CIO REPORTS

The Weekly Letter

AUGUST 2, 2016

Chief Investment Office

Themes are in the eye of the beholder: To our eyes, observable pockets of strength are driving Mary Ann Bartels
the bullish move in equities, suggesting various themes are at play. The continued reach for yield Head of Merrill Lynch Wealth
is evident in the performance of the Telecom and Utilities sectors. The outperformance of Energy Management Portfolio Strategy

and Materials is likely due to strong rallies in commodities. Industrials have gained from government Rodrigo C. Serrano
Vice President
spending for infrastructure and defense. Near-term risks, however, have produced episodic volatility.
In this environment we favor remaining diversified in higher-quality, dividend-paying companies.
Recent Publications
Markets in Review: Last week equities were mostly higher, with the S&P 500 Index flat but
international equities, as represented by the MSCI EAFE Index, up 2.4%. Bond prices rose, with Weekly Letter
Riding the Global Wave
the 10-year Treasury yield at 1.45% last Friday, down from 1.57% on Friday of the prior week. Midyear Review
Commodities overall, as measured by the Bloomberg Commodity Index, fell 0.4%, affected by a The Uncertainty Factor
Rethinking U.S. Trade
5.9% decrease in WTI crude to $41.60. Gold, however, rose by 2.2%, to $1,351.00 per ounce.
Monthly Letter
Looking Ahead: In a busy week for the U.S., we will be getting data on vehicle sales, a For What It’s Worth:
comprehensive snapshot of the service sector and Friday’s jobs report, all for July. Meanwhile, Something’s Happening Here

in the eurozone, Markit reports its final Composite Purchasing Managers Index for July. CIO Outlook
The Forces Shaping Our World

Themes are in the eye Exhibit 1: Year-to-date returns reflect a reach for yield
and the commodities rally.

of the beholder Telecom

Utilities
Energy 13.9
22.6
26.1

So far this year, episodic volatility has made it feel as if Materials 12.9
we’ve seen both a bull and a bear market in the S&P 500 in Industrials 10.1
just seven months. The index sank 10.3% from January 1 to Consumer Staples 9.7
S&P 500 7.7
February 11 and since then has bounced back 20.0%, making Information Technology 7.5
some investors feel as if they are running in circles. Many of Health Care 5.4
Consumer Discretionary 5.3
them are asking what to do with equity markets having hit
Financials 0.4
record highs. To our eyes, observable pockets of strength are 0 5 10 15 20 25 30
driving the bullish move, suggesting various themes are at YTD Returns (%)
play. While we remain neutral on the equity market in the Source: Bloomberg and Merrill Lynch Chief Investment Office.
Past performance is no guarantee of future results.
near-term, we are compelled to understand what’s driving it.

Central among the drivers is a continued reach for yield amid
rising expectations of lower-for-longer interest rates evident
in the performance of the Telecom and Utilities sectors.
They are the top performers, with year-to-date returns of
26.1% and 22.6%, respectively. Consumer Staples is also
outperforming the broader market with a return of 9.7%,
ranking it sixth among sectors.
Sandwiched in between these historically higher-yielding
categories are Energy, Materials and Industrials. Energy and
Materials have returned 13.9% and 12.9%, respectively. Their
outperformance is likely due to strong rallies in commodities
from very depressed levels on rising optimism that Emerging
Market economies will stabilize, China’s in particular. Meanwhile,
Industrials returned 10.1%. Increases in government spending for
infrastructure and defense, the result of fiscal stimulus approved
by Congress in December, may be behind its results.
Financials, on the other hand, is the worst-performing
segment of the market year-to-date, with a gain of 0.4%.
Its underperformance may be linked to reduced expectations
for the Federal Reserve raising interest rates this year. Despite
the lackluster result, we remain keen on the creation of the new
Real Estate segment within the Global Industry Classification

Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated
(MLPF&S), a registered broker-dealer and Member SIPC, and other subsidiaries of Bank of America Corporation (BofA Corp.).
Investment products:
Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value
© 2016 Bank of America Corporation. All rights reserved.
Standard (GICS). Equity-focused Real Estate Investment Trusts
(REITs) will be separated from Financials and put into this new
classification after the market close on August 31.
Strength from income, commodities, stimulus
A powerful force likely driving the outperformance of the
Utilities, Telecom and Consumer Staples sectors is a reach
for yield resulting from aging populations in search of income.
According to the United Nations, Japan, Europe, China and the
U.S., in aggregate, are expected to see a 44% increase in the
number of people 60 or older from 2015 to 2030. However,
confronting this demographic trend are extraordinarily low
interest rates. Central banks have scrambled to bolster
global economic growth by adopting ultra-low policy rates
and engaging in quantitative easing — the purchase of
various types of fixed income instruments aimed at lowering
borrowing costs throughout the economy. The result has been
an environment featuring the lowest global interest rates in
5,000 years, according to BofA Merrill Lynch (BofAML) Global
Research. The outperformance of historically high-dividend
paying sectors of the equity market may reflect bond refugees
roaming the investment landscape in search of yield.
Meanwhile, the strong performance of Energy and Materials
stocks compared to the broader S&P 500 has been partly
aided by rising commodity prices. Year-to-date, the Bloomberg
Commodity Index is up 7.5% and has rebounded 15.8% since
bottoming on January 20. Signs of stabilization in China have
been a significant factor underpinning sentiment, helping the
asset class recover from significantly oversold levels.
The prospect of future fiscal stimulus as well as the
spending approved by Congress in December has propelled
outperformance by Industrials. As we noted in The Weekly
Letter “Infrastructure Impulse,” investors increasingly believe
that infrastructure spending will grow regardless of who wins
the presidential election in November. Furthermore, defense
stocks have benefitted from increased procurement amid
rising geopolitical tensions. The research firm Strategas notes
that U.S. defense spending looks set to increase this year for
the first time since 2011.
Lower for longer stings Financials, but not REITs
Financials have been a laggard year-to-date, the result of
rising expectations for an environment of lower interest rates.
BofAML Global Research notes that recent disappointing job
creation, sluggish productivity growth and global risks abroad
are factors expected to push the Federal Reserve toward a
more conservative rate-hiking cycle.
Within Financials, however, we’re focused on August 31, when
after the market close equity REITs will be split out as a separate
CIO REPORTS • The Weekly Letter
GICS sector within the S&P 500. According to estimates
from BofAML Global Research and Cohen and Steers, the
resulting money flows into REITs from U.S. equity funds may
be between $30 billion and $100 billion due to the realignment
of investment weights with the new structure of the index. In
addition to potential near-term appreciation, REITs may provide
income-hungry investors with appealing dividend yields. As
of July 29, U.S. REITs offered a yield of 3.9%, versus 2.1% for
the S&P 500. The yield differential between REITs and 10-
year U.S. Treasuries stood at 2.4%, underscoring the relative
attractiveness of the REITs as a source of income. REITs may
also provide diversification by reducing volatility as they attract
greater liquidity from equity funds and separate from Financials,
historically among the most volatile sectors in the S&P 500.
Portfolio Considerations: The S&P 500’s volatile road thus
far this year feels to many as if the index has chased its own
tail. However, we have focused on notable areas of strength
within the index and the messages that can be discerned from
them. The reach for yield has been a significant driver in the
outperformance of Utilities, Telecom and Consumer Staples.
Rebounding commodity prices have helped turn Materials and
Energy into outperformers. Increased government spending
on infrastructure and defense, and the potential for further
stimulus, can be seen in the outperformance of Industrial stocks.
While we remain positive on equities over the longer-term,
near-term risks have produced episodic volatility, exasperating
investors. In this environment we favor remaining diversified in
higher-quality, dividend-paying companies. Patient, long-term
or more aggressive investors may consider reintroducing select
Emerging Market equities into their portfolios given appealing
valuation levels, while investors looking for a hedge against
volatility may consider maintaining a small allocation to gold.
Second-quarter S&P 500
earnings update
For the second quarter, S&P 500 earnings
are coming in better than expected. However,
their year-over-year growth is likely to remain slightly negative.
BofAML Global Research believes the worst of the decline in
earnings per share (EPS) is behind us and forecasts improving
trends over the coming quarters.
After three weeks of results, representing 76% of the index’s
constituents, 62% of companies have beaten on earnings per
share, 52% have beaten on sales and 40% have beaten on
both measures. This compares to the historic average for a
full quarter of 53%, 57% and 35%, respectively. Overall the
reporting season has not been bad versus expectations.
2
Markets in Review
Trailing Economic Releases Equities
Total Return in USD (%)
„„The Bureau of Economic Analysis reported that U.S. second-quarter
Level WTD MTD YTD
GDP grew at a seasonally adjusted annual rate of 1.2%, versus
DJIA 18,432.2 -0.7 2.9 7.4
a BofAML Global Research estimate of 3.0%. A contraction in NASDAQ 5,162.1 1.2 6.6 3.8
inventories was the primary driver behind the miss. S&P 500 2,173.6 0.0 3.7 7.7
„„The University of Michigan Sentiment index ticked higher to 90.0 S&P 400 Mid Cap 1,559.5 0.5 4.3 12.6
Russell 2000 1,219.9 0.6 6.0 8.3
in the final report for July from 89.5 in the preliminary report.
MSCI World 1,721.8 0.9 4.2 4.9
The result was in line with the BofAML Global Research estimate. MSCI EAFE 1,689.1 2.4 5.1 0.4
„„In the eurozone, quarter-over-quarter growth of second-quarter GDP MSCI Emerging Mkts 873.5 0.5 5.0 11.8
was in line with the consensus estimate of 0.3%. At 1.6%, year-over-
Fixed Income
year growth slightly beat the 1.5% estimate and compares to 1.7%
Total Return in USD (%)
in the first quarter. Yield (%) WTD MTD YTD
ML US Broad Market 1.80 0.5 0.6 6.1
S&P 500 Sector Returns (as of last Friday’s market close) ML 10-Year US Treasury 1.45 0.8 0.3 7.7
ML US Muni Master 1.67 0.2 -0.1 4.3
S&P 500 Sector Total Returns (week-to-date) ML US IG Corp Master 2.76 0.5 1.4 9.1
Information Technology 1.6% ML US HY Corp Master 6.76 -0.4 2.5 12.1
Health Care 0.3%
Materials 0.1% Commodities & Currencies
Consumer Discretionary 0.0% Total Return in USD (%)
Financials -0.1% Level WTD MTD YTD
Industrials -0.5%
Bloomberg Commodity 170.1 -0.4 -5.1 7.5
Telecom -0.6%
Utilities -1.1% WTI Crude $/Barrel1 41.6 -5.9 -13.9 12.3
Consumer Staples -1.4% Gold Spot $/Ounce1 1,351.0 2.2 2.2 27.3
Energy -2.0% Prior Prior 2015
Level Current Week End Month End Year End
-3% -2% -1% 0% 1% 2% EUR/USD 1.12 1.10 1.11 1.09
USD/JPY 102.06 106.13 103.20 120.22
Source: Bloomberg.1 Spot price returns. All data as of last Friday’s close.
Past performance is no guarantee of future results.

Looking Ahead
In the U.S., a busy week for July economic data is headlined by vehicle BofA Merrill Lynch Global Research
sales, a comprehensive snapshot of the service sector and Friday’s jobs Key Year-End Forecasts
report. In the eurozone, Markit reports its final Composite PMI for July. S&P 500 Outlook 2016 E
Target 2,000
Upcoming Economic Releases
EPS $117.00
„„On Tuesday, vehicle sales for July should provide a glimpse into the Real Gross Domestic Product 2016 E
state of the consumer. BofAML Global Research expects annualized Global 3.0%
sales of 17.3 million, an acceleration from the prior month’s rate of U.S. 1.9%
16.6 million. Euro Area 1.5%
„„On Wednesday, we get a comprehensive snapshot of the service Emerging Markets 4.0%
sector as both Markit and the ISM report their service sector PMI. U.S. Interest Rates  2016 E
„„On Friday, the Bureau of Labor Statistics releases its employment Fed Funds (eop) 0.63%
report for July. BofAML Global Research expects 165,000 jobs were 10-Year T-Note (eop) 1.50%
created during the month. Commodities 2016 E
„„On Wednesday in the eurozone, Markit reports its final Composite Gold (period average) $1,323
PMI for July. The consensus estimate is for a reading of 52.9, WTI Crude Oil (eop) $54.00
indicating growth in the region. All data as of last Friday’s close.

CIO REPORTS • The Weekly Letter 3

 CHIEF INVESTMENT OFFICE
Christopher Hyzy
Chief Investment Officer
Bank of America Global Wealth and Investment Management

Mary Ann Bartels Karin Kimbrough Niladri Mukherjee

Head of Merrill Lynch Wealth Head of Macro and Economic Policy Managing Director
Management Portfolio Strategy Merrill Lynch Wealth Management Chief Investment Office

Emmanuel D. Rodrigo C. John

Hatzakis Serrano Veit
Director Vice President Vice President

The opinions expressed are those of the Merrill Lynch Chief Investment Office only and are subject to change. While some of the information included draws upon research published by
BofA Merrill Lynch Global Research, this information is neither reviewed nor approved by BofA ML Research. This information and any discussion should not be construed as a personalized
and individual recommendation, which should be based on your investment objectives, risk tolerance, and financial situation and needs. This information and any discussion also is not
intended as a specific offer by Merrill Lynch, its affiliates, or any related entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or
service. Investments and opinions are subject to change due to market conditions and the opinions and guidance may not be profitable or realized. Any information presented in connection
with BofA Merrill Lynch Global Research is general in nature and is not intended to provide personal investment advice. The information does not take into account the specific investment
objectives, financial situation and particular needs of any specific person who may receive it. Investors should understand that statements regarding future prospects may not be realized.
No investment program is risk-free, and a systematic investing plan does not ensure a profit or protect against a loss in declining markets. Any investment plan should be subject to periodic
review for changes in your individual circumstances, including changes in market conditions and your financial ability to continue purchases.
Asset allocation and diversification do not assure a profit or protect against a loss during declining markets.
Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any
financial decisions. The investments discussed have varying degrees of risk. Some of the risks involved with equities include the possibility that the value of the stocks may
fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Bonds are subject to interest rate,
inflation and credit risks. Investments in high-yield bonds may be subject to greater market fluctuations and risk of loss of income and principal than securities in higher rated
categories. Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic
or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or sector may pose additional risk due to lack
of diversification and sector concentration. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic
conditions on real estate values, changes in interest rates, and risk related to renting properties, such as rental defaults. There are special risks associated with an investment
in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial
factors. Income from investing in municipal bonds is generally exempt from federal and state taxes for residents of the issuing state. While the interest income is tax exempt,
any capital gains distributed are taxable to the investor. Income for some investors may be subject to the federal alternative minimum tax (AMT).
Past performance is no guarantee of future results.
© 2016 Bank of America Corporation  ARNFGMHJ