Market Review and Q3 2019 Outlook - Live Mutual

Market Review and Q3 2019 Outlook

as of July 1, 2019

Past performance is no guarantee of future results. The information contained in this document represents the views of the MML Investment Adviser. LLC portfolio management team. This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are as of July 1, 2019 and may have changed since that time.

Asset Allocation Views

The views contained herein are as of July 1, 2019 and may have changed since that time.

Asset Allocation

The MML Investment Advisers, LLC portfolio management maintains a neutral position for equities versus fixed income ? Investors continued to bid global stock prices up in the second quarter of 2019, on diminished concerns that the global economy was entering a period of recession, the belief that the trade war was not escalating and expectations that the Federal Reserve's (Fed) and foreign central banks would be more supportive with monetary policy. A neutral stance for equities versus fixed income reflects these positive factors while recognizing downside risk given elevated stock prices, high debt levels, lackluster corporate earnings growth and political and trade uncertainty.

Equity & Commodity Related

Neutral on U.S. large cap ? While valuations are rich, the U.S. economic and employment data remains supportive. Negative on U.S. small cap ? Valuations relative to large cap stocks are less compelling at this point in the business cycle. Neutral on international developed ? Better valuations than U.S. stocks and more supportive monetary policy outside the U.S. are offset by relative weaker economic growth. Positive on emerging markets ? Inexpensive valuations and stablized global growth are positives, but we are monitoring the impact of policy changes and the ongoing trade war. Negative on U.S. REITS (downgrade) ? Inflationary pressures remain weak and valuations relative to U.S. stocks are no longer as compelling. Neutral on commodities ? Prices remain somewhat attractive offset by slowing global demand growth.

Fixed Income

Negative on duration (downgrade) ? Global fiscal and monetary stimulus support economic growth which in turn supports rising interest rates. Positive on U.S. Treasuries ? Yields and inflation expectations are modest. As corporate bond spreads tightened, the attractiveness of U.S. Treasuries has improved. Negative on investment grade ? Low yields and potential inflationary pressures mean that the risk-return trade-off is modestly better versus below-investment grade bonds. Neutral on high yield (upgrade) ? Improved yield spreads versus U.S. Treasuries and investment-grade corporate bonds combined stable global growth expectations make high yield bonds more attractive. Neutral on U.S. Treasury Inflation-Protected Securities (TIPS) ? Slowing global economic growth is expected to reduce inflationary pressures. Neutral on international bonds ? Underperformed U.S. bonds this quarter making the yield differential and currency exposures more compelling.

Overall Position

Fixed Income*

- Neutral

Equity* +

Equity*

U.S. Large Cap U.S. Small Cap Intl Developed Emerging Markets U.S. REITS Commodities

- Neutral +

Fixed Income*

Duration Treasuries Investment Grade High Yield TIPS International

- Neutral +

Current Position

Previous Quarter

* Equity include equities and alternatives. Fixed income includes fixed income and cash.

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Investors concerns over slowing global economic growth drove stock market volatility higher and prices lower

Q2 2019 Economic Review

? Investor pushed aside concerns of a global economic slowdown to bid global stock prices to near all-time highs. The market rally was supported by expectations that the U.S. Federal Reserve (Fed) would be cutting interest rates as soon as July 2019 and a belief that the trade negotiations between the U.S. and China appear to remained on track.

? Economists forecast global economic growth to remain positive in 2019. The expectation is for developed markets to grow by around 2%, while emerging markets are expected to grow by around 4%. A misstep in policy or an escalation of the global trade war could put more pressure on the global economy.

? In June, Fed chairperson Jerome Powell addressed fears of how the continuing U.S./China trade war could hurt the U.S. economy. Powell commented that the Fed was closely monitoring the situation and the Fed would "act as appropriate to sustain the expansion." This perceived willingness to cut interest rates was positive for risk assets and drove equity indices higher. Investors are currently expecting the FOMC to reduce interest rates by 0.25% in July and another 0.25% in October. The 10-year U.S. Treasury yield ended the quarter at 2.00%, down 0.41% from the prior quarter.

? U.S. companies in the S&P 500? Index reported that first quarter 2018 earnings per share declined by -0.4% as the trade war increased the cost of doing business. Globally, corporate earnings are expected to grow in 2019 as corporations adjust to tariffs and lower interest rates reduce debt servicing costs.

? Investor concerns regarding European Union stability remained top of mind as a Brexit agreement remains elusive with the U.K. expected to choose a new Prime Minister in July. Their first duty will be to negotiate an agreement by the October 31 deadline.

Q2 2019 Markets Review

? Global stocks outperformed for the quarter with U.S. growth stocks leading the charge. Clear signals from the FOMC that they would do everything in their power to counteract an economic downturn or financial turmoil, including lowering the Fed funds rate, was well received by investors.

? Global bonds, especially longer duration bonds, had a strong quarter as the expectations for easing global monetary policy drove interest rates lower.

? Emerging markets stocks continued to trail their developed market brethren as investors remained concerned over the impact of the ongoing trade war on exporters.

Asset Class

U.S. Large Cap Stocks U.S. Mid Cap Stocks U.S. Small Cap Stocks U.S. Value Stocks U.S. Growth Stocks Developed Market Stocks Emerging Market Stocks U.S. Bonds Developed Market Bonds Emerging Market Bonds U.S. High Yield Corporate Bonds U.S. Long Duration Treasuries

QTD (%)

4.30 3.19 2.10 3.68 4.50 3.68 0.61 3.08 3.42 3.76

2.50

6.11

YTD (%)

18.54 18.02 16.98 16.05 21.41 14.03 10.58 6.11 4.99 10.60

1 Year Benchmark

(%)

10.42 S&P 500 Composite 3.68 Russell Mid Cap -3.31 Russell 2000 7.34 Russell 3000 Value 10.60 Russell 3000 Growth 1.08 MSCI EAFE (net) 1.21 MSCI EM (net) 7.87 Barclays US Agg Bond 4.10 Barclays Gbl Agg Ex US 11.32 JPM EMBI Global

9.94 7.48 Barclays US Corp High Yield

11.14 12.30 Barclays US Treasury 20+ Yr

Source: Morningstar Direct as of 6/30/2019 Past performance does not guarantee future results.

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Consumers have plenty of reasons to be optimistic despite a lukewarm economy and high stock prices

Low unemployment, rising income, and increased wealth kept consumer confidence near post recession highs.

Average Hourly Earnings of All Employees: Total Private, Percent Change from Year Ago, Monthly, Seasonally Adjusted

4.00

3.50

3.00

2.50

2.00

1.50

1.00 Jun-07

Jun-09

Jun-11

Jun-13

Jun-15

Source: U.S. Bureau of Labor Statistics

Jun-17

Jun-19

Wage growth is especially strong in the private sector.

Companies are paying more to attract and retain workers as the unemployment rate has fallen to its lowest level since 1969 at 3.6% (3.7% as of June 2019). Continued wage growth may create risk that wages will cut into corporate earnings.

Retail sales are back on track after concerns that Fed policy would push the U.S. economy into a recession lessened considerably.

Consumer confidence rebounded and confident consumers tend to spend their hard-earned wages. House sales and prices have also rebounded after tax law changes reduced the ability for home buyer to deduct interest payments. Personal consumption expenditures grew at an annualized rate of 4.2% as of May 2019.

Advance Real Retail and Food Services Sales

8 6 4 2 0 -2 -4 -6 -8 -10 -12 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Federal Reserve Bank of St. Louis

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Positive U.S. economic growth and low interest rates are expected to support corporate earnings growth

Positive economic data and more supportive monetary policy by the Fed have fueled expectations for continued corporate earnings growth despite elevated debt levels.

The U.S. dollar continues to show strength, reminding investors of the leading role the U.S. plays in the global economy.

While global debt levels are elevated, a decade of expansive low-interest monetary policy keeps borrowing costs low. The Feds shift from monetary tightening back to stimulus should help keep interest rates lower for longer.

U.S. companies continue to deliver positive earnings per share growth despite the disruption that the global trade war has caused.

Strong sales growth, operating efficiencies, lower taxes, lower interest rates and net share buybacks among companies in the S&P 500? Index are expected to result in earnings per share growth of 2.4% in 2019 and 11.1% in 2020. Rising wages and higher debt levels may put continued earnings growth at risk.

S&P 500 Calendar Year Bottom-Up EPS Actuals & Estimates

$250

$200

$150

$100

$50

$0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: FactSet 5

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