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

2. 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.

3. 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.

4. 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

5. 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.

6. 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.

7. 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.

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

9. 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

10. 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

11. 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

12. 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.

13. 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

14. 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

15. 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.
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