1Past performance is no guarantee of future results. Financial term and index definitions are available in the appendix.

The Anatomy of a Recession: What to Look for and Where We’re Headed

First Quarter 2019

Investment Products: Not FDIC Insured • No Bank Guarantee • May Lose Value

2

Probabilities vs. PossibilitiesThe Wall of Worry

North Korea Escalation

Eurozone Breakup

Trade Wars

Dollar Strengthens

Rising U.S. Debt Burden

Fed Tightens

EM Problems Intensify

U.S. Economy Slows

Inflation Overshoot

China Hard Landing

Peak Earnings

3

S&P 500 & Panic Attacks

Data as of Dec. 31, 2018. Source: Standard & Poor’s.

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

2015 2016 2017 2018

Brent Bottoms

at $27.88

“The definition of insanity is doing the same thing over and over again and expecting a different result.”

- Attributed to Albert Einstein

Greece Sets

7/5 Vote

Renewed

Grexit

Scare

Yuan Devalued &

ETF Flash Crash

Oil Falls, Dollar Rises

Third Ave

Blows Up

Endgame

Panic

WTI

Bottoms

Brexit

Rate Hike

Scare

Japan

Goes

NIRP

Trump

Impeachment

Scare

N. Korea

Crisis

Short

Volatility

Unwind

Trade War

Escalation

Quitaly

Fears

U.S. Gov.

Shutdown

Fed

Communication

Error

4

Investment Returns

10.2%

9.7%

6.3%

5.4%

3.5% 3.5%

2.7% 2.6%

0

2

4

6

8

10

12

U.S. Stock REITs Governments

Related Bonds

International

Equities

Gold Homes Inflation Average Investor

Effects of Panic Attacks on Average Investors30 Years Annualized Returns (1987-2016)

Source: Bloomberg, Dec. 31, 2016. Average asset allocation investor return is based on an analysis by DALBAR, Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Indices shown are as follows: REITs are represented by the Wilshire U.S. REIT Index, U.S. Stocks are represented by the S&P 500 Index, International Equities are represented by the MSCI EAFE Index, Government-Related Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index, Homes are represented by U.S. existing home sales median price, Gold is represented by the U.S. dollar spot price of one troy ounce, Inflation is represented by the Consumer Price Index. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance is no guarantee of future results.

5

S&P 500 Market Crashes vs. PullbacksCrashes are longer, more extreme, and more likely to be followed by a recession

Market Crashes defined as decline of 20% or greater in S&P 500 lasting at least 1 year. Pullbacks defined as declines of 15% or greater in S&P 500 (no time component). 1987 decline persisted at 20% or greater loss 1 year after Aug-87 peak despite trough coming in Dec-87.Source: S&P, NBER, and Bloomberg.

Market Crashes

Peak Trough Days S&P 500 Recession

Nov. 1968 May 1970 543 -36% Yes

Jan. 1973 Oct. 1974 630 -48% Yes

Nov. 1980 Aug. 1982 621 -27% Yes

Aug. 1987 Dec. 1987 101 -34% No

March 2000 Oct. 2002 929 -49% Yes

Oct. 2007 March 2009 517 -57% Yes

Average 557 -42% 83%

Pullbacks

Peak Trough Days S&P 500 Recession

Sept. 1976 March 1978 531 -19% No

Feb. 1980 March 1980 43 -17% Yes

July 1990 Oct. 1990 87 -20% Yes

July 1998 Oct. 1998 83 -19% No

April 2010 July 2010 70 -16% No

April 2011 Oct. 2011 157 -19% No

Average 162 -18% 33%

557

162

Days

-42%

-18%

S&P 500 Drawdown

83%

33%

Recession Probability

3x longer

than

a pullback

2.3x as

severe

2.5x more

likely to

coincide with

a recession

Market Crashes Pullbacks

6

1929 vs. 1987

Black Monday: Truly an Outlier?The Great Depression: 1929

7

Strength of Economic Expansions

Data as of Sept. 30, 2018, most recent available as of Dec. 31, 2018.Source: Strategas Research Partners. U.S. economic expansions since 1948.

-10

0

10

20

30

40

50

60

0 5 10 15 20 25 30 35 40

Cu

mu

lati

ve %

Gro

wth

Number of Quarters

Current Expansion

Average Rebound: 23%

Historical Expansions

1948 - 1953

1960 - 1969

1990 - 2001

2007 - Present

1981 - 1990

2001 - 20071969 - 1973

1973 - 1980

8

Just How Long Can The Cycle Continue?

As of Dec. 31, 2018.Source: FactSet.

0 5 10 15 20 25 30

Australia (Jan 1992 - Present)

Japan (1975 - 1992)

UK (1992 - 2008)

Canada (1992 - 2008)

U.S. (1990 - 2001)

U.S. (June 2009 - Present)

Number of Years

Historical Economic Expansions

Extended economic expansions are more common outside of the U.S.

9

U.S. Recession Risk Indicators

• 12 variables have historically foreshadowed a looming recession

• Yield curve, credit spreads, money supply and commodities signal risk right now

Fin

an

cia

lIn

flati

on

Co

nsu

mer

Bu

sin

ess

Acti

vit

y

Expansion Recession Caution

Data as of Dec. 31, 2018.Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg.

Fourth Quarter 2018 Third Quarter 2018

Yield Curve

Credit Spreads

Money Supply

Wage Growth

Commodities

Housing Permits

Jobless Claims

Retail Sales

Job Sentiment

ISM New Orders

Profit Margins

Truck Shipments

Overall Signal

10

U.S. Recession Risk Indicators

• 12 variables have historically foreshadowed a looming recession

• Yield curve, credit spreads, money supply and commodities signal risk right now

Data as of Dec. 31, 2018.Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg.

Current 2007-2009 2001 1990-1991 1981-1982 1980 1973-1975 1969-1970

Yield Curve

Credit Spreads

Money Supply

Wage Growth

Commodities

Housing Permits

Jobless Claims

Retail Sales

Job Sentiment

ISM New Orders

Profit Margins

Truck Shipments n/a n/a

Overall

Fin

an

cia

lIn

flati

on

Co

nsu

mer

Bu

sin

ess

Acti

vit

y

Recession

Expansion Recession Caution

11

U.S. Recession DashboardCase Study: 2006-2009

Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg.

Fin

an

cia

l Yield Curve

Credit Spreads

Money Supply

Infl

ati

on

Wage Growth

Commodities

Co

nsu

mer

Housing Permits

Jobless Claims

Retail Sales

Job Sentiment

Bu

sin

ess

Acti

vit

y

ISM New Orders

Profit Margins

Truck Shipments

S&

P 5

00

1,270

1,418

1,5031,468

1,280

600

800

1,000

1,200

1,400

1,600

Q2 2006 Q4 2006 Q2 2007 Q4 2007 Q2 2008

Overall Signal:

Overall Signal:

Overall Signal:

12

Yield Curve Spread10-Year Treasury Bonds Minus 3-Month T Bills

Data as of Dec. 31, 2018. BPS = Basis Points, one hundredth of one percent.Source: Fed Reserve Bank of St. Louis, retrieved from FRED. Compiled: econpi.com

Yield curve spread less than zero (inverted)

occurs prior to recessions.

0

50

100

150

200

250

300

350

400

450

500

-300

-200

-100

0

100

200

300

400

500

1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

Recession Yield Curve Spread

Basi

s P

oin

ts (

BP

S)

13

S&P 500 Returns by Yield Curve SteepnessEquities Have Done Well Following a Flatter Yield Curve

Data from 1962-Dec. 31, 2018. Source: Federal Reserve, S&P, Bloomberg, and FactSet.Note: Forward 12 and 24-month annualized returns for S&P 500 based on level of 3-Month vs. 10-Year yield curve and change in 3-Month vs. 10-Year yield curve over prior 3 months during periods where the yield curve flattened over the prior 3 months.

0 to 50 BPS

Yield Curve

Steepness

0.9

5.3

10.9

13.5

9.8

2.2

5.0

7.6

11.4

10.2

0%

2%

4%

6%

8%

10%

12%

14%

16%

< 0 0 - 50 50 - 100 100 - 200 > 200

Basis Points

12 Month Annualized Returns 24 Month Annualized Returns

A flattening yield curve traditionally provides positive returns over

the following one and two years.

Investor returns drop substantially once the yield curve inverts.

14

Job Openings vs. Unemployed

Data as of Nov. 30, 2018; most recent available as of Dec. 31, 2018.Source: FactSet, DOL, NBER.

0

2

4

6

8

10

12

14

16

18

2001 2003 2005 2007 2009 2011 2013 2015 2017

Th

ou

san

ds

Recession

Job Openings, Non-Farm, US, Level, In Thous, SA, JOLTS - United States

Unemployment, Thous Persons - United States

At the peak in 2009, there were seven unemployed people for every job opening.

Today, the ratio is less than 1:1.

7:1

Ratio

1:1

Ratio

15

Households Assets vs. Liabilities

1As of Date: Sept. 30, 2018, latest available as of Dec. 31, 2018.Source: Federal Reserve.Assets vs. Liabilities of households and nonprofit organizations.

Other Liabilities

Real Estate

Deposits

Equities

Pensions

Other

$0

$25

$50

$75

$100

$125

$ T

rill

ion

s

Total Assets:

$125 TrillionTotal Liabilities:

$16 Trillion

American households are in a strong financial position with robust balance sheets.

Household leverage is the lowest it has been since 1Q 1985.

U.S. Households Leverage1

0%

5%

10%

15%

20%

25%

1952 1959 1966 1973 1981 1988 1995 2002 2010 2017

% o

f T

ota

l A

ssets

Consumer Credit

Home Mortgages

U.S. Households Assets

16

Market Outlook: Where We’re Headed

17

20

02

20

00 20

18

20

08 19

94

19

77 20

05

20

04

19

87

20

11

20

10

19

79

19

81 19

76

19

84

20

07

19

88

19

78

19

90

19

93

19

92

20

15

20

06

19

83

19

95

19

80

20

16

20

14

20

01

20

12

20

17

19

99

19

86

19

97

19

82

20

03

19

89

19

85

20

13 20

09

19

91 19

98 19

96

-6

-4

-2

0

2

4

6

Third Greatest Decline in P/Es in Past 40 Years

Data as of Dec. 31, 2018.Source: Credit Suisse, S&P and FactSet.

S&P 500 valuations are much more compelling after the market derating.

Near term recession risks remain muted. This should support returns in 2019.

18

Two Important Historical Analogues

*Projected NTM EPS.**Projected NTM P/E.Data as of Dec. 31, 2018. Returns and

economic data source: FactSet. Dashboard: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council,

American Trucking Association, Conference Board, and Bloomberg. S&P 500 data: Total Price Return.

Fin

an

cia

lIn

flati

on

Co

nsu

mer

Bu

sin

ess

Acti

vit

y

Indicators

Yield Curve

Credit Spreads

Money Supply

Wage Growth

Commodities

Housing Permits

Jobless Claims

Retail Sales

Job Sentiment

ISM New Orders

Profit Margins

Truck Shipments

Overall (Year End)

Real GDP YoY 7.3%

Earnings 21%

P/E Contraction (2.0x)

1984

1.4%

26.3%

1985

Expansion

Recession

Caution

S&P 500 Annual Returns, Recession Risk Indicators, and Select Economic Data as of December 31

• Both 1984 and 1994 saw strong earnings, a robust economy, and P/E contraction that led to

disappointing market performance.

• In each case, the following year did not see a recession and markets rallied substantially.

4.0%

19%

(3.0x)

1994

-1.5%

34.1%

1995

3.0%

19%*

(3.6x)**

2018

-6.2%

2019

???

19

Buybacks Should Drive Markets Into Year-EndS&P 500 Companies

Data as of Dec. 31, 2018.Source: JPMorgan.

0

100

200

300

400

500

600

700

800

900

1,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

$ B

illi

on

Announced Executed

$938

The $331 billion gap between announced and executed buybacks in

2018 should help drive markets higher over the next several months.

$331

Billion

Gap

$607

20

Post-Midterm Election PerformanceMidterm Year Since 1950

Source: FactSet, S&P.

0%

5%

10%

15%

20%

25%

30%

35%

1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

S&P Price Return

In the 12 months following a midterm election, the S&P 500 has

been up 15.3% on average, historically.

Every period historically has had a positive return.

Average: 15.3%

21

U.S. vs. International Equity Performance

S&P 500 vs. MSCI EAFE.Data as of Dec. 31, 2018.Source: FactSet.

Geographic leadership tends to persist for multiple years.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1978 1983 1988 1993 1998 2003 2008 2013 2018

Dif

fere

nces

Betw

een

In

dexes

77.9%

174.9%

112.5%U.S.

Outperformed

International

Outperformed

390.5%

95.8%

U.S

.

Ou

tperf

orm

ed

U.S.

Outperformed

International

Outperformed

22

Chinese Stimulus

Sources: JP Morgan, National Statistics Bureau of China, Bloomberg, Societe Generale and Macquarie.*Note: China Monetary Conditions Index advanced six months.Chinese Monetary Conditions data as of Sept. 30, 2018. China GDP data as of Nov. 30, 2018. Both are most recent available as of Dec. 31, 2018. Fiscal Stimulus data as of Dec. 31, 2018.

Similar to 2015-16, China is taking steps to stimulate their economy including:

• Lower interest rates (Shibor -100 bps , 250 bps cuts of RRR)

• Yuan devaluation

• Looser credit standards: New bank loans +10% in Q4, +30% in Q3

• Fiscal stimulus (Government spending, tax cuts)

• Capital injections via medium term lending facility (MLF) and expansion of MLF scope

4%

8%

12%

16%

20%

24%

50%

70%

90%

110%

130%

150%

170%

2008 2010 2012 2014 2016 2018

Chinese Monetary Conditions lead GDP*

China Monetary Conditions (Adv 6 Mo) (LHS)

China Nominal GDP YoY (RHS)

2.1

4.75

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

U.S. China

% o

f G

DP

2018-19 Fiscal Stimulus

125%

Larger

23

One Year OutlookThemes That Will Drive the Market Over the Next 12 Months

Trump’s

Presidential Agenda

U.S. Dollar

Interest RatesEarnings

$

ValuationsDebt

International

Oil

24

Trump’s Presidential Agenda

25

Presidential Cycle: The Economy

Source: Strategas Research Partners.

7

1

0

3

0

1

2

3

4

5

6

7

8

Year 1 Year 2 Year 3 Year 4

Number of Recessions Starting Per Year of the Presidential Cycle

1948 – 2016

Since 1948, no recession

has started in the 3rd year

of a presidential

administration.

26

Presidential Cycle: The Stock Market

Source: Strategas Research Partners.

7.0%6.4%

16.1%

6.7%

4.8%

3.3%

19.2%

11.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Year 1 Year 2/Midterm Year 3 Presidential Election Year

S&P 500 Annual Performance by Presidential Term Year

Inclusive of First & Second Term vs. First Term Only, Since 1949

S&P Price Return - Inclusive of First and Second Term S&P Price Return - Only First Term Performance

S&P Historical Average

Since 1949: 9.0%

Current

Period

27

RepatriationUnremitted Foreign Earnings: S&P 500

Data as of Dec. 31, 2017. Source: Standard & Poor’s and Bloomberg.

0 100 200 300 400 500 600 700 800 900

Information Technology

Health Care

Consumer Staples

Financials

Industrials

Energy

Consumer Discretionary

Materials

Utilities

Real Estate

Telecommunication Services

$ Billion

Unremitted Foreign Earnings

19.7% of market value

18.4% of market value

28

Fiscal Stimulus > Trade ConcernsTariffs vs. Fiscal Policy

Data as of Dec. 31, 2018. Source: Strategas Research Partners.

$0

$50

$100

$150

$200

$250

$300

$350

$400

Estimated Tariffs Fiscal Policy

Bil

lio

ns

Auto Tariffs: $40 B

Existing China Tariffs: $44 B

China 301/Retaliation (3rd Round): $111 B

China 301/Retaliation (2nd Round): $50 B

$251 BillionIncremental Tariffs

$372 BillionIncremental Fiscal Stimulus

Repatriation: $250 B(estimated)

Spending: $52 B

Tax Cuts: $70 B

Steel & Aluminum Tariffs: $6.3 B

29

Business and Consumer ConfidenceConfidence Remains Elevated Despite Ongoing Trade Tensions

Source: NFIB, Conference Board, and Bloomberg.Data as of Dec. 31, 2018.

Business and consumer confidence are each near their highest level

in over a decade.

50

60

70

80

90

100

110

120

1985 1990 1995 2000 2005 2010 2015

University of Michigan Consumer Sentiment

80

85

90

95

100

105

110

1985 1990 1995 2000 2005 2010 2015

NFIB - Small Business Optimism

Data as of Dec. 31, 2018. Data as of Nov. 30, 2018.

30

Earnings

$

31

Manufacturing PMI and S&P 500 EPS

Data as of Dec. 31, 2018. Source: Bloomberg.

-50

-40

-30

-20

-10

0

10

20

30

40

50

30

35

40

45

50

55

60

65

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

ISM Manufacturing PMI, 12 Month Moving Average, Shifted 6 Months Forward (Left)

S&P 500 EPS Year over Year % Change, 4 Quarter Average (Right)

32

Buybacks & Dividends

S&P 500 as of Dec. 31, 2018. Remainder as of Sept. 30, 2018, most recent available as of Dec. 31, 2018.Source: Credit Suisse, S&P, Bloomberg.

0

500

1,000

1,500

2,000

2,500

3,000

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

S&

P 5

00

($)

Bil

lio

n

Dividends (Left Axis) Buybacks (Left Axis) S&P 500 (Right Axis)

33

-10%

0%

10%

20%

30%

2011 2012 2013 2014 2015 2016 2017 2018

Revenue Earnings Tax Impact

-10%

0%

10%

20%

30%

S&P 500 Revenue & Earnings Growth

Source: Credit Suisse. YoY growth.Data as of Sept. 30, 2018, most recent available as of Dec. 31, 2018.

Revenue and earnings growth are at the strongest level since the early part of the recovery.

Earnings growth is quite robust, even excluding the 8% boost from tax reform.

Fastest Earnings Growth Since 2011

Fastest Revenue Growth Since 2011

34

Peak Earnings A Reason To Sell?S&P 500 Returns Following Peak EPS Growth Since 1962

Note: Peak EPS based on YoY trailing EPS growth.Source: Credit Suisse, S&P, NBER, and Bloomberg.

EPS Peak (S&P 500) Recession # Months S&P 500 Return (%)

3Q62 4Q69 87 63.6

1Q66 4Q69 45 3.2

4Q68 4Q69 12 -11.4

4Q73 4Q73 -1 1.7

4Q76 1Q80 37 6.2

3Q79 1Q80 4 4.4

3Q81 3Q81 -2 -11.3

2Q84 3Q90 73 132.5

2Q88 3Q90 25 30.2

3Q93 1Q01 90 152.8

2Q95 1Q01 69 113.0

1Q97 1Q01 48 53.3

1Q00 1Q01 12 -22.6

3Q02 4Q07 63 80.1

1Q04 4Q07 45 30.4

3Q06 4Q07 15 9.9

Average (1962-2006) 39 39.8

4Q10 - 96 99.3

2Q14 - 54 27.9

3Q18? - - -

Average Including Current Cycle (1962-Present) 43 42.4

Peak earnings do not

necessarily mean the

end of the economic

or market cycle.

35

International

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

36

Home Country Bias

Morningstar Category Assets as of Nov. 30, 2018. GDP as of Dec. 31, 2017. MSCI World Index as of Dec. 31, 2018.Source: Morningstar, IMF, FactSet. Data most recent available as of Dec. 31, 2018.

U.S.

International U.S.

International

U.S.

International

Investors tend to over-allocate to their home country.

% Assets% GDP % Market Cap

The U.S. represents 75% of

U.S. investor portfolios

The U.S. represents only

32% of Global GDP

The U.S. represents 40% of

Global Market Cap

37

International Roadmap

Data as of Dec. 31, 2018.Source: Standard & Poor’s, Moody's, MSCI, FactSet, and Bloomberg.Note: United States P/E and EPS growth is S&P 500, all others are MSCI Country/Region Index.

Economic Government Financial Currency

GDP

Growth

(%, YoY)

Economic

Momentum

Central Bank

Policy

Sovereign Credit

Rating

P/E

Ratio

(x)

EPS

Growth

(%, YoY)

North America 3.3 Accelerating Neutral & Hiking AAA 14.3 7.8 Stable

Europe ex-UK 1.6 Decelerating Easy & Stable AA- 12.1 9.2 Weakening

United Kingdom 1.5 Stable Easy & Hiking AA 11.4 5.0 Weakening

Asia ex-Japan 2.7 Decelerating Easy & Stable AAA 11.2 6.4 Weakening

Japan -2.5 Decelerating Easy & Stable A 11.2 2.6 Stable

Emerging Markets 4.8 Stable Neutral & Hiking BBB+ 10.6 8.0 Weakening

Positive

Positive

Caution

Neutral

Neutral

Neutral

38

Europe vs U.S. Retail Sales and Unemployment

Source: FactSet, U.S. Census Bureau, DOL, Eurostat.Retail Sales data as of Nov. 30, 2018. Unemployment data as of Nov. 30, 2018, latest available.

90

95

100

105

110

140

160

180

200

2007 2009 2011 2013 2015 2017

$ M

illi

on

Retail Sales

U.S. Retail Sales (LHS) Eurozone Wholesale and Retail Sales (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

2007 2009 2011 2013 2015 2017

Unemployment

U.S. Unemployment Rate Eurozone Unemployment Rate

Europe is earlier in their economic cycle than the U.S.

39

Proportion of Revenues from Emerging Markets

Source: Bloomberg, J.P. Morgan.

8%

19%

0%

5%

10%

15%

20%

U.S. Europe

European equities are more exposed to Emerging Markets than U.S. equities.

40

Interest Rates

The U.S. Treasury Department is responsible for issuing all Treasury bonds, notes and bills; it is responsible for the revenue of the U.S. government.

41

Treasury Borrowing Set to SurgeBigger Deficits, Fed QE Unwind Boost Financing Needs

Source: Treasury, primary dealer estimates. Data as of Dec. 31, 2018.Estimates and forecasts are inherently limited and should not be relied upon as indicators of actual or future results.

1,273

1,080

1,014

779

2021

2020

2019

2018

Actual

Estimate

Estimate

Estimate

30.2% Increase vs. 2018

Net marketable borrowing in billions of dollars per fiscal year

42

European Rates Poised to Move Higher

Data as of Dec. 31, 2018.Source: US Treasury, BofA Merill Lynch, Fed Fred database, Haver Analytics.

0

5

10

15

20

25

30

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

%

Recession U.S. 10-Yr. Treasury Yield ICE BofA ML Euro High Yield - YTM

43

Treasury Positioning

As of Dec. 25, 2018, most recent data available as of Dec. 31, 2018.Source: CFTC and Bloomberg.

-1,000

-800

-600

-400

-200

0

200

400

600

800

2001 2003 2005 2007 2009 2011 2013 2015 2017

Nu

mb

er

of

Co

ntr

acts

(T

ho

usa

nd

s)10-Year Treasury Net Speculative Futures Positioning

The record short Treasury futures positioning has begun to reverse itself which

has helped bring down long term yields.

Further unwind may be needed in order for rates to move higher in 2019.

44

Oil

45

Global Oil Supply vs. Demand

Source: Energy Intelligence & Bloomberg.Note: 6-Month Moving Average. Data as of Dec. 31, 2018.

0

20

40

60

80

100

120

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2010 2011 2012 2013 2014 2015 2016 2017 2018

Cru

de O

il P

rice (

NY

M $

/bb

l)

Mil

lio

n B

arr

els

/Day

Deficit (Left Axis) Surplus (Left Axis) Crude Oil Inverted (Right Axis)

Surplus

Deficit

The oil market has shifted back to a (modest) surplus, which has

weighed on oil prices in recent months.

Importantly, the surplus remains much smaller than in 2015,

suggesting WTI may be close to finding support at current levels

46

OPEC Spare Capacity

As of Dec. 31, 2018.Source: EIA.

0%

1%

2%

3%

4%

5%2009

2009

2009

2009

2010

2010

2010

2010

2011

2011

2011

2011

2012

2012

2012

2012

2013

2013

2013

2013

2014

2014

2014

2014

2015

2015

2015

2015

2016

2016

2016

2016

2017

2017

2017

2017

2018

2018

2018

2018

2%

1%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

OPEC spare capacity has been in secular decline since the 1980s.

Tight spare capacity means the impact from any supply disruptions would be magnified.

47

U.S. Retail Gasoline Price

Data as of Dec. 31, 2018. Source: EIA, FactSet.*Average 2018 oil price year-to-date.

1.5

2.0

2.5

3.0

3.5

4.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

($)

2018 Average:

$2.72

Current:

$2.29

-15.8%

YoY

Assuming current oil prices, the US consumer is in line to receive a $121B boost this year

due to lower gas ($61B) and tax reform ($60B).

It would take $3.14 gas on average over the course of 2019 to eliminate the boost from

tax cuts. This would be a 37% increase from current levels.

48

Energy Relative to Market

Data as of Dec. 31, 2018. Source: FactSet.S&P 500 GICS Energy Sector Holdings vs. S&P 500 Index from Jan. 1990 through Dec. 2018.

0.5

1.0

1.5

2.0

1967 1969 1972 1974 1977 1979 1982 1985 1987 1990 1992 1995 1998 2000 2003 2005 2008 2010 2013 2016 2018

Recession Energy Sector Relative Total Return

The energy sector has outperformed the market in the later

stages of every economic cycle going back to the 1960s.

%

49

U.S. Dollar

50

U.S. Dollar Cycle

As of Dec. 31, 2018.Source: Federal Reserve Bank of St. Louis, Federal Reserve and FactSet.Major Currencies, Index Mar 1973=100, Monthly, Not Seasonally Adjusted.

60

70

80

90

100

110

120

130

140

150

1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

Ind

ex

Mar

19

73

=1

00

U.S. dollar cycles typically last approximately 15 years.

The dollar’s peak in 2016 may have started a longer downtrend.

17 years 14 years

Trade-Weighted U.S. Dollar

14 years

51

-20

0

20

40

60

80

100

2016 2017 2018

Nu

mb

er

of

Co

ntr

acts

(T

ho

usa

nd

s)

U.S. Dollar Net Speculative Futures Positioning

75

80

85

90

95

100

Tra

de W

eig

hte

d U

.S.

Do

llar

Ind

ex

Trade Weighted U.S. Dollar Index (RHS) Series2

U.S. Dollar Positioning

• U.S. dollar positioning today vs. start of year

• Investor sentiment has shifted

As of Dec. 31, 2018.Source: CFTC and Bloomberg.

Dollar positioning has changed from net short to net long, suggesting

much of the dollar’s appreciation may have already occurred.

Dollar

Weakness

Net Short

Position

Dollar

Strength

U.S. Dollar (LHS)

Dollar

Weakness

Dollar

Strength

52

Twin Deficits: Budget and Trade

Data as of Sept. 30, 2018, most recent available as of Dec. 31, 2018.Source: BEA, Federal Reserve, FactSet.

-8.0

-5.5

-3.0

-0.5

2.0

4.5

7.0

9.5

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Tw

in D

efi

cit

s -

5 Y

ear

Ch

an

ge

Real

Tra

de W

eig

hte

d D

oll

ar

-5

Year

Ch

an

ge

Real Trade Weighted Dollar (Lagged 2 Years, Left Axis) Twin Deficits as a % of GDP (Right Axis)

Twin deficits show the dollar should modestly weaken over the next several years.

53

Foreign Sales as % of Total SalesS&P 500 Sectors

As of Dec. 31, 2018.Source: FactSet.

55.9

53.1

43.5

41.7

36.6

36.1

34.9

34.0

20.2

13.3

3.1

0 10 20 30 40 50 60

Information Technology

Materials

Consumer Staples

Energy

Health Care

Industrials

Consumer Discretionary

Communication Services

Financials

Real Estate

Utilities

(%)

54

Debt

55

Student Loans Not a Macro Issue

• There are 44 million student loans outstanding

• 84% have a balance smaller than $50k

• 16% hold 56% of outstanding student loan balances

Data as of Dec. 31, 2017. Source: New York Fed Consumer Credit Panel/Equifax.

Less than 5k

20%

5k-10k

17%

10k-25k

28%

25k-50k

19%

50k-75k

8%

75k-100k

3%

100k-200k

4%200k+

1%

Less than 5k

2% 5k-10k

4%

10k-25k

15%

25k-50k

23%

50k-75k

16%

75k-100k

10%

100k-200k

19%

200k+

11%

Borrower Distribution by

Outstanding Balance in 2016

Debt Distribution by

Outstanding Balance in 2016

56

Corporate Debt Maturity Wall?S&P 500 Percent of Debt Due by Maturity

Data as of Dec. 31, 2018. Source: Strategas Research Partners.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

2042

2043

2044

2045

2046

2047

2048

2049

2050+

Weig

hte

d A

vera

ge Y

ears

to

Matu

rity

Corporations have taken advantage of low rates and have termed out their debt.

The weighted average maturity for S&P 500 companies is 10 years.

57

U.S. Credit Quality Deterioration

As of Dec. 31, 2018.Source: Strategas and Bloomberg/Barclays.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

AAA

9.2%

AA

10.3%

A

36.1%

BAA

44.4%

In 1973, only 9% of credits were rated BAA versus over 44% today.

58

U.S. is the Only Country with Growing Debt Levels

As of Dec. 31, 2018.Source: IMF Forecasts, Haver Analytics, Deutsche Bank Research.

-40

-30

-20

-10

0

10

20

Gre

ece

Cyp

rus

Po

rtu

gal

Germ

an

y

Malt

a

Icela

nd

Irela

nd

Neth

erl

an

ds

Au

stri

a

Lit

hu

an

ia

Can

ad

a

Sw

ed

en

Slo

vak R

ep

ub

lic

Cze

ch R

ep

ub

lic

Slo

ven

ia

Belg

ium

New

Zeala

nd

Sw

itze

rlan

d

Au

stra

lia

Italy

Latv

ia

Den

mark

Sp

ain

Fin

lan

d

Un

ited

Kin

gd

om

Lu

xem

bo

urg

Jap

an

Fra

nce

Est

on

ia

Isra

el

Ho

ng

Ko

ng

SA

R

No

rway

Sin

gap

ore

Ko

rea

Un

ited

Sta

tes

Change in Government Debt-to-GDP Ratio

2018 - 2023

59

Valuations

60

65

14 14

20

34

0

5

10

15

20

25

30

35

<-20% -20% - 10% -10% - 0% 0% - 10% 10% - 20% >20%

Years

S&P 500 Annual Total Return Ranges

Market Annual Returns Distribution of S&P 500 Total Returns Since 1926

As of Dec. 31, 2018. Source: Strategas Research Partners.

1927

1928

1933

1935

1936

1938

1942

1943

1945

1950

1951

1954

1955

1958

1961

1963

1967

1975

1976

1980

1982

1983

1985

1989

1991

1995

1996

1997

1998

1999

2003

2009

2013

2017

1930

1931

1937

1974

2002

2008

1941

1957

1966

1973

2001

1929

1932

1934

1939

1940

1946

1953

1962

1969

1977

1981

1990

2000

2018

1947

1948

1956

1960

1970

1978

1984

1987

1992

1994

2005

2007

2011

2015

1926

1944

1949

1952

1959

1964

1965

1968

1971

1972

1979

1986

1988

1993

2004

2006

2010

2012

2014

2016

61

Strength of U.S. Bull Markets

Data as of Dec. 31, 2018.Source: Bloomberg, FactSet.

11.9%

14.1%

14.2%

15.0%

16.2%

17.6%

20.0%

20.0%

20.0%

20.1%

23.3%

26.7%

0% 5% 10% 15% 20% 25% 30%

1946-48

1974-80

2009 - Present

2002-07

1957-61

1962-66

1949-56

1990-2000

1966-68

1987-90

1970-73

1982-87

S&P 500’s Annual Rate of Change

The current bull market is the tenth strongest since WW2.

62

Price/Earnings Is Not The Only Indicator To Watch

Data as of Dec. 31, 2018.Source: Bloomberg.

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Recession S&P 500 Price/Earnings Ratio

Sept. 2009

23.2

Dec. 2007

17.5

63

-6%

-4%

-2%

0%

2%

4%

6%

8%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Earnings Price YieldInterest Rates: S&P 500 Minus YTM of 10-Year Treasuries

Source: FactSet. Data as of Dec. 31, 2018.YTM: Yield to maturity. E/P Yield: The earnings yield refers to the earnings per share for the most recent 12-month period divided by the current market price per share.

Quarter E/P YieldYTM 10-Year

Treasuries Spread

Q4 1968 5.5% 6.2% -0.7

Q2 1990 6.4% 8.4% -2.0

Q1 2000 3.6% 6.0% -2.4

Current 5.8% 2.7% 3.1

Valuation levels at end of the three longest U.S. economic

cycles based on quarter end values:

64

New Secular Bull Market?

Data as of Dec. 31, 2018. Source: Standard & Poor’s and Bloomberg.

1

5

25

125

625

3125

1930 1940 1950 1960 1970 1980 1990 2000 2010

S&P 500

1950-1970

All-Time Highs: 365

Cumulative Return: 451.9%

1930-1950

All-Time Highs: 0

Cumulative Return: -22.2%

1970-1980

All-Time

Highs: 35

Cumulative

Return:

17.2%

2000-2010

All-Time

Highs: 13

Cumulative

Return:

-24.1%

2010-Present

All-Time Highs:

207

Cumulative

Return: 125%

1980-2000

All-Time Highs: 500

Cumulative Return:

1,261.2%

S&

P 5

00

In

dex

(Lo

g-S

cale

)

65

Bull Market Top Checklist

Source: Strategas Research Partners.

2000 2007 Current Comments

Blow-off top Few signs of panic buying or speculative excess in public equity markets.

S&P is currently below its 200-day MA after peaking in January.

Heavy inflows into equity

market funds

Net inflows into equity mutual funds and ETFs is underwhelming while

inflows into bond funds remain robust.

Big pick-up in M&A activity M&A activity has picked up significantly this year from years in the past.

In absolute dollar terms, activity is near historical highs.

IPO activity Despite some high-profile new issues in 2017, deal volume and assets

raised remain far below the pace exhibited in 2015.

Rising real interest rates Real rates have moved higher and although not yet worrisome, they are

worth watching.

Weakening upward

earnings revisions Upward earnings revisions remain at elevated levels.

Erosion in number of

stocks making new highs The numbers of companies making 52-week highs peaked in January.

Shift towards

defensive leadership

Since the February 2016 low, cyclical shares have outperformed for the

past two years. It is worth noting in the past month there has been a

shift toward defensive shares.

Widening credit spreads High-yield and investment grade credit spreads have moved higher

recently but compared to a longer-term history are still contained.

66

Name and PositionIndustry

Experience

ClearBridge

TenureEducation, Experience and Professional Designations

Biographies

Jeffrey Schulze, CFA 14 years • • Member of the CFA Institute

• Lord Abbett & Co., LLC – Portfolio Specialist

• BS in Finance from Rutgers University

Joined ClearBridge

in 2014Director, Investment Strategist

Josh Jamner, CFA 9 years • • Member of the CFA Institute

• RBC Capital Markets - Assistant Vice President, Associate Strategist

- U.S. Equity

• Bessemer Trust - Assistant Vice President, Client Portfolio Analyst

• BA in Government from Colby College

Joined ClearBridge

in 2017Vice President,

Investment Strategy Analyst

67

Glossary of TermsBunds: Bonds issued by Germany's federal government. Bunds are available in 10- and 30-year maturities.

Duration: Years to receive bond’s true cost, including present value of all future coupon and principal payments.

ECB: European Central Bank

EPS: Earnings Per Share

GDP: Gross Domestic Product

ICE BofA ML Euro High Yield Index: Tracks the performance of Euro denominated below investment grade corporate debt publicly issued in the euro

domestic or Eurobond markets.

P/E Ratio: Price/Earnings ratio

PMI: Purchasing Manager’s Index

Quantitative easing (QE): Monetary policy implemented by a central bank in which it increases the excess reserves of the banking system through the

direct purchase of debt securities.

Yield Curve: Comparison of interest rates at a point in time of bonds with equal credit quality but different maturity dates.

YoY: Year Over Year

U.S. Treasurys: Direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the

principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the

federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when

the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the

market value of these securities.

Case-Shiller Home Price Indexes: A group of indexes that tracks changes in home prices throughout the United States. The indexes are based on a

constant level of data on properties that have undergone at least two arm's length transactions. Case-Shiller produces indexes representing certain

metropolitan statistical areas (MSA) as well as a national index.

NASDAQ Composite Index: A market capitalization-weighted index that is designed to represent the performance of NASDAQ securities and includes

over 3,000 stocks.

NIKKEI 225: Price-weighted index composed of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange.

S&P 500 Index: Unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

Shibor: (The Shanghai Interbank Offered Rate) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other

banks in the Shanghai wholesale (or "interbank") money market.

RRR: The reserve requirement (or cash reserve ratio) is a central bank regulation employed by most, but not all, of the world's central banks, that sets the

minimum amount of reserves that must be held by a commercial bank.

68

Additional Important Information

Past performance is no guarantee of future results.

©2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and ClearBridge Investments, LLC are subsidiaries of

Legg Mason, Inc.

All opinions and data included in this presentation are as of December 2018 unless noted otherwise and are subject to change. The opinions and views

expressed herein are of the presenter and may differ from other managers, or the firm as a whole, and are not intended to be a forecast of future events,

a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics

have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither

ClearBridge Investments nor its information providers are responsible for any damages or losses arising from any use of this information.

All investments involve risk, including loss of principal.

Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular

investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a

recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding

the appropriateness of investing in any securities or investment strategies should consult their financial professional.

TN18-124

846542

CBAX481300 1/19