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Economic and Financial Market Review and Outlook Market Commentary

September 2015

ECONOMIC WEAKNESS IN CHINA and related policy responses, along with potential Federal Reserve (Fed) rate normalization, have been driving the markets since mid-August. Realized and implied volatility has surged across asset classes, and U.S. equity markets saw their first 10% correction in four years. Chinese authorities’ intervention and the European Central Bank’s efforts to expand quantitative easing supported developed markets in early September.

Market pricing suggests the Fed is more likely than not to hold policy rates steady in September, which is consistent with our view. But opinions and market pricing remain split in the days ahead of the September 17 decision, so either decision – to raise rates or not – is likely to cause volatility in various market segments.

Labor Market Continues to Improve The August unemployment rate fell to a new cyclical low of 5.1%. This level approaches the average unemployment rate of 4.5% at cyclical lows during prior U.S. expansions since 1960. The labor market has retraced roughly 90% of the increase in unemployment from the low of 4.4% in May 2007 to the peak of 10.0% in October 2009.

The pace of overall job gains in August was marginally slower than the average of prior months, and overall wage growth remains slow. However, the broad employment picture shows the labor market moving closer to full employment.

By itself, the labor market situation would support the Fed beginning the rate normalization process. However, inflation measures continue to move counter to the Fed’s desired path, and growth in the manufacturing sector appears to have lost momentum. These developments are inconsistent with the Fed lifting rates in September, while the deterioration in financial conditions over the past month may also influence the Fed’s decision.

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Keith Hembre, CFA Chief Economist and Investment Strategist, Head of Quantitative Strategies Nuveen Asset Management, LLC

Economic and Financial Market Review and Outlook

September 2015

Unemployment Fell to a New Cyclical Low 12%

U.S. Unemployment Rate

to oscillate around the 2% trend in place since the recovery began in 2009.

Average Unemployment Trough

10%

Certain segments of the economy continue to perform well.

Auto sales rose to a 17.7 million unit annual rate in August, the best reading of this cycle. Service sector activity also appears relatively strong based on recent survey data. Second quarter gross domestic product (GDP) growth was revised up to 3.7%, but that gain featured the largest quarterly buildup of business inventories since 1998. The overall business inventory-to-sale ratio now sits at its highest level since 2009.

Average Trough Since 1960 = 4.5%

8% 6% 4% 2%

1950

1960

1970

1980

1990

2000

2010

Source: Bureau of Labor Statistics. Data from 1/1/48 to 8/31/15.

These high inventory levels were likely a factor leading the August ISM manufacturing index to slip to 51.1. This is the lowest reading since early 2013 when the Fed was in the early stages of the third quantitative easing program. High inventories will likely weigh on production in the months ahead.

Inflation Moves Lower The Fed has repeatedly indicated that it must be reasonably confident that inflation will move toward its 2% objective before it will begin rate normalization. The Fed views falling energy prices and the strengthening dollar as transitory effects on inflation and expects the improving labor market to push inflation higher over time.

Manufacturing growth typically correlates with financial market performance and Fed policy moves. The Fed has undertaken five monetary policy tightening cycles since the early 1980s. At the onset of each cycle, the ISM manufacturing index was 55.0 or better, indicating broad-based manufacturing momentum. It would be unusual to see the onset of a rising interest rate cycle in the face of the current softening in momentum.

But inflation measures are moving in the opposite direction.

A broad range of inflation indicators seem to signal with reasonable confidence that inflation will not return to 2% over the Fed’s forecast horizon.

▪▪ The PCE deflator, the Fed’s preferred measure of inflation,

Manufacturing Growth Typically Correlates with Fed Moves ISM Manufacturing Index Level

has risen just 0.3% since July 2014. While falling energy prices have played a role, the slide in crude oil prices to new lows in August suggests this effect is likely to persist longer than the Fed’s forecasts anticipated.

▪▪ The core PCE deflator (excluding food and energy

prices) fell to just a 1.2% annual increase in July, the lowest reading since 2011.

▪▪ Inflation compensation available in the Treasury market in late August slipped to the lowest level since 2009.

65 60.5

60

55.8

55

56.5

56.1

55.5

51.1 50

Sept 2015

June 2004 June 1999 Feb 1994 Rate Increase Cycle

April 1987

May 1983

Source: Institute for Supply Management.

▪▪ Disinflationary pressures will likely intensify, suggested by

If the Fed holds policy rates steady, we would expect to see: ▪▪ Higher inflation expectations ▪▪ Steeper yield curve ▪▪ A weaker dollar ▪▪ Support for riskier market segments such as credit, equities

recent developments such as China’s modest devaluation of the yuan and the renewed slump in commodities.

Economic Data Remains Mixed Labor market data show that the economy grew steadily above its long-term potential as the unemployment rate continued to decline through August. Economic growth data continue

and emerging market currencies and equities ▪▪ Support for precious metals and broader commodities in the near term

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Economic and Financial Market Review and Outlook

September 2015

We think these anticipated moves would likely be fairly muted for a couple of reasons.

First, with one week to go before the Fed’s decision on rates, markets are assigning only a 30% chance of a September move. In addition, we would expect a rate increase to begin when we see an upturn in inflation readings and expectations. More important to market performance will be the evolution of the global growth picture and related policy responses by governments and central banks in the world’s major economies.

Investment Strategy We are maintaining our underweight in emerging market equities. China’s economic performance continues to be uncertain with no basis for a fundamental upturn. Government intervention remains a wildcard for local Chinese markets, and these interventions have contributed to significant market swings in recent weeks. In the intermediate-term, these actions will likely result in a less efficient market as investors demand a higher risk premium. Policy options for many other emerging markets appear fairly limited. However, the meaningful decline and negative sentiment in emerging markets may lead us to tactically add exposure should the current downtrend break.

We maintain an overweight in EAFE (Europe, Australasia, Far East) equities.

Policy makers in Europe and Japan are responding to recent market weakness. The European Central Bank has expanded the scope of quantitative easing, and Japan has proposed lower corporate tax rates.

Within the domestic markets, we continue to prefer large cap equities relative to small caps. The relative performance pattern remains choppy in 2015 following a strong year of relative performance for large caps in 2014. The underlying trend and relative valuations remain favorable for large caps.

Surprisingly, Treasury bonds have failed to rally in concert with equity weakness over the past few months. This may be related to China selling Treasuries to support its domestic markets, rising real interest rates in anticipation of a Fed rate increase, or a combination of these factors. In particular, Treasury inflation protected securities (TIPS) have underperformed due to their longer duration and falling inflation expectation.

We remain overweight high yield municipal bonds relative to core bonds and inflation protected securities. High yield municipals have been a relatively stable source of high income.

We remain relatively neutral on real estate and commodities, although we continue to hold a small options-related natural gas position, given depressed pricing for natural gas and the high implied volatility. ▪

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Economic and Financial Market Review and Outlook

September 2015

For more information, please consult with your financial advisor and visit nuveen.com.

Future is a financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.

Inflation represented by the Consumer Price Index (CPI), reflecting the change in consumer prices determined monthly. Core inflation excludes food and energy.

ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.

The personal consumption expenditure (PCE) deflator measures the average change over time in the price paid for all consumer purchases.

SOURCES Payrolls U.S. Department of Labor

RISKS AND OTHER IMPORTANT CONSIDERATIONS

This information represents the opinion of Nuveen Asset Management, LLC and is not intended to be a forecast of future events and this is no guarantee of any future result. It is not intended to provide specific advice and should not be considered investment advice of any kind. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. This report contains no recommendations to buy or sell specific securities or investment products.

All investments carry a certain degree of risk, including possible loss of principal and there is no assurance that an investment will provide positive performance over any period of time.

There are specific risks associated with small company investments including higher volatility than large cap companies and limited resources. Investing internationally presents certain risks not associated with investing solely in the U.S., such as currency fluctuation, political and economic change, social unrest, changes in government relations, differences in accounting and the lesser degree of accurate public information available, foreign company risk, market risk and correlation risk. These risks can be exaggerated in emerging markets. Commodities markets historically have been extremely volatile, and the performance of securities and other instruments that provide exposure to those markets therefore also may be highly volatile.

Derivative securities may experience heightened interest rate risk. The use of derivatives

Gross Domestic Product U.S. Department of Commerce Business Inventories U.S. Department of Commerce S&P 500 Standard and Poor’s U.S. Treasury and U.S. and Foreign Government Bond Yields Bloomberg Treasury Spreads Bloomberg Oil Prices Bloomberg U.S. Dollar Index Bloomberg

presents risks different from, and possibly greater than, the risks associated with investing directly in traditional securities. Securities in the real estate sector are greatly affected by economic downturns that may persist as well as changes in property values, taxes, and regulatory developments. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Credit risk refers to an issuers ability to make interest and principal payments when due. The guarantee provided by the U.S. government to treasury inflation protected securities relates only to the prompt payment of principal and interest and does not remove the market risks of investing in these securities. High yield bonds are speculative and along with unrated bonds may carry heightened credit risk, liquidity risk, and potential for default.

Investors should contact their tax advisor regarding the suitability of tax-exempt investments in their portfolio. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on state of residence.

It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.

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