yield, notwithstanding short-term uncertainty. Exhibit 20: Returns in 2016 At the dawn of 2017, we face uncertainty, but Some of the best-performing assets in 2016 experienced US equities and high yield are expensive, and significant declines before recovering. valuations no longer provide much margin of Total Return 6) safety and protection from the downside. Similarly, m Return Through Year-End 2016 other asset classes such as fixed income provide 40 m Return Through 2018 ow) sag negligible returns but come with downside risk, 45 313 e.g., if the incoming Trump administration’s fiscal ” policy is more stimulative than we expect or if the 12.0 Federal Reserve raises interest rates ata more rapid pace than we expect. 0 As we prepared our one- and five-year 410 - | | annualized expected returns for this Outlook and 209 cr finalized our investment recommendations for ‘a a 2017, we were struck by two observations. S&P 500 Total Return Index Bloomberg Barclays High S&P Banks Select Industry First, the general recommendations and see “eturn Total Return index volatility warnings in our Outlook publications nata through December 31,2016 over the last several years have been similar, have Source: Investment Strategy Group, BIobMBerG. been directionally correct and have generally a added value to our clients’ portfolios. We have continuously recommended that clients stay point of the year. Energy high yield provides an invested in their strategic US equity allocation. We — excellent example. On February 11, 2016, the have also recommended maintaining some tactical US energy high yield sector (as measured by the tilts such as an allocation to high yield. Yet we Bloomberg Barclays High Yield Energy Total have warned clients to be prepared for bouts of Return Index) was down 19.1% year to date—one volatility. Last year, our exact message to clients of the worst-performing sub-asset classes at that with respect to volatility was that “markets will time. Similarly, the US bank s