2015_US Economy Outlook

A special publication from our Investment Strategy Committee

Its not too late to invest

2015 Economic and Market

Please see page 15 for important disclaimers.

Economy U.S. equities U.S. fixed income International Alternative investments

The U.S. economy should outperform others, potentially creating investment opportunities.

We expect further increases in corporate earnings and stock prices.

Investors may need to rethink strategies in light of probable Fed policy changes.

Investors may see improvement in the world economy and international markets.

Despite a disappointing 2014, we believe 2015 shows promise.

Economic and market forecast

Asset classes

Cash alternativesInternational developed stocksU.S. large-cap stocks Commodities

International developed xed income

Emerging-market stocksHigh-yield securitiesIntermediate-term IG bondsInternational emerging market xed income

Short-term IG bondsREITs

U.S. small-cap stocksU.S. mid-cap stocks

Long-term IG bonds

Ination-adjusted GDP latest quarter percent change annual rateUnemployment end of period/latestCPI ination 12-month averageFederal decit rolling 12-monthsExisting home sales (SAAR*) end of period/latestTotal vehicle sales (SAAR*) end of period/latest

Ination-adjusted GDP rolling four quarters3.5% 1

5.8% 2

1.7% 2

$0.5 tril. 2

5.3 mil. 2

16.4 mil. 2

2.3% 1

S&P operating earnings trailing four quartersS&P 500 price/earnings trailing four quarters operating earnings

S&P 500 index latest (as of 11/19/14)

17.5

2,048.72$117.00/shr.

U.S. equity

10-year Treasury yield latest (as of 11/19/14)30-year Treasury yield latest (as of 11/19/14)

Target federal funds rate latest (as of 11/19/14)

3.08%

0.09%2.36%

U.S. fixed income

Gold (per troy ounce) latest (as of 11/19/14)U.S. dollars per euro latest (as of 11/19/14)

Oil (per barrel) latest (as of 11/19/14)

$1.26

$74.58$1,182.72

MSCI Emerging Markets index latest (as of 11/19/14)MSCI EAFE index latest (as of 11/19/14) 1,820.89

989.91

International, commodities and currency

Sources: Bloomberg, Wells Fargo Advisors*SAAR = Seasonally adjusted annual rate 2 = Data as of October 20141 = Data as of third-quarter 2014

2014 latest

2014 latest 2015 year-end forecast

2014 latest 2015 year-end forecast

As of November 19, 2014, unless otherwise noted

Recommended tactical portfolio weightings As of November 19, 2014

Economy 2014 latest 2015 year-end forecast

2015 year-end forecast

17.2$128.00/shr.2,150-2,250

Forecasts andrecommendations inthis report are producedby analysts and strategistson the Wells Fargo AdvisorsInvestment StrategyCommittee.

Overweight Evenweight Underweight

5.4%1.8%$0.4 tril.

5.8 mil.17.5 mil.

2.8%

3.50%-4.00%3.00%-3.50%0.75%

$1.22-$1.26$1,050-$1,150$88.00-$92.001,050-1,1301,950-2,050

Source: Wells Fargo AdvisorsIG - Investment grade - Treasuries, agency securities, mortgage-backed securities, corporate bonds, and municipal bonds.See sector weightings denition on page 14.

2 Please see page 15 for important disclaimers.

2015 Economic and Market Outlook 3Please see page 15 for important disclaimers.

Key messages from our report

Economy 4 6

Be positive, not defensive

We believe 2015 may be the year when consumer condence catches upwith business condence. If so, investor condence could also improve.

The U.S. economic expansion could continue for several more years as thereis good news when looking at consumer and business nances, U.S. crudeoil production, and overall economic performance.

Onward and upward

We expect the U.S. stock market will continue to trend higher in 2015.

The November through May period tends to be a seasonally positiveone for stocks and to show a leaning toward cyclically sensitive issuesversus defensive.

We recommend investors carry overweight positions within cyclicallysensitive sectors for participation in this mid-cycle portion of the currenteconomic cycle.

A slow transition

We expect the Fed will begin increasing short-term interest rates duringthe summer of 2015.

Short-term rates should increase with greater velocity than long-term rates,causing the yield curve to atten.

We strongly advise investors to avoid overconcentration to any particular risk.A balanced position should generate acceptable performance while limitingrisk and allowing for allocations to be adjusted if volatility increases.

We expect better days ahead

The world economy and international markets are likely to improve in 2015,helped by a strengthening U.S. economy, lower energy prices, subduedination, and international government stimulus.

Investment demand for gold and silver is fading. We recommend reallocatingprecious metals positions into a broadly diversied commodity position.

We advise against giving in to the urge to sell o international positions inthis environment of a strong U.S. dollar and prospective U.S. economic andequity market outperformance.

U.S. equity

International

A brighter tomorrow?

For 2015, strategies that focus on buying and selling domestic stocks shouldgain from the increased volatility we anticipate.

Event driven and private capital strategies should do well as a result ofstrong corporate balance sheets and increased demand for more innovativelending solutions.

For the long term, we continue to believe diversifying alternative investmentholdings may be the best way to benet from a variety of strategies that tendto do well under diverse economic circumstances.

U.S. fixed income

Alternative investmentsTalk to your Financial AdvisorThe 2015 Economic and Market Outlook oers ourperspective on whats happened this year as well as ourforecast for the year ahead.

You may want to discuss these key points with yourFinancial Advisor to determine whether adjustmentsto your investments may be needed to help you stayon track toward your goals.

8

12

10

4The global economy is likely to increase only modestly in 2015, especially during the years first half. Economic growth slowed significantly in Europe and Japan in 2014. In addition, Chinese economic growth continues to slow as that country transforms from an economy based on exporting to one fueled by domestic spending.

The good news is global inflationary pressures are subsiding during this period of economic weakness, allowing consumers and businesses to stretch their spending further. Equally important, monetary policymakers in Europe and Japan are attempting to boost economic growth by purchasing assets following policies similar to the Feds recently completed quantitative easing program. However, it may take time for these efforts to produce results.Fortunately, U.S. economic policies have been more effective in boosting economic activity. Therefore, our economy is likely to be stronger than many others throughout most of 2015.

We project inflation-adjusted gross domestic product (GDP) growth will average 2.8% in the four quarters of 2015. That would be better than the current consensus expectation for economic growth to average 2.2% this year. In addition, we expect the 12-month consumer price inflation rate to average only 1.8% in 2015.

Be positive, not defensiveU.S. economy should outperform others, potentially creating investment opportunities

Economy


Disappointing economic news in foreign economies could create some volatility in global financial markets during 2015. However, we believe investors should not get too defensive but should remain positive and take advantage of opportunities that volatility creates.

Confidence likely to improve furtherOne of the positive surprises in the U.S. economy in 2014 has been the improvement in the labor market. Unemployment has been trending down since the end of the 2008-2009 recession. The jobless rate dropped to less than 6.0% in late 2014 as layoffs subsided and companies added workers.

Unfortunately, many workers who lost jobs during the recession are not getting the new ones. Consequently, consumer confidence still appears to be lagging business confidence. But we believe 2015 will be the year when consumer attitudes finally catch up to the improvements in the U.S. economy. If so, we would also expect investor sentiment to improve at the same time.

2.8Rolling four quartersinflation-adjusted GDP

forecasts2015 year-end

5.4End of year

unemployment

1.8-month average

CPI inflation

Source: Wells Fargo Advisors

Sources: The Conference Board, Haver Analytics, and Wells Fargo Advisors

Consumer confidence making a comebackAlready on a rebound,consumer condenceis likely to improve further.

150

25

Index 1985 = 100

Consumer condence index

Civilia

n un

employmen

t rate

50

75

100

125

1510050095

Gary ThayerChief Macro Strategist

2015 Economic and Market Outlook 5

Fed likely to raise ratesAs economic activity continues to improve, the U.S. economy should no longer need the economic stimulus exceptionally low short-term interest rates provide. However, the Fed has indicated short-term rates could remain low for a considerable period following the October 2014 ending of its quantitative easing program. We believe that means the Fed is likely to wait to start raising these rates until summer 2015.

If we are correct, the Fed would then be waiting until the global economy starts to respond to the economic stimulus out of Europe and Japan, reducing the risk that the Fed would be raising rates while the rest of the world is still weak.

Twin U.S. deficits declineIn addition to the improving U.S. economy, the federal budget deficit and the U.S. trade deficit have been positive surprises.

As employment grows, more people are working and paying taxes. At the same time, government spending on income support programs is growing more slowly. As a result, the U.S. federal budget deficit has dropped to less than 3.0% of GDP. This means the U.S. governments total debt is rising at a slower pace than a few years ago when the government was borrowing more money to finance bigger yearly deficits.

Sources: Haver Analytics and Wells Fargo Advisors

Federal budget deficit picture has improvedThe federal budgetdecit is signicantlyless than it was at theend of the recession.

$400

$-1,600

Billion

s

$-1,200

$-800

$-400

$0

Recessions

10 15050095

Federal budget surplus (+) or decit (-)


The U.S. trade deficit has also improved recently as the United States produces more domestic oil and natural gas, requiring less importing of foreign energy. The decline in imports means there are fewer dollars going overseas, dampening the supply of the U.S. currency in foreign exchange markets. This reduced supply of dollars from trade is occurring at the same time that the demand for dollars has improved as foreign investors look more favorably on the stronger U.S. economy and the decline in the federal deficit. As a result, the dollars value has strengthened.

We believe the last time the U.S. economy has been in a situation similar to the current environment was in 1997. That was the sixth year of the long economic expansion of the 1990s. It was also a period when the dollars value was strengthening because the U.S. economy was stronger than many foreign economies, especially several Asian economies which suffered currency crises that year. And that slow global economic growth dampened inflationary pressures. Of course, past performance does not guarantee similar results. Nevertheless, the U.S. economy continued to expand for several more years and did not go into recession until 2001.

6Onward and upwardWe expect further increases in corporate earnings and stock prices

U.S. equities

Our 2014 outlook called for the continuation of the slow-growth economy with moderate earnings growth and inflation. We expected greater volatility as the Fed continued to taper its quantitative easing bond purchases. During the Feds three quantitative easing phases, the markets traded on a bed of liquidity. When negative events led to selling pressures in recent years, liquidity, low inflation, and low interest rates enticed many investors to quickly buy on pullbacks.

We also believe the recent years low market volatility levels resulted from investors unwillingness to broadly speculate in stocks following the dramatic market declines during the last two recessions. Thus, pullbacks have tended to start from moderate valuation points (and even relatively attractive levels versus interest rate levels). This low volatility does not represent the norm.

Regardless of our expectations for increasing volatility, we anticipated late in 2013 that the S&P 500 Index would trade higher by year-end 2014. Although poor weather conditions negatively impacted first-quarter fundamentals, we enjoyed catch-up growth during the second quarter.

During the years first two quarters, S&P 500 Index operating earnings increased at an 11% rate. Third-quarter earnings appeared a touch stronger. In addition, earnings breadth (higher versus lower earnings) during the first nine months of 2014 hit the strongest level since 2010. This favorable earnings breadth is in keeping with the breadth of job growth across domestic economic segments during the past 18 months.


Throughout 2014, we recommended long-term investors use market pullbacks as opportunities to accumulate quality issues. During September and October, the combination of Fed tapering, soft international growth, ISIS and Ebola concerns, mid-term election chatter, and a history of seasonal weakness resulted in a nearly 10% correction for the S&P 500 Index. In the pullback, we suggested investors tactically overweight large-capitalization domestic stocks, taking the funds from cash.

More of the same aheadFrom our vantage point, the forward-looking domestic fundamentals have not changed. Our expectations for many leading indicators, market breadth, job growth and breadth, consumer confidence, and personal spending support our outlook for continuing broad economic expansion in 2015. We also continue to foresee further housing- and manufacturing-segment growth.

When stocks pulled back this fall, so did oil and gas prices, inflation expectations, and 10-year Treasury yields. Stocks appeared more attractive at lower levels, especially relative to the lower yields.

We continue to project 2015 S&P 500 Index operating earnings of $128 versus $120 in 2014. During the autumn pullback, we remained comfortable with our year-end 2015 S&P 500 Index target range of 2,150-2,250. Overall, slow international growth and a stronger dollar are likely to result in a continuation of moderate inflation levels and offer potential price/earnings (P/E) multiple expansion of the S&P 500.

128.00S&P 500 earnings

2,150-2,250S&P 500 index



2015 opportunities in U.S. equities

Consumer DiscretionaryIndustrials

Energy Consumer Staples

Information TechnologyUtilitiesFinancials

Health Care

TelecommunicationMaterials


Overweight* Evenweight* Underweight*As of December 2, 2014

*See sector weightings denition on page 14.

Stuart Freeman, CFAChief Equity Strategist

2015 Economic and Market Outlook 7Please see page 15 for important disclaimers.

Still mid-cycle with rate increases aheadIn recent quarters, inflation and interest rate levels have run below average street expectations. Although job growth increased at a 200,000-plus rate in October for the ninth month in a row (something not seen since the nine months through March 1995), inflation levels are still running below the Feds preferred 2% target. Wage inflation is stagnant; this remains an issue for the economy, the Fed, consumers, and voters.

Nonetheless, we believe 2015 will see the beginning of interest rate increases. The Fed has already begun to reduce its easing process through tapering; we expect it may begin to tighten next summer and perhaps once more by year-end 2015. The start of Fed tightening generally suggests it believes the domestic economy can expand with less help. Increases suggest the Fed is more comfortable with labor market metrics and that the economy can move closer to full potential and a healthy inflation level.

Of course, no cycle is exactly like another. Each has its own idiosyncrasies. However, there are some similarities across phases of economic recoveries. Consider the market performance from the point at which the Fed started to increase rates during the last two cycles (the periods beginning in February 1994 and June 2004). In those cases, S&P 500 Index performance was persistently positive in forward 12-month periods starting from the beginning of rate increases and continuing well beyond the start of those rate increases.

We have included a chart of 36 months of forward 12-month changes in the S&P 500 Index beginning with the initial fed funds rate increases in those two cycles. The blue bars represent forward 12-month S&P 500 Index changes for tightening that started in February 1994; the red bars depict the forward-looking market changes during the tightening cycle starting June 2004.

For both cases, positive fundamentals continued to support the stock market during the back end of the cycles, despite periods of rate increases. Furthermore, the returns of the 10 primary S&P 500 Index sectors were broad (on a 12-month forward-looking basis for 36 months following initial rate increases). The number of sectors that declined over one-year periods during the 1990s example averaged less than one out of 10. The average decline was one out of 10 sectors in the 2000s example.

As we look into 2015, the November through May period tends to be a seasonally positive one for stocks; it also tends to be a period that shows a leaning toward cyclically sensitive issues versus defensive. We recommend investors carry overweighted positions within the cyclically sensitive Industrial, Information Technology, and Consumer Discretionary sectors for participation in this middle portion of the current economic cycle.

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

50%

40%Ch

ange in S&P

500

Index

-10%

Higher rates may not hurt stocks

Sources: Factset, Conference Board, Wells Fargo Advisors

During the Feds lasttwo tightening cycles,the S&P 500 Indexsperformance wasconsistently positivefor long periods afterthe rst interest rateincrease.

0%

10%

20%

30%

Past performance is not an indication of future results.

Forward 12-month period beginning Feb. 1994Forward 12-month period beginning Feb. 2004

Months from first rate increase

8U.S. fixed income

The coming year is likely to be one of transition for the fixed income markets. We expect the Fed to move off of its policy of keeping rates essentially at zero. Short-term rates will remain extremely low by historical standards, but it has been over six years since the federal funds target rate was above virtually zero. Many investors have adapted their income and fixed income investment philosophies to account for a zero short-term rate environment; however, as short-term rates rise over time, strategies that were effective in the current environment may become less desirable for some investors.

Fed impactWe expect the Fed will begin increasing short-term interest rates next summer. Our federal funds target is 75 basis points1 at year end, implying two increases over the course of 2015.

We expect the Fed to take a measured and data-dependent approach that may result in long pauses between incremental increases in short-term rate policy, at least initially. Such an approach has the

A slow transitionInvestors may need to rethink strategies in light of probable Fed policy changes

potential to make messaging a difficult task for the Fed in the upcoming year. If the Fed does not clearly communicate its intentions to the market, fixed income volatility may increase in the year ahead.

As we move closer to an eventual increase in the federal funds rate, we expect short-term rates will increase at a greater velocity than long-term rates. The bond market is likely to adjust in advance of an actual increase in interest rates. For many investors, higher short-term interest rates could be a significant positive development providing meaningful risk-free returns for the first time in more than six years.

In longer maturities, we expect only modest increases in rates as the interest-rate curve flattens. Still, investors should remember that it takes only small increases in longer-term interest rates to have a significant negative price impact on long-maturity/duration fixed income positions.

Curve flattening should be expected well into and through the next Fed tightening cycle. Our 2015 targets allow for modest curve flattening as short-term rates move higher. Our 2015 30-year U.S. Treasury target is 3.50%-4.00%, just 50 basis points over our 10-year 3.00%-3.50% target.

0.75target federal

3.00 -3.5010-year Treasury yield

3.50 -4.0030-year Treasury yield


funds rate



2015 opportunities in U.S. fixed income

Agency securities U.S. Treasuries

Mortgage-backedsecuritiesMunicipal bonds

Preferred securities

Treasury Ination-Protected Securities

Corporate bonds


underweightEvenweight UnderweightOverweight overweightSlight Slight

Duration

As of December 2, 2014

See page 14 for duration denition.

Slightly short*

* We recommend a duration slightly short of an investors target duration. If an investor does not have a target duration, we recommend a duration of approximately 4.75 years in taxable portfolios and 7.25 years for tax-exempt portfolios.

Brian Rehling, CFAChief Fixed Income Strategist

1A basis point is 1/100 of one percent.

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

400

-200 0%

Yield curve has flattened after fed funds rate increases

Source: Bloomberg, Wells Fargo Advisors

Historically, the yieldcurve has attenedsignicantly in periodswhen the Fed increasedthe federal fundstarget rate.

Past performance is not an indication of future results.

Federal funds target rate

25%

300

200

100

0

-100

20%

15%

10%

5%

Curve s

teep

ness (b

asis points)

Rates

rise

Rates rise

Curve attens

Curve attens

Curve attens

10-year yield minus 2-year yieldFed funds target rate

Rates r

ise


A flattening curveThe interest rate curve flattened significantly in other periods in which the Fed increased the federal funds target rate. The flattening often occurred over a number of years, with the two-year Treasury yield moving above the 10-year Treasury yield by the end of each of the last three tightening cycles. We think the current cycle will likely follow a similar path, although we expect the curve flattening to be drawn out and occur over a number of years; investors should not fear that the current expansionary economic phase is nearing an end.

Potential investment implicationsTraditional fixed income: Investors in traditional fixed income have struggled with low yields for many years. The threat of rising interest rates has also been a concern for these investors. For most investors, high-quality fixed income securities continue to deserve a meaningful allocation in portfolios. Core bond positions can help reduce portfolio volatility and be a source of stability during equity market corrections.

High yield: In past tightening cycles, we have seen significant credit spread widening and underperformance in the high-yield space, but not until near the end of Fed tightening as rate increases slow the economy, the yield curve inverts, and recessionary conditions take hold.

Municipals: We expect that spending cuts will continue in 2015 due to the ongoing federal government sequester and 2014 mid-term election results, which will support the municipal market by limiting new supply as was the case in 2014. This could be somewhat offset by reduced demand due to less attractive relative valuations, which may continue to decline from two-year highs set in 2013 should yields on taxable bonds begin to rise in 2015.

Investors should be prepared for income strategies to struggle relative to recent performance as the curve flattens there is the potential that this could lead to liquidity concerns in certain products or asset classes at some point. While we remain concerned about this space, we recognize that avoiding credit risk in the income space will likely quickly hinder performance absent a near-term correction (giving up yield in a low-yield world quickly drags down performance). The impact is further magnified for portfolios that are also short duration.

In 2015 we look to balance credit and interest rate risk to maintain performance while strongly advising that investors avoid overconcentration to any particular risk. A balanced position should allow for investors to experience acceptable performance while limiting risk and allowing for allocations to be adjusted should volatility increase.


10

We expect better days aheadInvestors may see improvement in the world economy and international markets

International

Concern about global economic and earnings growth coincided with weaker international markets in late 2014. However, the world economy and international markets are likely to improve in the second half of 2015, helped by a strengthening U.S. economy, lower energy prices, subdued inflation, and government stimulus in the form of exceptionally low interest rates notably in Europe and Japan. Manufacturers around the world appear to agree: As the chart on page 11 shows, manufacturers in nearly 80 percent of non-U.S. countries surveyed expect expansion next year, a higher share than earlier in 2014.

The world economy is, nevertheless, improving more slowly than the U.S. economy, and the difference should be sharpest in the first half of 2015 while stimulus policies gradually take effect. That difference should favor the dollar over its main competitor currencies, especially in Europe and Japan. We expect a more mixed outlook for the dollar against emerging market currencies because these economies are healthier than those of Europe and Japan and, being the most reliant on energy, also benefit the most from reduced energy prices.

Global preferences should favor U.S. equity markets: The stronger U.S. economic growth and benign inflation prospects should support continued earnings gains and equity prices. By comparison, the developed and emerging market economies should generate less additional momentum, though the U.S. economys strength should spark faster global trade to offset much of the sluggish domestic activity.

International fixed income looks somewhat less attractive than equities: The slow economic pace and the hope that central banks might buy debt to stimulate their economies have reduced yields to unattractive levels in Europe, Japan, Canada, and Australia. In addition, the U.S. dollars potential strength against these countries currencies reinforces our advice to allocate less than the long-term target to these markets.

However, subdued inflation and a prospective pickup in economic growth create a neutral outlook for emerging market sovereign debt. Moreover, emerging market debt denominated in dollars should help investors diversify income sources and avoid the risk of currency depreciations. We recommend investors take emerging market, dollar-denominated debt holdings toward their long-term target allocations.

Commodity supplies expected to reboundIn general, we expect closer commodity supply-demand in 2015 and single-digit returns in 2015. For two years, miners have struggled to rein in supply and are starting to restore a supply-demand balance. Recent energy price declines have coincided with worries about slow global economic growth, the dollars appreciation, and concerns about excess supply, but crude oil demand continues to grow, especially in emerging economies. Likewise, grain markets slashed prices on record 2014 harvests, but low prices historically induce rising consumption and reduce planting a year later.

1,950-2,050MSCI EAFE equity index

1,050-1,130MSCI Emerging-market


equity index

88.00- 92.00Crude oil per barrel

1,050- 1,150Gold per troy ounce

1.22- 1.26euro exchange rate



CoreAsset class SatellitesDeveloped Markets Equity

2015 opportunities in international and commodity investmentsAs of December 2, 2014

MSCI EAFE index Germany, New Zealand, Switzerland, United Kingdom

Commodities DBIQ Optimum Yield Diversied Commodity index Energy

Developed Markets Fixed Income S&P/Citigroup International Treasury BondEx-U.S. index

NorwayEmerging Markets Equity MSCI Emerging Markets index Malaysia, South Africa, South Korea, Taiwan

Emerging Markets Fixed Income J.P. Morgan Emerging Markets Bond Index Global None at this time


Paul Christopher, CFAChief International Strategist


Yet, precious metals look unappealing. Falling prices and geopolitical tensions have fueled physical demand, but investment demand is much more important for gold and silver prices and is fading as U.S. interest rates rise amid low inflation. We recommend reallocating from precious metals into a broadly diversified commodity position.

Look for regional opportunitiesThe trend toward less correlation among financial markets and between financial and commodity markets should also produce opportunities next year. As the recent global crises fade, investment returns are again following their own driving factors, instead of moving up or down together, as in the worst days of the recent crises.

We see the increasingly uncorrelated movements among global markets as the visible sign of growing monetary policy and economic growth divergences. More regional opportunities are likely to arise from differentiated local and regional market performances, and equally important, we see the opportunity to gradually increase international exposure toward long-term target allocations while international markets are at an early stage of economic recovery.

Resist the urge to liquidateIn this environment of a strong U.S. dollar and prospective U.S. economic and equity market outperformance, investors may be tempted to sell off their international positions. This may have some benefit in the short run, but it: Increases exposure to an unfavorable U.S. economic or political surprise

Leaves the investor with the difficult task of timing a reentry into international markets later

Denies the possibility of gaining from diversification

That is, the factors that drive markets are reverting more toward local conditions, and the differences across countries may offer investors an opportunity to reduce the portfolios long-term up and down swings while gaining from the positive returns we expect from international investments.


Percentage of positive growth forecasts is increasing Manufacturers in nearly80 percent of non-U.S.countries surveyedexpect expansion nextyear, a higher share thanearlier in 2014.

Monthly data from January 2014 - October 2014. Sources: Bloomberg and Wells Fargo Advisors Manufacturer sentiment measured by the Markit purchasing managers' survey for the following sample: Austria, Brazil, Canada,China, Czech Republic, France, Germany, Greece, India, Indonesia, Ireland, Italy, Japan, Mexico, the Netherlands, Poland, Russia,South Korea, Spain, Taiwan, Turkey, the United Kingdom, and Vietnam.

0%

20%

40%

60%

80%

100%

Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct.

12 Please see page 15 for important disclaimers.

Renewed bouts of market volatility, policy uncertainty at home and abroad, and muted returns across most global asset classes weighed on alternative strategies total returns in 2014. However, while alternative strategy performance on average struggled, pockets of solid individual manager and strategy performance could be found, particularly within U.S. equity and more macro focused approaches.

Unfortunately, for a broader majority of alternative fund managers, geopolitical turmoil and global growth concerns continued to influence broad investor sentiment and markets in unpredictable ways, making the positive outliers more the exception than the rule.

However, despite many muted performances in 2014, we continue to believe that going forward the longer-term value proposition for incorporating alternatives remains in place particularly given our belief that the Fed will become relatively less accommodative in 2015, and correspondingly, financial asset prices will experience greater gyrations as market participants become more cautious.

Alternative strategies can provide enhanced diversification during such potential bouts of volatility, while also creating longer-term investment portfolio return opportunities, as flexible alternative managers attempt to exploit the distortions in global asset prices such events create.

Some strategies show particular promiseOverall, our teams broader economic and market outlook remains constructive, and we believe conditions remain favorable overall for alternatives, both in terms of potential diversification and return benefits. Below are our thoughts on a few of our favorite strategy types as we head into 2015.

Hedged equity: Despite a challenging 2014, we expect hedged equity strategies to benefit from the tailwind of reasonable earnings growth and solid corporate fundamentals in 2015. In addition, such strategies may benefit from greater performance dispersion as decreasing correlations and rising valuations place additional premium on security selection. And lastly, an increase in market volatility may create attractive long-term buying opportunities for flexible managers as they seek to opportunistically deploy cash following market corrections/sell-offs.

Event driven: Strategies relying on corporate activity to drive returns were some of the hardest hit in 2014, as crowded merger and spin-off related transactions and distressed security positions experienced markdowns during bouts of credit and equity market volatility. However, despite such short-term performance struggles, we continue to favor such strategies going into 2015. With public company balance sheets still flush with cash, activist managers continuing to pressure corporate boards for shareholder-friendly change, and default rates continuing to remain low, the foundations remain in place for further potential upside.

Private capital: We continue to maintain a favorable view of private debt investments as gaps in U.S. and European bank lending to small- and medium-sized businesses, combined with increased demand for more innovative and customized business lending solutions create opportunities for private funds to serve as lenders of last resort. This view is further reinforced by numerous European banks recent stress test failures, which may lead to greater divesting of assets by such financial institutions as they attempt to repair their balance sheets.

Alternative investments

A brighter tomorrow?Despite a disappointing 2014, we believe 2015 shows promise

Investment objectivesIncome. Emphasis on achieving current income.

Growth and income. Balance in emphasis between potential capital appreciation and income.

Growth. Emphasis is on potential capital appreciation.

Risk toleranceConservative. The least risk for a given investment objective.

Moderate. A higher degree of risk for the potential to receive higher returns.

Long-term. The highest risk within a given investment objective.

Strategic asset allocation models

Conservative Moderate Long term

Growth

Growth & in

come

Income

Conservative income

Conservative growth and income

Conservative growth

Moderate income Long-term income

Moderate growth and income Long-term growth and income

Moderate growth Long-term growth

* Includes emerging-market debt. Includes emerging-market equities.

Have an overall plan before you actTo make the process of developing your overall investment strategy easier, Wells Fargo Advisors has craftednine models for asset allocation (investment mix) that cover a wide range of objectives from conservative incometo a more aggressive long-term growth allocation . Your Financial Advisor can work with you to choose anasset allocation specifically addressing your situation, financial goals, and risk tolerance.

17% Internationalxed income*

9% International xed income*

11% Traditional xed income

8% Traditional xed income

Large-cap equity 15%

REIT equity 3%

Small-cap equity 4%

Mid-cap equity 4%

Small-cap equity 10%


Mid-cap equity 12%

Commodities 3%

2% High-yield xed income


2% REIT equity

6% International equity3% Cash alternatives

Commodities 2%

3% Cash alternatives

3% REIT equity

Commodities 3%

2% REIT equity



REIT equity 3%Internationalxed income* 8%

International xed income* 13%

REIT equity 3%

Small-cap equity 2%

Mid-cap equity 2%


3% REIT equity

International equity 13% International equity 15%

Small-cap equity 6%

Mid-cap equity 8%

Mid-cap equity 15%


International equity 24%


Mid-cap equity 2%Large-cap equity 2%

Commodities 2%

REIT equity 3%

Mid-cap equity 4%


Commodities 2%Small-cap equity 4%

High-yield xed income 4%

10% International equity



Small-cap equity 8%

Mid-cap equity 11%

International equity 18%

2% REIT equity2% High-yield xed income

Commodities 3%

Cash alternatives 2% Cash alternatives 2%

74%Traditionalxed income





International xed income* 7%




8% International xed income*



22%Large-capequity

27%Large-capequity

30%Large-capequity

30%Large-capequity

28%Large-capequity

17%Mid-capequity

32%Internationalequity

13

Asset allocation


14

DefinitionsCommodities are basic goods used in commerce that are generally interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services.Consumer Price Index (CPI) is a measure of the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.Core is a broad, well diversified position in commodities or international investments.Current yield (frequently referred to as yield) is the annual income an investment provides divided by its current market price. For example, a bond selling at par ($1,000) paying $100 annually in interest would have a 10% yield. However, if the bonds market price fell to $900, its yield would increase to approximately 11%.Cyclical stocks are typically those of companies that sell discretionary items that consumers can afford to buy more of in a booming economy and will cut back on during a recession. In other words, when the economy is doing well, cyclical investments tend to perform well. The opposite, of course, is true when the economy is doing poorly. Defensive investments, on the other hand, tend to be less affected by economic cycle changes.Defensive stocks tend to be resistant to general stock market fluctuations. An investor may hold these stocks to help provide their stock portfolio with some price stability in a volatile market. Utility, gold and silver producer, and some consumer goods stocks are generally considered defensive. Cyclical stocks, on the other hand, tend to be more sensitive to general stock market fluctuations.Duration can be used to estimate the percentage change in a bonds value that will result from a 1% change in interest rates. For example, a duration of four means that a 1% change in prevailing rates in a one-year period should shift the bonds price in the opposite direction by 4%. The longer (higher) the duration, the more the bonds price will fluctuate as interest rates rise and fall.Emerging markets are financial markets in countries with developing economies. These markets are typically immature compared to those of the worlds major financial centers but are becoming increasingly sophisticated and integrated into international markets; they provide potentially higher returns but are intensely volatile.Gross domestic product (GDP) is the total value of the goods and services the economy produces during a year. Increasing GDP indicates growing economic activity. Decreasing GDP suggests the opposite.High yield is noninvestment-grade fixed income securities (rated Ba1 or lower by Moodys and/or BB+ or lower by S&P). These investments are considered to be speculative and are subject to a higher degree of risk.

Intermediate-term fixed income includes instruments that mature in six to 12 years.International investing involves putting money into financial markets in developed economies outside of the United States.Large-cap growth stocks have a market cap greater than $10 billion and a price-to-book ratio greater than 2.3.Large-cap value stocks have a market cap greater than $10 billion and a price-to-book ratio less than or equal to 2.3.Liquidity, in regard to the economy, is a reference to the money supply. The greater the liquidity, the larger the money supply.Long-term fixed income includes instruments whose maturities are greater than 12 years.Mid-cap growth stocks have a market cap between $2 billion $10 billion and a price-to-book ratio greater than 2.3.Mid-cap value stocks have a market cap between $2 billion $10 billion and a price-to-book ratio less than or equal to 2.3.Quantitative easing is a Federal Reserve strategy for increasing the money supply (adding liquidity) to help keep interest rates low and stimulate economic activity. In general, it involves Fed purchases of bonds from banks, providing them with money to lend to businesses and consumers.Real estate investment trusts (REITs) trade on the major exchanges and invest in real estate directly, either through properties or mortgages.Satellites are complementary commodity or international positions held alongside the core (see definition) with the objective of outperforming the core. Keep in mind that allocations to satellites may increase volatility.Sector weightings are guidance stock market strategists use to indicate how they believe investors should allocate their stock portfolios. When a strategists guidance is to overweight a sector, he or she believes it will perform well in the future and investors should allocate a larger percentage of their stock portfolios to that sector than its relative representation in the S&P 500 index. For example, if the Energy sector represents 11% of the S&P 500 index and a strategists guidance is to overweight that sector, he or she is recommending that investors allocate more than 11% of their stock portfolios to the sector. If a strategists guidance is to evenweight a sector, he or she believes investors allocation to that sector should be in line with its representation in the S&P 500. If a strategists guidance is to underweight a sector, he or she believes investors allocation to that sector should be less than its representation in the S&P 500.Short-term fixed income includes instruments that mature in one to six years.Small-cap growth stocks have a market cap less than $2 billion and a price-to-book ratio greater than 2.3.


Index definitions

DisclaimersSome information contained in this report was prepared by or obtained from sources that Wells Fargo Advisors believes to be reliable. Any market prices are only indications of market values and are subject to change.

Wells Fargo Advisors may not offer direct investments into the products mentioned in this report.

Asset allocation and diversification do not guarantee a profit or protect against loss in a declining market.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuations, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Technology and Internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market.

The prices of small- and mid-cap company stocks are generally more volatile than large-company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.

Investing in fixed-income securities involves certain risks, such as market risk if sold prior to maturity and credit risk, especially if investing in high-yield bonds, which have lower ratings and are subject to greater volatility.

Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment. All fixed-income investments may be worth less than original cost upon redemption or maturity. Government bonds are guaranteed as to payment of principal and interest by the U.S. government if held to maturity. Although government bonds are considered free from credit risk, they are subject to interest rate risk.

Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal alternative minimum tax (AMT).

Mortgage-backed securities are subject to prepayment risks. Changes in prepayments may significantly affect yield, average life, and expected maturity.

Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk, especially when real interest rates rise. This may cause the underlying value of the bond to fluctuate more than other fixed-income securities.

There are special risks associated with investing in preferred securities. They are generally subordinated to bonds or other debt instruments in an issuers capital structure, subjecting them to a greater risk of non-payment than more senior securities. Preferred dividends are not guaranteed and are subject to deferral or elimination.

There are special risks associated with an investment in real estate, including possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions.

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors, including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal, monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.

An investment that is concentrated in a specific sector, industry, country, or commodity increases its vulnerability to any economic, political, currency, or regulatory development affecting the sector, industry, country, sector, or commodity, which may result in greater price volatility.

There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change.

An index is unmanaged and not available for direct investment.

DBIQ Optimum Yield Diversified Commodity Index is a measurement of 14 commodities drawn from the energy, precious metals, industrial metals, and agriculture sectors.J.P. Morgan Emerging Markets Bond Index Global tracks total returns for U.S.-dollar-denominated debt instruments issued by emerging-market sovereign and quasi-sovereign entities.MSCI EAFE (Europe, Australasia, and Far East) Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The index consists of the following 21 developed-market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.S&P/Citigroup International Treasury Bond Ex-U.S. Index is designed to reflect the performance of bonds issued by non-U.S. developed-market countries.S&P 500 Index consists of 500 industrial, financial, utility, and transportation companies with market capitalizations of $4 billion or more.

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This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is made available with the understanding that Wells Fargo Advisors is not engaged in rendering legal, accounting, or tax-preparation services. If tax or legal advice is required, the services of a competent professional should be sought. Wells Fargo Advisors view is that investment decisions should be based on investment merit, not solely on tax considerations. However, the effects of taxes are a critical factor in achieving a desired after-tax return on your investment. The information provided is based on internal and external sources that are considered reliable; however, the accuracy of the information is not guaranteed. Specific questions on taxes as they relate to your situation should be directed to your tax advisor.Wells Fargo Advisors is a broker/dealer affiliate of Wells Fargo & Company; other broker/dealer affiliates of Wells Fargo & Company may have differing opinions than those expressed in this report. Contact your Financial Advisor if you would like copies of additional reports.

Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value

Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company. First Clearing, LLC is a registered broker-dealer and non-bank affiliate of Wells Fargo & Company. 2014 Wells Fargo Advisors, LLC. All rights reserved.

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