2016 Economic Outlook

Economic Outlook

• We anticipate moderate economic growth will continue in the US with real GDP expanding in the range of 2.0%-2.5% in 2016
• The US consumer-led economy should benefit from improving consumer balance sheets and the stimulative effect of low energy prices, but upside may be constrained by declines in purchasing power and aging demographics
• The unemployment rate should fall below 5%, but the labor market participation rate will likely continue to remain at high levels, limiting wage growth increases
• Inflation is poised to moderately increase from current low levels, but should remain substantially below its historical long-term average
• We believe the Fed will continue raising the fed funds rate but the pace of the Fed rate increases will be data dependent and driven largely by inflation and a slower-than-historical pace is likely
• Other major central banks across the globe will likely reduce short-term rates, creating a divergence in monetary policy and the continuance of a strong US dollar
• Housing demand is poised to be relatively strong driven by the strength of the consumer, an improving job market, and moderately low mortgage rates
• On a regional basis, low commodity prices may continue to have a negative impact on energy and agricultural operators, generating ancillary challenges for communities centered around these industries

Fixed Income Outlook & Strategy

• Given our economic forecast, we anticipate below average returns for fixed income assets
• Uncertainty around the pace of Fed rate hikes may cause an increase in near-term volatility among fixed income markets
• The Fed’s inflated balance sheet and low global yields should continue to dampen longer-term interest rates, resulting in a flatter yield curve (less differential between short-term and long-term rates)
• As investors have sought yield in a low rate environment, corporate and high yield bonds have become relatively expensive by historical standards, creating headwinds for these assets in a rising rate environment
• Although municipal bonds have higher valuations than historical averages, the limited net supply of municipal bonds and the high tax environment may help support muni prices
• We have positioned fixed income portfolios to have shorter-than-benchmark durations and some flexibility to overweight more attractive fixed income sectors and to underweight less attractive areas of the market

US Equities Outlook & Strategy

• We anticipate below average, but positive returns for US equities supported by a moderate-growth economic backdrop
• Market volatility may be higher than it was during the extended period of accommodative monetary policy
• Corporate earnings growth will likely be the key driver of equity returns, as increasing cost of capital may weigh on price-earnings multiples
• Risks to US equities include renewed geopolitical fears, potential global economic slowdown, uncertainty around the pace of future rate hikes, the impact of a strong US dollar, and weakness in the energy sector
• We have positioned our domestic equity portfolios to intelligently combine passive and active strategies and have tilted our portfolios to favor strategies that do well in mid-to-late economic cycles

Foreign Equities Outlook & Strategy

• Accommodative monetary policies of many major foreign economies and relatively attractive valuations may create an environment where developed international equities outperform US stocks in 2016
• Although favorable valuations and strong demographic trends are positive factors for emerging markets, low commodity prices and a strong dollar will likely present continued challenges for EM stocks
• We continue to maintain exposure to foreign equities in our portfolios, particularly developed international strategies

Alternatives Outlook & Strategy

• A muted outlook for bonds and stocks with higher volatility increases the importance of finding alternative sources of return and managing risk
• We believe absolute return strategies with low correlations to traditional markets will play an important role in providing independent sources of return and diversification benefits for investors
• Real assets strategies, such as real estate and commodity exposures, generally help to hedge against unexpected increases in inflation and to protect investors’ long-term purchasing power, but may continue to face headwinds in the near term
• We have positioned our alternative portfolios to increase exposure to absolute return strategies and decrease allocation to real assets

The INTRUST 2016 Economic and Market Perspectives is a consensus of divisions within INTRUST Bank, N.A. ("INTRUST") and is based on third party sources believed to be reliable. INTRUST has relied upon and assumed without independent verification the accuracy and completeness of this third party information.

INTRUST makes no warranties with regard to the information or results obtained by its use and disclaims any and all liability arising out of the use of, or reliance on the information.

We have positioned our alternative portfolios to increase exposure to absolute return strategies and decrease allocation to real assets