Economic and Market Outlook

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

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Cumulative % Growth Strength of Economic Expansions 60 50 1960-1969 40 1990-2001 1981-1990 30 1948-1953 Average Rebound: 23% 20 1969-1973 1973-1980 2001-2007 2007 - Present 10 0-10 0 5 10 15 20 25 30 35 40 Number of Quarters Historical Expansions Current Expansion Data as of June 30, 2018, most recent available as of Sept. 30, 2018. Source: Strategas Research Partners. U.S. economic expansions since 1948. 3

Just How Long Can The Cycle Continue? Historical Economic Expansions U.S. (June 2009 - Present) U.S. (1990-2001) Canada (1992-2008) UK (1992-2008) Japan (1975-1992) Australia (Jan 1992 - Present) 0 5 10 15 20 25 30 Number of Years Extended economic expansions are more common outside of the U.S. As of Sept. 30, 2018. Source: FactSet. 4

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, 2018. Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg. 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 Recession 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 Expansion Caution Recession Data as of September 30, 2018. Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg. 6

Business Activity Consumer Inflation Financial S&P 500 U.S. Recession Dashboard Case Study: 2006-2009 1,600 1,418 1,503 1,468 1,400 1,270 1,200 1,280 1,000 800 Overall Signal: Overall Signal: Overall Signal: 600 Q2 2006 Q4 2006 Q2 2007 Q4 2007 Q2 2008 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

BPS Yield Curve Spread Yield curve spread less than zero (inverted) occurs prior to recessions. 500 500 400 300 200 450 400 350 300 100 250 0-100 -200 200 150 100 50-300 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 0 Recession Yield Curve Spread Data as of September 30, 2018. Source: Fed Reserve Bank of St. Louis, retrieved from FRED. Compiled: econpi.com 8

S&P 500 Revenue & Earnings Growth 30% 20% Fastest Earnings Growth Since 2011 10% Fastest Revenue Growth Since 2011 0% -10% 2011 2012 2013 2014 2015 2016 2017 2018 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, 2018. 9

$ Billion Buybacks Should Drive Markets Into Year-End S&P 500 Companies 1,000 900 800 700 $716 YTD 600 500 $324 Billion Gap 400 300 200 $392 YTD 100 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 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, 2018. Source: JPMorgan. 10

Average Performance S&P 500 in Midterm Year Midterm Election Year Performance Average S&P 500 Performance in Midterm Years Since 1950 108% 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

Post-Midterm Election Performance Midterm Year Since 1950 35% S&P Price Return 30% 25% 20% 15% Average: 15.3% 10% 5% 0% 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 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

Strength of U.S. Bull Markets S&P 500 s Annual Rate of Change 1982-87 26.7% 1970-73 23.3% 1987-90 1966-68 1990-2000 1949-56 20.1% 20.0% 20.0% 20.0% 1962-66 2009 - Present 1957-61 2002-07 1974-80 17.6% 16.4% 16.2% 15.0% 14.1% 1946-48 11.9% 0% 5% 10% 15% 20% 25% 30% The current bull market is the eighth strongest since WW2. Data as of September 30, 2018. Source: Bloomberg, FactSet. 13

Price/Earnings Is Not The Only Indicator To Watch 25 Sept. 2009 23.2 20 Dec. 2007 17.5 15 10 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Recession S&P 500 Price/Earnings Ratio Data as of September 30, 2018. Source: Bloomberg. 14

Earnings Price Yield Interest Rates: S&P 500 Minus YTM of 10-Year Treasuries 8% 6% 4% 2% 0% -2% -4% -6% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 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 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 4.7% 3.1% 1.6 Source: FactSet. Data as of September 30, 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. 15

S&P 500 Index (Log-Scale) New Secular Bull Market? S&P 500 3125 625 125 1950-1970 All-Time Highs: 365 Cumulative Return: 451.9% 1980-2000 All-Time Highs: 500 Cumulative Return: 1,261.2% 2000-2010 All-Time Highs: 13 Cumulative Return: -24.1% 2010-Present All-Time Highs: 207 Cumulative Return: 157% 25 1970-1980 All-Time Highs: 35 Cumulative Return: 17.2% 5 1930-1950 All-Time Highs: 0 Cumulative Return: -22.2% 1 1930 1940 1950 1960 1970 1980 1990 2000 2010 Data as of September 30, 2018. Source: Standard & Poor s and Bloomberg. 16

Bull Market Top Checklist 2000 2007 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 2015. 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

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

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, 2018. GDP as of Dec. 31, 2017. MSCI World Index as of June 30, 2018. Source: Morningstar, IMF, FactSet. Data most recent available as of Sept. 30, 2018. 19

U.S. Outperformed U.S. vs. International Equity Performance 3.0 2.5 U.S. Outperformed 174.9% U.S. Outperformed 131.4% 2.0 1.5 77.9% 95.8% 1.0 International Outperformed 0.5 390.5% 0.0 International Outperformed 1978 1983 1988 1993 1998 2003 2008 2013 2018 Geographic leadership tends to persist for multiple years. S&P 500 vs. MSCI EAFE. Data as of September 30, 2018. Source: FactSet. 20

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 16.7 12.8 Strengthening Positive Europe ex-uk 2.2 Decelerating Easy & Stable AA- 13.8 8.9 Weakening Neutral United Kingdom 1.2 Decelerating Easy & Hiking AA 12.7 8.7 Weakening Positive Asia ex-japan 3.5 Accelerating Easy & Stable AAA 11.7 9.8 Weakening Positive Japan 3.0 Accelerating Easy & Stable A 13.4 5.4 Weakening Neutral Emerging Markets 5.4 Stable Neutral & Hiking BBB+ 11.1 10.3 Weakening Data as of Sept. 30, 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. 21

% of GDP Chinese Stimulus Similar to 2015-16, 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% 2.5 2.5 130% 110% 16% 2.0 1.5 1.5 67% Larger 90% 12% 1.0 70% 8% 0.5 50% 2008 2010 2012 2014 2016 2018 4% 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, 2018. China GDP data as of June 30, 2018. Both are most recent available as of September 30, 2018. Fiscal Stimulus data as of September 30, 2018. 22

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

$ Million Europe vs U.S. Retail Sales and Unemployment Retail Sales 200 180 160 140 2007 2009 2011 2013 2015 2017 108 106 104 102 100 98 96 94 92 90 Unemployment 14% 12% 10% 8% 6% 4% 2% 0% 2007 2009 2011 2013 2015 2017 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, 2018. Unemployment data as of August 20, 2018, latest available. 24

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. 2018 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. TN18-124 832421 CBAX481310 10/18 25