Investment and Economic Outlook Jeffrey Mortimer, CFA Director of Investment Strategy May 2018

Trade, Tariffs and Politics Causing Volatility S&P 500 INDEX This chart depicts landmark events that have contributed to the bouts of volatility so far this year. It is evident that equity markets do not like trade wars. As of 4/30/2018. Source: Strategas.

Beneath the Surface SECTOR PERFORMANCE S&P 500 Sectors M/M Chg YTD Chg Real Estate -0.62% -5.61% Utilities 2.10% -1.27% Energy 9.36% 2.92% Staples -4.32% -11.13% Telecom -0.98% -8.39% Discretionary 2.36% 5.53% Industrials -2.79% -4.31% Health Care 1.22% -0.02% Technology 0.09% 3.62% Materials 0.15% -5.37% Financials -0.37% -1.32% Consumer staples normally are a defensive sector in the market yet have the lowest YTD chg. Outperformance of consumer staples has always come in periods of falling inflation. Staples underperformance amounts to input costs relative to selling costs. When input costs take over it puts a lid on the profit margin causing underperformance in consumer staples. This happens when the market is anticipating inflation. As of 4/30/2018. Source: BNY Mellon WM. Total Return.

U.S. Wage Growth Bears Watching The uptick in wage growth signaling inflation caused the pullback seen in markets in February. Historically when this number gets to 4% it generally signals some challenges for the market. We’ve seem a modest increase in wage growth, but we are also factoring in the impact of tax reform. Some companies are paying bonuses, increasing wages or phasing in an increase in the minimum wage. Inflation can come from wage pressure or the velocity of money. Inflation would put a fire under the Fed, which has been patient based on docile inflation. Thus, we continue to watch this as it can influence the pace of the Fed. As of 3/31/2018 Source: EPI analysis of Bureau of Labor Statistics Current Employment Statistics public data series

10-Year Treasury Searches For New Range PERCENT We can see that the 10 year is definitely recalibrating to a new level. The question is, how does this picture end? New higher range is something we have to become more accustomed to. As of 5/2/18. Source: FactSet.

Equities vs. Bonds S&P EARNINGS YIELD OVER THE 10-YEAR TREASURY YIELD When you look at equity valuations relative to other asset classes, stocks aren’t as expensive as some may think. Over time this line does move from high to lows and everywhere in between. We are still in the range of 1 standard deviation up in the relative cheapness of equities vs. bonds. As of 4/30/2018. Source: Strategas.

Fiscal Policy Outweighs Tariffs $800BN FISCAL POLICY STIMULUS VS $31.5BN TARIFFS The markets aren’t worried about the current level of tariffs but they’re worried about the escalation of tariffs, specifically the tail wind of a trade war. Currently tariffs don’t hold a candle to tax reform. Source: Strategas.

Upward Earnings Revisions Moving Higher FactSet’s estimate for first quarter earnings growth is 17%. As of 4/30/2018. Source: Strategas.

Interaction between the Economy and Stock Market Low unemployment Falling commodity prices Inventories high Profits decreasing Falling inflation Capital expenditures decreasing Falling interest rates (loose $) High unemployment Rising commodity prices Declining inventories Profits accelerating Capital expenditures increasing Rising inflation Rising interest rates (tight $) Sell Protect Cheaper Capital: Borrow to Buy or Build

Interaction between the Economy and Stock Market Low unemployment Falling commodity prices Inventories high Profits decreasing Falling inflation Capital expenditures decreasing Falling interest rates (loose $) High unemployment Rising commodity prices Declining inventories Profits accelerating Capital expenditures increasing Rising inflation Rising interest rates (tight $) Sell Protect Cheaper Capital: Borrow to Buy or Build

Interaction between the Economy and Stock Market Low unemployment Falling commodity prices Inventories high Profits decreasing Falling inflation Capital expenditures decreasing Falling interest rates (loose $) High unemployment Rising commodity prices Declining inventories Profits accelerating Capital expenditures increasing Rising inflation Rising interest rates (tight $) Sell Protect Economy Stock Market Cheaper Capital: Borrow to Buy or Build

9:00: Current v. Historical Performance 11/30/2016 – 4/30/2018 Style Source: Morningstar Direct Performance measured using the following: Market Performance – S&P 500; Large Cap – Russell 1000; Small Cap – Russell 2000; Large Cap Growth – Russell 1000 Growth; Large Cap Value – Russell 1000 Value; Small Cap Growth – Russell 2000 Growth; Small Cap Value – Russell 2000 Value Current period is not included in historical average calculations.

Asset Class Positioning INVESTMENT STRATEGY COMMITTEE RECOMMENDATIONS Underweight Small Underweight Neutral Small Overweight EQUITY u Large Cap Mid Cap Small Cap International Developed Large Cap International Developed Small Cap Emerging Markets Private Equity Private Equity-Real Estate FIXED INCOME Treasuries Investment-grade Corporate Tax-exempt High Yield DIVERSIFIERS Real Estate (REITs) Long/Short Hedge Absolute Return Hedge Managed Futures Commodities We continue to recommend a slight overweight to equities and underweight to fixed income. We have taken the opportunity to lean in and reallocate to emerging markets equities, making our underweight in that category less severe. We expect diversifiers will continue to play their role in portfolios as a source of diversification and as a buffer of volatility. As of 3/7/18

Our Key Investment Themes 2018 Global Monetary Normalization Begins Fiscal Stimulus Market Volatility/ Geopolitical Risk Upward Drift in Inflation and Rates SYNCHRONIZED GLOBAL GROWTH Earnings-Driven Equity Gains Increased Dispersion Yield Curve Dynamics

Disclosure The information provided is for illustrative/educational purposes only. All investment strategies referenced in this material come with investment risks, including loss of value and/or loss of anticipated income. Past performance does not guarantee future results. No investment strategy or risk management technique can guarantee returns in any market environment. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. BNY Mellon Wealth Management may refer clients to certain of its affiliated offering expertise, products and services which may be of interest to the client. Use of an affiliate after such a referral remains the sole decision of the client. Strategic Architecture is a service mark owned by The Bank of New York Mellon Corporation BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2018 The Bank of New York Mellon Corporation. All rights reserved. M151157