.2 million, so we do think, even if mortgage rates move up a little bit, especially if there s more tax cuts and infrastructure spending, that you re going to see good construction, both residential and particularly nonresidential, and that there s a lot of movement for that to go up and support the economic growth. Let me maybe end by talking about the Fed. A lot of discussion about that today, how will the Fed react, the whole issue of Donald Trump and Janet Yellen. And her appointment, by the way, runs through January of 2018, not So I fully expect that she ll serve out her team and is unlikely to be reappointed by a president Trump. But time will tell. But I think it means that the Fed will do what they feel they need to do. December rate hike, we still think, is a little more likely than not, and that s what the futures markets think. They re still saying about two out of three chance. It s been bouncing around, as you can imagine, in the last half-day. Clearly, it will depend on what the markets do. If you do have another 800-down-point day, which we don t necessarily expect between now and when the Fed meets on December 13 and 14, the Fed s going to be watching that like a hawk. We think some of the economic data that they ll get out will be decent. As I said, we think some of the inflation numbers and inflation expectations will move up. Going into next year, it had been and would remain our base case that the Fed moves in June to raise rates 0.25%, and then again, probably, at the end of next year, which now could coincide with nearly the end of Janet Yellen s term. And then as we look out to 2018, we had been thinking another two or three rate hikes. So the basic position we ve talked about for quite some time about being a bit defensive on duration and on the bond market and Bill will talk about that I think very much remains in place. And that a slow, but persistent movement up in both short- and long-term interest rates over the next couple of years, thinking strategically beyond what will happen in December, in five weeks, is still the right way to be positioned in fixed income relative to equities. So I think I d pretty much stop there. I d try to talk about global risk. Obviously, election outcome uncertainty. Well, the uncertainty s over of the outcome now. The policies, we ll have to see what the Fed does. As I say, we think there will be more fiscal stimulus. Who knows about acts of terrorism or what s going to go on in the rest of the world? We think the Affordable Care Act probably does get repealed. But when you add it all up, of course, this is a historic, as it has been called, election. But we still think it means the U.S. economy is positioned for moderate economic growth with maybe some fiscal stimulus could actually add to the growth potential over the next couple of years, rather than think that the results of the election is somehow the economy and the markets are going to take a really ugly turn for the worse. So let me stop there, and I think I ll just throw it right to Bill Stone. 4

5 Bill Stone: Thanks, Stu, appreciate it. And thanks, everybody, for taking time out to join us today. I wanted to talk a bit about, really, the elections and what we think some of the impacts on the financial markets either have been and, I guess I ll say more on also what they will be. So first, though, I think it s probably good to deal with some of the questions, and I actually saw some of the questions you were sending in. I think we ll be able to handle at least a few of them in the midst of this, which is nice. So I think the first one is, what does typically happen to the markets post an election? And I know I did this when this looked like we were going to open down this morning, perhaps even to a large amount. But it was interesting when you take a look at this. In six out of the last eight elections, you had the S&P 500 actually down the day after the election, so the median decline was about 0.7%. Interestingly enough, though, on the other side, in almost all cases, in six out of the seven, you actually had a positive return over the next 12 months. The median case there was essentially 13%. I think another one of the examples I was using was 2008, when President Obama was first elected. And if you think about it, it certainly was not on the level of the ups that you would say that the Trump election is. But it certainly was less expected, I think, and certainly a more unknown figure. Certainly had some track record, though, so it s not an exact analogy. But it was interesting enough that in 2008, the S&P 500, the day after his election, was down more than 5%. And then in the 12 months after, was up about 12% on price and about almost 15% total return. But I think after I said all that, we looked like, or we did it s almost sure we re going to actually have a very good day here, the first day after markets were so bad in the middle of the night last night. That is one of the questions we get is, how does that happen? I guess as I think about it, there s no way you can for sure know why it happens. I think I ll put it on two sides. So one is, I think, many market participants came into the election night hedged, assuming that Hillary Clinton was going to win. When it looked much more shaky, that it was heading towards Trump s way, I think they wanted to exit those positions or hedged somehow. And typically, at that time of night, you generally are certainly not going to have the kind of liquidity you have during the day, and I think that swung things quite a bit. That s just kind of, I guess, a micro answer or a marketplace answer. But I think the second part of it is probably I think there are some lessons to be learned from Brexit. So when you think about the Brexit vote, again in a situation where the polls all thought it wasn t going to happen, the markets certainly were set up not thinking it was going to happen well, think about what happened post-brexit, which is the stock market, after a few days, went significantly higher in the UK. So I think you have to look at the stock market and the global stock market as learned lessons, or the participants learned lessons. And I think the lesson they took is it doesn t necessarily mean that the stocks are going to go down if you get one of these unexpected outcomes. And I think they moved it much quicker than you saw under Brexit. And I think that s perhaps the best explanation for why we got such a quick reversal. So let me keep moving, talk a bit about what s going on. So this is just a chart of the U.S. dollar. I just mentioned one of the things that went on is we did last night see the U.S. dollar during that point, as I mentioned, when you saw the market selling off around the expectation of a Trump victory, you saw the dollar dip quite a bit. But now, since the dollar really strengthened up quite a bit on the other side. I ll just talk about one specific currency; we could talk about more later. But certainly, the U.S. dollar strengthened sharply against the Mexican peso. That has been probably the most direct currency in terms of being one that really moves with Trump s, I guess, possibilities of election and, obviously, his eventual election. I will say, though, again very similar to the over-reaction in stocks that we saw, the Mexican peso has strengthened somewhat, or at least it s moderated off of its significant sell-off, although, again, still net down. 5

6 Stu talked a bit about yields, about Treasury yields, but I think it s worth spending a little more time on it. What we ve seen is a significant move up in Treasury yields. So we ve seen them move from yesterday at about 1.85% to about a 2.05%, last I looked here. So 20 basis points move is a big move in a day. We re now not that far away from the year s highs, which is a 2.27% that we actually got at the end of the year last year, on the 31st of last year. So year-to-date highs, we re nearing in there. Two-years moved up a bit as well, the two-year Treasury yield. It only moved up about four basis points, from 0.85% to 0.89%, roughly, so below its high for the year at 1.05%. I think in terms of you know, some of the questions we get is what s the view on, and why did this happen? I think it was highly likely that you would see yields move higher under either candidate winning. Perhaps the sharper move here, or this really sharp move here in the short run, is perhaps going back to what Stu talked about, which is with the Republicans essentially sweeping, and that was certainly not market consensus, it s highly likely that they will be able to put through some of the plans. I think many people thought, Well, you know, both Clinton and Trump are talking about spending money and doing these things, but probably they ll face a split Congress or at least a much more difficult tack to it. And that probably led people to underestimate that. And that s where I think you see a quick catch-up in terms of yields. The other thing I did want to mention not in this chart, but it s worth mentioning we have seen inflation expectations move up. That s just what s priced into the market around inflation expectations. I think the good news is the last time we were on one of these calls, we talked about the fact that we had become much more interested in recommending exposure to Treasury and inflation-protected securities. This has certainly benefited that allocation, and it s certainly a spot we continue to look at in our opinion. Let me talk a little bit on oil. Oil remains important not a big move, now that things have settled in a little bit. Yesterday oil was a bit below $45.00 a barrel. Last I checked, we were at like $45.40 a barrel. It probably means more in terms of implications for S&P 500 earnings. It will be interesting to see over the longer run, though, if you have to consider that our view of lower-for-longer continues just because it seems likelier. I think it is highly likely that Trump will be much more amenable to more drilling here in the United States, so I think that at least, on the margin probably, keeps oil on that lower-for-longer. Let s talk a little bit I think it s interesting to look at how some of the and I just picked out a few on purpose specific sectors and how they performed in the three months prior to the election. So if you re looking at these lines in general, we see the green line is healthcare, by far the worst over the three months ahead. I think part of that was and I ll talk more about healthcare later but it really, that healthcare was one of the ones that it was hard not to see that it may in fact suffer under either candidate winning. I ll talk a little bit about the fact that that s probably changed now. And I do want to talk about that when we get into the kind of future state. But I think it was interesting to see that. Also, what is really interesting to me, and maybe it was telling you at least some sort of idea of a Trump victory, is that energy and financials actually did better than the S&P 500 coming up to the three months before. Those are two sectors you would not typically associate with high odds of Hillary Clinton winning the presidency. She would, all other things being equal, probably be a little bit more negative for those sectors than, certainly, Donald Trump. So it s just kind of interesting to put that into perspective. I ll talk a little bit more about, again, forward looks on some of those in a bit later. I think it questions about, talking about the day after, talking about 12 months. But what, you know, even the rest of this year, how does that typically play out? Well, this chart shows this year not today, of course but the green line shows how this year has played out so far, starting at essentially, I ll call it 100 at the beginning of the year, and then how the typical year, whether either the incumbent party wins the presidency or the incumbent party loses the presidency, has the winning one the incumbent party winning the higher one. The blue one is the incumbent party losing. 6

7 But what you see in either case is, interestingly enough, you typically see a market sell-off if the incumbent party lost. But then in both cases, you do typically see a rally into the end of the year. So that s the answer to the question, is you typically do see a relief rally. So perhaps at least history would say that maybe we don t have to worry as much as some people think out there. Next up, I just thought it was interesting to talk about. I know we ve written about this before, but to me it s amazing that the market and this is one of the reasons why we really kept our options open and never really said it was a sure thing that Hillary Clinton was going to win, because the market has had an amazing track record of predicting the presidential winner. So we now have the market correct in 20 out of the last 23 elections. Well, how are they correct? Well, if you look at the performance of the S&P 500 overall in the three months prior to election, if it s down, typically the incumbent party s presidential candidate had lost. If it s up, they ve typically won. Well, we knew, going into election night, that the S&P 500 was down 1.9% and, of course, we know what happened in things. Also of interest, but we also track the one-month, and that one has a decent track record if you look at it in terms of open elections. So in five out of the last seven open elections, where you didn t have someone running again for president, if you had that negative return, you also had that same outcome, where the incumbent party s candidate lost. This is an FYI. That one also signaled that the incumbent party candidate in other words, Hillary Clinton was likely to lose. So I think that s one interesting thing to keep in mind, that not necessarily that certainly, it s not right all the time. I certainly wouldn t stake everything on it. But it was one of the reasons why we certainly left our minds open despite the polls, that could happen. Let me move on in terms of the rundown of how it looks typically when you look at the president and Congress in terms of what political party they re in. I don t usually read a whole lot into this, to be honest, although now with the way things shook out, I could make a really strong case. But I think you know, I use more of the case where you re probably better off having a bit of, call it, you know, diversification in the sense of having some control over either party being able to swing things too far in either direction. I think it controls maybe some of the worst impulses of either party, by the way. I ll say the one thing, even though we talk about the fact that this is a Republican sweep, I think it is fair to note that in the Senate, you re only talking 51, maybe 52 in terms of Republicans in the Senate, so certainly not a dominant majority. The House is a bit better. They lost some, the Republicans, but I think either way, that s one thing. The second is, I think and Stu may have touched on this a little bit Donald Trump s not your typical Republican, so it s not clear that the Republican Party members are necessarily going to want to go along with every idea he may in fact have. Obviously, he s got some mojo at the moment because he did have an amazing victory. But again, that probably only works to a point. So I think there is something to be taken out of that it s worth thinking about that side of things. I m going to skip over the next one. It s just kind of an interesting chart if you re interested in terms of what the kind of returns for many of the presidents were in terms of the S&P 500. So let me talk, because I think this is what a lot of people like to talk about, is the implications for some of the sectors. I ll take what I think are some of the, I ll say the easier ones, or the ones that we maybe focused in on. You know, I think and again, we re best to look at the Republican side now energy. Certainly, I talked about it. And this is it s funny, because we ve got a plus on both sides, and I think the differentiation is when you get down to selected industry. Obviously, the plus is in alternative energy if it was a Democratic move. The more traditional energy should probably benefit from the Republican side. You re seeing some of that energy rally today in the market. 7

8 Next up, in terms of financials, I think, you know, I would say we did I think I have to revise the negative and say in general, I think this particular outcome, because I think a lot of what we did was think about the president and, honestly, assumed that we would at least have more losses out of the Republican side. So I think in terms of financials, it s probably a bit more positive than we certainly gave it credit for. One thing is the likely reduction in maybe some regulatory pressure on the financials. Secondly, certainly today, one of the reasons why the financials have done so well is because the yield curve and I don t want to get too technical but it has steepened. In other words, the 10-year Treasury yield has moved up a lot more than the two-year Treasury. Why does that matter? Well, that s the way lending companies make their money, is in that differential, so the steeper the better for lending companies. So that is one side. If that continues on, that is very positive for financial companies. Healthcare, here s another one that I think I mentioned it before, I think. The issue with healthcare is, again, didn t expect the kind of sweep that we got. And so I think you have to revise it a little bit on one side. So I think you have to put a plus in the healthcare, maybe a double-plus at the moment. So one is because, again, you had the Republicans keep the House side, again keep their majority on the Senate. I d say standard Republicans are not likely to favor price controls or any sort of price negotiation, even, on pharmaceuticals. I had a negative in there because Donald Trump had previously said he was open to negotiation on drug prices. Again, with this kind of majority of Republicans in the Congress, I think they would likely shut that down and he d probably give that idea up probably willingly, anyway. So that s why I think you ve got to put a plus. The second one is there was a proposition in California, Proposition 61, that dealt with drug pricing, and it failed by a large margin. So it s just one of those, I mean literally, political moves that came from being really in the doghouse to really coming out and being really not under nearly as much political pressure. So I think you have to change that. In industrials, that s really connected with some of the infrastructure spending that we would expect. Frankly, we had a plus on both sides because that s a spot where you would have expected both had talked about infrastructure spending. And I think as Stu mentioned, with Trump having a Republican Congress, it seems likely that maybe he can at least get some through. Now, they may I d say again, your kind of standard Republicans, they re not typically as in favor of spending. But I still think again, given his I ll use my technical term mojo, he probably can get something through here. I think the last one I d want to highlight is really defense. Again, he s talked a lot about beefing up the defense, so I think it s highly likely we see increased defense spending. The last thing on the oh, I guess, one more thing it s not really a sector, but I think one other thing to watch is really the higher likelihood of corporate tax reform. I think you re going to see the market looking at companies that have a lot of cash holdings overseas and perhaps looking at that as an attractive quality that, again, because of probably the odds of a corporate tax reform have moved up, that may actually drive some moves there. A sector that tends to have a lot of that is technology, so you may see that there. Lastly, I do want to mention on the big picture of the market. So I do think you have to give that a Trump victory likely raises some uncertainty relative. One is when the non-incumbent party wins, just fact of the matter is, that s part of the reason why the market probably sold off in advance is because of that increase in uncertainty. 8

9 I think the second one is because, again, Trump is not your prototypical Republican, you certainly have to consider that side. And I think that side of things. And I think, and really, Stu talked about it. I know that certainly we are among the people going to be watching, and I m sure a lot will be watching what Donald Trump really prioritizes. So does he prioritize kind of that trade issue and the protectionism? That s likely less you know, probably less economically friendly. Stu would say, I would argue less, probably financial markets friendly versus the other side that s likely more economically friendly. Is financial market friendly, really focusing on that deregulation and that corporate tax reform, maybe personal tax reform, that side of things. So I think that s important to note. So let me wrap up with, because you may have thought you were through all the geopolitical things out there, I ll give you a list of the things that we re watching in the future. We won t talk a whole lot about them, but I just wanted you to know these are some things that we ll certainly be monitoring going forward, and we ll certainly be communicating with you if we think there s something you need to know on them. But we have upcoming a constitutional referendum in Italy. That may get pushed off, but at least as of right now, that s where that sits. We have a vote in Austria. I think the most interesting one, or at least certainly in the short run, is the UK. We talked a bit about Brexit earlier. They are supposed to trigger what s called Article 50 to start the countdown in exiting the European Union here in the first quarter of next year, but I didn t put it on here December 7 the Supreme Court in the UK is supposed to hear a case about Article 50, really deciding if Parliament needs to vote in order to trigger it. Why does that matter? Well, the markets are watching very closely on whether it s a very acrimonious, otherwise known in shorthand as a hard exit from the EU, or a soft one, meaning they could somehow negotiate a much more pleasant departure that keeps things much more intact. And I think to me, that s probably one of the biggest things to watch right now. So with that, I ve probably taken up more than my time here. So, Tom, I ll turn it back over to you. Terrific, Bill and Stu. Thank you for your opening comments as well. We have a lot of questions that have come in. I ll try to get to as many of them as possible. Loosely speaking, they break down into three buckets, one being purely economic, the second being policy, and the third being market. So, Stu, why don t I actually start with you and try to lump in a couple of different questions? This has to do with China, so the broad question is sort of impact of the election results on emerging markets. The more specific question is around how significant China s investment in the U.S. financial markets is. And the question is, could they easily pull out? What would be the impact? So I ll let you take that first. Yes. You know, China, obviously, Trump s and China s agreement or disagreement will be very important. I guess I d say that from an emerging market point of view, at this point, unless the dollar gets a lot stronger, and I don t think it will we do think it will over time, but not that quickly that the emerging market versus developed markets, international markets and the U.S. you know, Bill might have something to add I don t know as we d want to reallocate there at this point in time. China, I mean clearly, if we were to put tariffs on China, I expect to retaliate. That could come if we branded them or called them a currency manipulator. That would give the president in this case, president-elect, but then president you know, an ability to impose sanctions on China and then, you know, what could the Chinese do? Could they sell Treasury bonds? I suppose they could do that. I suppose they would also impose tariffs on us. And so you would get that kind of lose lose situation. But I guess I m hoping cooler heads will prevail and that some of that really strident talk about, you know, tariffs is not going to come to pass. But the whole issue of trade and trade deals and having better deals is what Trump has said he s all about. But on the other hand, I think he ll have some people around him, and we ll certainly see over the next couple of months who he appoints in different positions, that will moderate, maybe, any tendency he would have to do any bilateral, shall we say, trade protectionism with China. 9

10 Great, thanks, Stu. You did mention trade, which leads right into another question which is specifically just simply the threat of a trade war. Does that increase the likelihood of a recession, thinking 2017 or 2018? And if so, how would you handicap that? I mean, the threat you know, threats, like anything, work for a while until you either act on them or you don t, and the person or situation you re threatening kind of learns to ignore you. So I don t think that causes a recession. I think actual trade barriers and tariffs could do that, but simply the threat of one especially if it s kind of a bargaining chip from a guy who loves to bargain I don t think the threat of one is decisive in the economy growing or not growing. It may pare some of that economic growth. I mean, clearly, different industries that would be more subject to those international trade flows or companies that do more international business could have their stock prices affected. But I guess I m less concerned about the threat or fear of trade, because if it doesn t materialize in the next three or four months after the inauguration, I think the threat would be the threat level should come down, and in and of itself is not going to be recessionary or something that would make or break the economy. Yes. Stu, I m going to stay with you for one more and then switch to Bill. I m going to lump two together, one being Fed policy, which you did touch on, but specifically, could you reiterate your point on the probability of December for increase? Can you follow that up with your current forecast for 2017, and then also go a little longer out on the curve in terms of what you think the 10-year might do as we head into Yes, good question. As I said, December probability is I hate to sound like it s a toss-up. If the stock market holds in and there aren t any major sell-offs, lasting sell-offs, over the next 30 days, the Fed meets on December 13 and 14, I actually think some of the economic data they ll get I don t know to what extent it matters any more but on, say, retail sales, employment we may even get an upward revision to third-quarter GDP growth would reinforce the case, as the Fed likes to say, for a rate hike in December. The question is, will that be overdone or basically pushed out because of concerns about the economy next year amidst all this uncertainty, or the fact that the 10-year itself has moved up a lot. And that is, in a way, sort of a form of tightening. So I think it s a close call. I did check around some of our, quote, competitors. It seems to me, and not surprisingly, some of the Wall Street firms are still calling for a December rate hike. But I suspect it could very well go the other way if economic data s a little disappointing and the markets are highly volatile between now and the Fed. Looking out, as I mentioned, we think there could be two rate hikes next year, in part because of a little faster economic growth, in part because of some faster inflation and maybe inflationary expectations. In terms about the curve, as we say, we ve seen this sharp steepening in the curve over the last day or two. It was happening, really, over the last couple of months, but of course, in the last I guess it s now 12.5 hours it s really accentuated. The markets, as I say, even the short end of the market is down, so that would play into the idea of down in price, up in yield, that the Fed is still in play. So yes, if the Feds, even if they skip December and they go two times next year with a little bit of higher inflationary expectations, people recalling Janet Yellen s words of, Well, maybe the economy could run hot. Well, now there might be a reason to think it could without the Fed being determined to squash that by being aggressive. But that should mean a little steeper yield curve. 10

11 So whereas before, we thought maybe 2% was a reasonable level when the 10-year was at 1.75%, it does appear as though maybe more like a 2% to 2.25% range could be where we are at midyear and maybe a bit north of that by the end of the year, sort of a forecast in development and under possibly revision. But we were in the 1.5% to 1.75% range. We think we broke out of that 1.75% to 2%. And while today may be a big over-reaction, maybe something just north of 2% could be a reasonable place to see the 10-year trade over the first half of next year, going back to Bill s comments that we have been defensive on duration and looking for ways to still own fixed income, but in ways it would benefit if short rates go up or if inflation goes up with TIPS. Great. Bill, a question for you. And Stu, don t go far, because I have some more coming your way also. But Bill, we know that in Donald Trump s platform, there were a number of things, from corporate tax reform, individual tax reform, infrastructure spending, on to building a wall and other policies in that vein. If you had to outline some things that we should be watching for that should lead an investor to become more conservative or take defensive action, what would be some of those policy areas that would give you pause about our market outlook going into 2017? Bill Stone: Thanks, Tom. You know, what I would focus on is kind of what I talked about, which is where does he prioritize? Because you know, he still may say, Well, okay, I m going to I have an issue with the Chinese deal, so I m going to put some sort of tariff on a very specific subsector area. While I may or may not like that, I don t know enough about it to say. I m just using it as an example. But that s not the same thing as, I think, as Stu talked about, where you d have an entire thing of just declaring China a currency manipulator, where you re really starting a much bigger issue. And I think so what I would really watch is where does he prioritize? Does he spend his political capital on the deregulation side, on the corporate tax reform, on the, let s call it personal tax reform, personal tax cuts, whatever you d like to call it, that back side. If he uses that first in terms of what s really showing up as his major priority, and then because he wants to, I guess, in the main, he probably believes in some of these things, too, but deliver on what he talked about, if it s more of a, I guess, less focused on side, I think that s the way it goes well. So I think those are the keys to watch. Yes. Thanks, Bill. And we did have a couple of questions on what sectors should do well. I think you covered that in your presentation. I believe it was slide 25. Stu, back to you. I ll start you with a very easy definitional question, and then I want to move into a couple of things. So the definitional question, when PNC does our small business survey, can you define what you mean by small business? Yes. Typically, we re talking about companies that have less than $3 million in sales. They usually have less than 10 employees. They tend to be business veterans, we found, that often these people have been in business, running their own business for as many as 20 or 25 years. So we re not talking about recent startups and probably not a lot of tech companies in there. So it s definitely small in terms of revenue, in terms of sales, and in terms of numbers. You know, the kind by definition, I call them the grass roots of the American economy. You know, one little blade of grass, but when you multiply that by millions and millions, it s a landscape that is important to the economy, and maybe even more important than their larger brothers and sisters. So that s the definition of small tiny, tiny small. 11

12 Got it. And moving on to our outlook, Stu, we had a question that was asking whether or not our economic outlook was a little bit rosy, given some of the sort of, kind of world economic environments that you highlighted during your comments. So, one, a comment on the U.S. economy. But then take us right into how that plays with Donald Trump suggesting that he can take us from 2% to 4% growth. And the third part, so I hope you have your notepad, is the impact on debt and deficits of really trying to ramp up growth. Well, I see we re out of time for questions, but that would have been a good one. Well, you re right; it s like a three-part question. Are we a little rosy? You know, growth of just over 2.25%, at least relative to the last four or five years, if not rosy, would be a little on the higher side. But as I mentioned, if we re going to get some fiscal stimulus beyond what maybe even we were thinking about and as I said, I think housing will do well, and I still think the consumers will be hanging in there. That, to me, doesn t strike me as too rosy. If it were 3% or something like that, then I d be saying that s a lot. The question about taking us from 2% to 3% or 4%, I just don t think that happens next year. I suppose if, depending on what gets through the Congress and if he stays away from maybe some of the negatives on the trade side, you could stimulate faster economic growth, but you re going to need some productivity to go along with that as well. So maybe we could see some of that if some of the money that s invested or brought back in repatriation is put into new equipment and into worker training. But, you know, that s usually not a within-one-year phenomenon. So I think it is pretty tough to get economic growth from three or four or five years in a row of 2% up to 3% or 4% on a sustained basis. And then, I m sorry, Tom, the third part of that question? I started to write it down, but I missed one. That s all right. The debt and deficit, so if that accelerates, how does that roll through? Yes, I mean, you know, you re sitting there with a Republican Congress and a Republican House. It s very sensitive to the debt and the deficit. But I don t see any way you can cut taxes and do infrastructure spending and not, in at least, say, the first year, add to the deficit on that, even if there are some paybacks over time to a stronger economy and stronger revenues. Maybe that comes in year 2 or year 3, and it may be worth it. But I do think the outlook for the deficit is it went up a little this year for the first time. It s probably going to go up more next year, and next year, in this case, the fiscal year. But I think in the calendar year as the result of some fiscal policy actions. But I guess I still think there are going to be members of the House that are going to be looking for ways I m not sure how to try to minimize the amount of this that is deficit financed as opposed to the repatriation tax revenue or maybe some other types of revenues. But, you know, it s pretty hard to talk about what you think would be a tax hike coming out of the Republican Congress. So I think it means the deficit is bigger and, of course, that s financed and add to the debt. And as I said, I think a little bit of that is what s being processed in the higher Treasury yields today and that we think will probably persist over the coming year, even if we have a little bit of an over-reaction going on right now. Fantastic. Bill, one more for you. It s a softball question. And then we ll go to closing remarks. But the question is, how much longer do you expect the current strong market to continue? 12