Economic and Market Outlook

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1 Economic and Market Outlook Fourth Quarter 2018 Investment Products: Not FDIC Insured No Bank Guarantee May Lose Value Past performance is no guarantee of future results. Financial term and index definitions are available in the appendix. 1

2 Investing involves risk including possible loss of principal. Information is current as of the date of this material. Any opinions expressed herein are from a third party and are given in good faith, are subject to change without notice, and are considered correct as of the stated date of their issue. Merrill Lynch, Pierce, Fenner & Smith Incorporated is not a tax or legal advisor. Clients should consult a personal tax or legal advisor prior to making any tax or legal related investment decisions. Bank of America Corporation ( Bank of America ) is a financial holding company that, through its subsidiaries and affiliated companies, provides banking and investment products and other financial services. Merrill Lynch 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. Merrill Lynch Life Agency is a licensed insurance agency and a wholly owned subsidiary of Bank of America Corporation. Merrill Lynch offers a broad range of brokerage, investment advisory and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select. The views and opinions expressed in this presentation are not necessarily those of Bank of America Corporation; Merrill Lynch, Pierce, Fenner & Smith Incorporated; or any affiliates. Merrill Lynch has not participated in preparing this presentation and accepts no responsibility for the accuracy of the information contained herein. For more information about these services and their differences, speak with your Financial Advisor. Nothing discussed or suggested in these materials should be construed as permission to supersede or circumvent any Bank of America, Merrill Lynch, Pierce, Fenner & Smith Incorporated policies, procedures, rules, and guidelines. Investment products offered through MLPF&S and insurance and annuity products offered through Merrill Lynch Life Agency Inc.: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed Are Not Insured by Any Federal Government Agency Are Not Deposits Are Not a Condition to Any Banking Service or Activity 2

3 Cumulative % Growth Strength of Economic Expansions Average Rebound: 23% Present Number of Quarters Historical Expansions Current Expansion Data as of June 30, 2018, most recent available as of Sept. 30, Source: Strategas Research Partners. U.S. economic expansions since

4 Just How Long Can The Cycle Continue? Historical Economic Expansions U.S. (June Present) U.S. ( ) Canada ( ) UK ( ) Japan ( ) Australia (Jan Present) Number of Years Extended economic expansions are more common outside of the U.S. As of Sept. 30, Source: FactSet. 4

5 Business Activity Consumer Inflation Financial U.S. Recession Risk Indicators 12 variables have historically foreshadowed a looming recession Only money supply signals risk right now Third Quarter 2018 Second 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 Expansion Caution Recession Data as of September 30, Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg. 5

6 Business Activity Consumer Inflation Financial U.S. Recession Risk Indicators 12 variables have historically foreshadowed a looming recession Only money supply signals risk right now Recession Current 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 Expansion Caution Recession Data as of September 30, Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg. 6

7 Business Activity Consumer Inflation Financial S&P 500 U.S. Recession Dashboard Case Study: ,600 1,418 1,503 1,468 1,400 1,270 1,200 1,280 1, Overall Signal: Overall Signal: Overall Signal: 600 Q Q Q Q Q Yield Curve Credit Spreads Money Supply Wage Growth Commodities Housing Permits Jobless Claims Retail Sales Job Sentiment ISM New Orders Profit Margins Truck Shipments Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg. 7

8 BPS Yield Curve Spread Yield curve spread less than zero (inverted) occurs prior to recessions Recession Yield Curve Spread Data as of September 30, Source: Fed Reserve Bank of St. Louis, retrieved from FRED. Compiled: econpi.com 8

9 S&P 500 Revenue & Earnings Growth 30% 20% Fastest Earnings Growth Since % Fastest Revenue Growth Since % -10% Revenue Earnings Tax Impact 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. Source: Credit Suisse. YoY growth. Data as of June 30, 2018, most recent available as of September 30,

10 $ Billion Buybacks Should Drive Markets Into Year-End S&P 500 Companies 1, $716 YTD $324 Billion Gap $392 YTD Announced Executed The $324 billion gap between announced and executed buybacks YTD should help drive markets higher over the next several months. Data as of September 30, Source: JPMorgan. 10

11 Average Performance S&P 500 in Midterm Year Midterm Election Year Performance Average S&P 500 Performance in Midterm Years Since % The market hasn t made much progress until October in midterm election years. 106% 104% 102% 5.1% 100% 0% 98% -2% 96% -4% 94% -6% 92% -8% Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Source: Strategas Research Partners. 11

12 Post-Midterm Election Performance Midterm Year Since % S&P Price Return 30% 25% 20% 15% Average: 15.3% 10% 5% 0% 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. Source: FactSet. 12

13 Strength of U.S. Bull Markets S&P 500 s Annual Rate of Change % % % 20.0% 20.0% 20.0% Present % 16.4% 16.2% 15.0% 14.1% % 0% 5% 10% 15% 20% 25% 30% The current bull market is the eighth strongest since WW2. Data as of September 30, Source: Bloomberg, FactSet. 13

14 Price/Earnings Is Not The Only Indicator To Watch 25 Sept Dec Recession S&P 500 Price/Earnings Ratio Data as of September 30, Source: Bloomberg. 14

15 Earnings Price Yield Interest Rates: S&P 500 Minus YTM of 10-Year Treasuries 8% 6% 4% 2% 0% -2% -4% -6% Valuation levels at end of the three longest U.S. economic cycles based on quarter end values: Quarter E/P Yield YTM 10-Year Treasuries Spread Q % 6.2% -0.7 Q % 8.4% -2.0 Q % 6.0% -2.4 Current 4.7% 3.1% 1.6 Source: FactSet. Data as of September 30, 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. 15

16 S&P 500 Index (Log-Scale) New Secular Bull Market? S&P All-Time Highs: 365 Cumulative Return: 451.9% All-Time Highs: 500 Cumulative Return: 1,261.2% All-Time Highs: 13 Cumulative Return: -24.1% 2010-Present All-Time Highs: 207 Cumulative Return: 157% All-Time Highs: 35 Cumulative Return: 17.2% All-Time Highs: 0 Cumulative Return: -22.2% Data as of September 30, Source: Standard & Poor s and Bloomberg. 16

17 Bull Market Top Checklist Current Comments Blow-off top x Few signs of panic buying or speculative excess in public equity markets. S&P is currently only 6% above 200-day MA after peaking in January. Heavy inflows into equity market funds x Net inflows into equity mutual funds and ETFs is underwhelming while inflows into bond funds remain robust. Big pick-up in M&A activity IPO activity x Rising real interest rates x M&A activity has picked up significantly this year from years in the past. In absolute dollar terms, activity is near historical highs but within the context of overall market cap we wouldn t be surprised to see further increases. Despite some high-profile new issues in 2017, deal volume and assets raised remain far below the pace exhibited in Real rates have moved higher, but relative to historical levels they are low. Weakening upward earnings revisions Erosion in number of stocks making new highs x Upward earnings revisions remain at elevated levels. x The numbers of companies making 52-week highs peaked in January. Shift towards defensive leadership x Since the February 2016 low, cyclical shares have outperformed for the past two years. Changes here is an item to watch going forward. Widening credit spreads x High-yield and investment grade credit spreads remain compressed and are not worrisome at the moment. Source: Strategas Research Partners. 17

18 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. Past performance is no guarantee of future results. Financial term and index definitions are available in the appendix. 18

19 Home Country Bias % Assets % GDP % Market Cap International U.S. U.S. U.S. International International The U.S. represents 75% of U.S. investor portfolios The U.S. represents only 32% of Global GDP The U.S. represents only 41% of Global Market Cap Investors tend to over-allocate to their home country. Morningstar Category Assets as of Aug. 31, GDP as of Dec. 31, MSCI World Index as of June 30, Source: Morningstar, IMF, FactSet. Data most recent available as of Sept. 30,

20 U.S. Outperformed U.S. vs. International Equity Performance U.S. Outperformed 174.9% U.S. Outperformed 131.4% % 95.8% 1.0 International Outperformed % 0.0 International Outperformed Geographic leadership tends to persist for multiple years. S&P 500 vs. MSCI EAFE. Data as of September 30, Source: FactSet. 20

21 International Roadmap GDP Growth (%, YoY) Economic Government Financial Currency Economic Momentum Central Bank Policy Sovereign Credit Rating P/E Ratio (x) EPS Growth (%, YoY) Neutral North America 41. Accelerating Neutral & Hiking AAA Strengthening Positive Europe ex-uk 2.2 Decelerating Easy & Stable AA Weakening Neutral United Kingdom 1.2 Decelerating Easy & Hiking AA Weakening Positive Asia ex-japan 3.5 Accelerating Easy & Stable AAA Weakening Positive Japan 3.0 Accelerating Easy & Stable A Weakening Neutral Emerging Markets 5.4 Stable Neutral & Hiking BBB Weakening Data as of Sept. 30, 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. 21

22 % of GDP Chinese Stimulus Similar to , China is taking steps to stimulate their economy including: Lower interest rates (Shibor -200bps, 150 bps cuts of RRR) Yuan devaluation Looser credit standards: New bank loans up 75% y/y in July Fiscal stimulus (Government spending, tax cuts) Approximately $100 billion capital injection via medium term lending facility 170% Chinese Monetary Conditions lead GDP* 24% 3.0 Fiscal Stimulus 150% 20% % 110% 16% % Larger 90% 12% % 8% % % 0.0 U.S. China China Monetary Conditions (Adv 6 Mo) (LHS) China Nominal GDP YoY (RHS) *Note: China Monetary Conditions Index Advanced 6 Months. Chinese Monetary Conditions data as of August 31, China GDP data as of June 30, Both are most recent available as of September 30, Fiscal Stimulus data as of September 30,

23 Proportion of Revenues from EM 20% 19% 15% 10% 8% 5% 0% U.S. Europe European equities are more exposed to EM than U.S. equities. Source: Bloomberg, J.P. Morgan. 23

24 $ Million Europe vs U.S. Retail Sales and Unemployment Retail Sales Unemployment 14% 12% 10% 8% 6% 4% 2% 0% U.S. Retail Sales (LHS) Eurozone Wholesale and Retail Sales (RHS) U.S. Unemployment Rate Eurozone Unemployment Rate Europe is earlier in their economic cycle than the U.S. Source: FactSet, U.S. Census Bureau, DOL, Eurostat. Retail Sales data as of September 30, Unemployment data as of August 20, 2018, latest available. 24

25 Additional Important Information Past performance is no guarantee of future results. Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and ClearBridge Investments, LLC are subsidiaries of Legg Mason, Inc. Bank of America Corporation is not affiliated with Legg Mason, Inc. All opinions and data included in this presentation are as of September 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. TN CBAX /18 25

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