Market Snapshot

Liz Ann Sonders Senior Vice President Chief Investment Strategist Charles Schwab & Co., Inc. March, 2015

As of 1/15. Dotted lines represent projections (2/15-12/16). Source: Bank of Japan (BoJ), Bloomberg, European Central Bank (ECB), FactSet, Federal Reserve. 1

80

130

180

230

280

330

380

430

480

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2008 2010 2012 2014 2016

BoJ

(¥, t

rillio

ns)

Fed

($, t

rillio

ns) &

ECB

(€, t

rillio

ns)

Fed Monetary Base ECB Monetary Base BoJ Monetary Base

Global central banks’ massive QE programs

As of 1/15. QE=quantitative easing. QE3=1/13-10/14. QE2=10/10-6/11. ECB QE=3/15-9/16. Source: Bank of Japan (BoJ), Bloomberg, European Central Bank (ECB), FactSet, Federal Reserve, GavekalDragonomics, International Monetary Fund (IMF). 2

Divergences in QEs’ sizes are notable

Fed QE3Fed QE2

BoJ 2013

BoJ 2014

ECB QE

0.0

0.5

1.0

1.5

2.0

2.5

3.0Ratios of QE to Bond Issuance

FedECB

BoJ

0

20

40

60

80

1002016 Projected Monetary Base as % of Nominal GDP

As of 2/27/15. The Citigroup Economic Surprise Index measures the amount that economic activity surprised or disappointed relative to analyst expectations. It’s defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance beating consensus. The index is calculated daily in a rolling three-month window. Source: FactSet. 3

Global economic surprises tilting toward non-US

-100

-75

-50

-25

0

25

50

75

Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15Citig

roup

Eco

nom

ic Su

rpris

e In

dex

US Eurozone China Japan

(0215-1604)

US GDP slows down … temporarily?

As of 4Q14. *Represents contribution to percent change in real GDP. Numbers may not add up to 100% due to rounding. Source: Bureau of Economic Analysis, FactSet.

% of real GDP

2Q14 annualized

Q/Q % change

3Q14 annualized

Q/Q % change

4Q14 annualized

Q/Q % change

Consumer spending 68.2% 2.5% 3.2% 4.2%

Government spending 17.8% 1.7% 4.4% (1.8%)

Federal: 6.9% (0.9%) 9.9% (7.5%)

State/local: 10.9% 3.4% 1.1% 2.0%

Net exports of goods & services (2.9%) (0.3)* 0.8* (1.2)*

Exports: 13.0% 11.1% 4.5% 3.2%

Imports: (15.9%) 11.3% (0.9%) 10.1%

Fixed investment 16.4% 9.5% 7.7% 4.5%

Nonresidential: 13.3% 9.7% 8.9% 4.8%

Residential: 3.1% 8.8% 3.2% 3.4%

Change in private inventories -- 1.4* 0.0* 0.1*

Real GDP 4.6% 5.0% 2.2%

4

2.3% (“new normal”) = average real GDP since June 2009 recession end

3.2% (“old normal”) = average private sector real GDP since June 2009 recession end

(0215-1604)

Closer to “escape velocity” than recession in US

*As of 3/2/15. Green means indicator is above “escape velocity” level. Lighter green means indicator is getting close to “escape velocity” level. ISM=Institute for Supply Management. Source: Ned Davis Research (NDR), Inc. Further distribution prohibited without prior permission. Copyright 2015(c) Ned Davis Research, Inc. All rights reserved. 5

Indicator

“Escape Velocity”

level

Key recession

level

NDR Recession Probability Model 5 50

Breadth of Philly Fed State Leading Indexes 95 52

NDR Economic Timing Model 17 0

NDR Composite Leading Model 3.4% -2.6%

National Financial Conditions Index -0.7 0.9

Initial unemployment claims (4-week average) 350,000 500,000

Conference Board’s Consumer Confidence Index 98.2 63.2

Conference Board’s Business Confidence Index 61 43

ISM Manufacturing Index 55.0 48.0

ISM Non-Manufacturing Index 55.2 51.4

Escape velocity refers to economic growth returning to potential after a recession, and activity is self-sustaining, i.e., it no longer needs the support of fiscal/monetary accommodation

Current

level

0.3

98

20

3.3%

-0.7

294,500

96.4

60

52.9

56.7

(0215-1604)

Inflation rates converging to sub-target?

As of 1/15. US Inflation=Consumer Price Index (CPI). Eurozone Inflation= Eurostat Eurozone Core Monetary Union Index of Consumer Prices. Japan Inflation=Consumer Price Index (CPI). Source: FactSet. 6

-4

-2

0

2

4

6

2008 2009 2010 2011 2012 2013 2014 2015

y/y %

cha

nge

US Inflation Japan InflationEurozone Inflation 2% Target Inflation Rate

Inflation risk low while velocity remains low

As of 2/15. Source: FactSet, Federal Reserve.

But “velocity” of money remains depressed

7

Fed flooded system

500

1,500

2,500

3,500

4,500

2007 2008 2009 2010 2011 2012 2013 2014 2015

Monetary Base ($, billions)

2

4

6

8

10

2007 2008 2009 2010 2011 2012 2013 2014 2015

M2 to Monetary Base Ratio

Low inflation generally bullish for US stocks

As of 2/20/15. The Reuters CRB (Commodity Research Bureau) Continuous Commodity Index (CCI) represents a geometric average of 17 commodity futures prices. DJIA=Dow Jones Industrial Average. Source: FactSet, Ned Davis Research, Inc. (Further distribution prohibited without prior permission. Copyright 2015(c) Ned Davis Research, Inc. All rights reserved.).

1/19/1968-2/20/2015

Reuters CCI index DJIA annualized gain

> 108.2 -0.9%

96-108.2 7.2%

< 96 15.5% We are here

8

60

80

100

120

140

160

180

200

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

3-w

eek

mov

ing

aver

age

Reuters CRB Continuous Commodity Index (y/y % change)

High Inflationary Pressures (Bearish)

Low Inflationary Pressures (Bullish)

9 As of 1/15. Source: FactSet, High Frequency Economics, Ltd.

Yellow-shaded areas indicate Fed tightening periods

Unemployment saying Fed’s too patient?

-8

-4

0

4-3

0

3

61985 1989 1993 1997 2001 2005 2009 2013

Unemployment Rate, 1Y % point difference (left-inverted scale)Fed Funds Target Rate, 1Y % point difference (right)

Lower US unemployment leads higher wages

10 As of 1/15. Source: Department of Labor, FactSet.

6.6

5.4 5.6

3

4

5

6

7

8

9

10

1986 1990 1994 1998 2002 2006 2010 2014

Unemployment Rate Average When Wages Bottomed

1

2

3

4

5

1986 1990 1994 1998 2002 2006 2010 2014y/y %

chan

ge, 3

m mo

ving a

verag

e

Average Hourly Earnings of Production & Nonsupervisory Employees

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

2004 2006 2008 2010 2012 2014

Job Openings (JOLTS) - thousands

As of 12/14. Job Openings and Labor Turnover Survey (JOLTS) is a monthly survey of private nonfarm establishments and local government entities which provides information on the total number of job openings, hires, and separations (voluntary quits and layoffs/discharges). Source: Department of Labor, FactSet, ISI Group LLC.

US job openings have surged

11

Average nonfarm payroll employment change = +122k

Average nonfarm payroll employment

change = +267k

Long-term US unemployment has plunged

12 As of 1/15. Source: Department of Labor, FactSet.

0

1

2

3

4

5

1948 1958 1968 1978 1988 1998 2008

Long-Term Unemployment Rate (more than 27 weeks)Short-Term Unemployment Rate (less than 5 weeks)

Market’s expectations way under Fed’s

13 As of 2/15. FOMC=Federal Open Market Committee. Source: Bloomberg, Federal Reserve. 13

0.00.51.01.52.02.53.03.54.0

2014 2015 2016 2017

September 2014 Median FOMC Fed Funds Rate ProjectionsDecember 2014 Median FOMC Fed Funds Rate ProjectionsFed Funds Futures Rate (market expectations)

Volatility up across all asset classes

As of 2/27/15. Average Daily Move=50-day moving average of absolute daily change. bps=basis points. WTI=West Texas Intermediate. JPM Global FX Volatility Index is an index of global foreign-exchange volatility that tracks options on currencies of major and developing nations in percentage points. Source: Bespoke Investment Group (B.I.G.), Bloomberg. 14

0.0

0.4

0.8

1.2

1.6

2.0

2011 2012 2013 2014 2015

Average Daily Move in S&P 500 (%)

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

2011 2012 2013 2014 2015

Average Daily Move in 10-Year Treasury Yield (bps)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2011 2012 2013 2014 2015

Average Daily Move in WTI Crude Oil Price (%)

0

5

10

15

20

25

30

1992 1995 1998 2001 2004 2007 2010 2013

JPM Global FX Volatility Index

Mexicanpeso crisis

Peak of euro crisis

Asian financial crisis/Russia default Global

financial crisis

Fed tightenings ahead of US bear markets and recessions

Date of 1st Fed rate hike

Bear market start

# months to bear market

Recession start

# months to recession start

4/15/1955 8/2/1956 16 8/1957 28

9/12/1958 12/12/1961 39 4/1960 19

7/17/1963 2/9/1966 31 n/a n/a

11/20/1967 11/29/1968 12 12/1969 25

1/15/1973 1/11/1973 0 11/1973 10

8/31/1977 n/a n/a 1/1980 29

9/26/1980 11/28/1980 2 7/1981 10

9/4/1987 8/28/1987 -1 7/1990 34

2/4/1994 n/a n/a n/a n/a

6/30/1999 3/24/2000 9 3/2001 21

6/30/2004 10/9/2007 40 12/2007 42

Mean 16 Mean 24

Median 12 Median 25

Bear market defined as 20+% drop in S&P 500. See last slide for definition of recession. Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2015(c) Ned Davis Research, Inc. All rights reserved.).

Big lag from 1st hike to trouble historically

15

US stocks tend to rally into/after initial rate hike

16

98

100

102

104

106

108

110

112

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6Months Prior | Months Post

S&P 500 Around Starts of Fed Tightening Cycles

Average of 13 cases since 1928

Start of Tightening Cycle

1928-2014. Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2015 (c) Ned Davis Research, Inc. All rights reserved.)

Economic & market performance during rising interest rate periods (based on Fed tightening cycles)

% Gain per annum

Start date Fed rate End date Fed rate S&P 500

total return Coincident

index Nonfarm payrolls

4/30/1955 1.75% 7/31/1957 3.00% 15.1% 3.0% 2.5%

9/30/1958 2.00% 8/31/1959 3.50% 24.8% 13.8% 3.9%

7/31/1963 3.50% 11/30/1965 4.00% 16.2% 5.4% 3.8%

11/30/1967 4.50% 3/31/1969 5.50% 9.2% 4.4% 3.6%

1/31/1973 5.00% 3/31/1974 7.50% -13.9% 2.2% 3.0%

8/31/1977 5.75% 1/31/1980 12.00% 12.6% 3.5% 3.8%

9/30/1980 11.00% 4/30/1981 13.00% 15.5% 2.7% 2.1%

9/30/1987 6.00% 1/31/1989 6.50% -2.4% 4.0% 3.3%

2/28/1994 3.25% 1/31/1995 5.50% 3.6% 4.6% 3.6%

6/30/1999 5.00% 4/30/2000 6.00% 8.3% 4.2% 2.6%

6/30/2004 1.25% 5/31/2006 5.00% 7.6% 2.6% 1.7%

Median 9.2% 4.0% 3.3%

Mean 8.8% 4.6% 3.1%

Gain per annum over entire history 11.3% 2.5% 1.7%

Tightening cycle defined as at lest 3 consecutive rate increases without an intervening easing cycle. Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2015(c) Ned Davis Research, Inc. All rights reserved.).

Longer-term US performance during rising rates

17

Higher US rates more a positive than negative

As of 1/15. Demand Deposits are funds held in an account from which deposited funds can be withdrawn at any time without any advance notice to the depository institution. Source: Bureau of Economic Analysis, Cornerstone Macro, FactSet, Federal Reserve.

18

200

400

600

800

1,000

1,200

1990 1995 2000 2005 2010 2015

$, bil

lions

Demand Deposits at Commercial Banks

0

400

800

1,200

1,600

1990 1995 2000 2005 2010 2015

$, bil

lions

Household Interest Income Household Interest Expense

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. We believe the information obtained from third-party sources to be reliable, but neither Schwab nor its affiliates guarantee its accuracy, timeliness, or completeness. The views, opinions and estimates herein are as of the date of the material and are subject to change without notice at any time in reaction to shifting market conditions. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Disclosures

19 ©2015 Charles Schwab & Co., Inc. All rights reserved. Member SIPC

Indexes are unmanaged, do not incur management fees, costs and expenses (or "transaction fees or other related expenses"), and cannot be invested in directly. The Breadth of Philly Fed State Leading Indexes are produced monthly by the Federal Reserve Bank of Philadelphia, and designed to predict the 6-month growth rate of each state's coincident index. The components of the leading indexes are: state coincident indexes, state-level building permits, state initial unemployment insurance claims, delivery times from the ISM manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury note. The Business Confidence Index is a quarterly survey by the Conference Board of approximately 100 CEOs in a wide variety of industries, details Chief Executives' attitudes and expectations regarding the overall state of the economy as well as their own industry. The Chicago Fed's National Financial Conditions Index (NFCI) provides a weekly view of U.S. financial conditions in money markets, debt and equity markets, and the traditional and "shadow" banking systems.

Index definitions

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Indexes are unmanaged, do not incur management fees, costs and expenses (or "transaction fees or other related expenses"), and cannot be invested in directly. The Conference Board's Coincident Economic Index (CEI) is a composite average of four individual economic indicators (employees on nonagricultural payrolls, personal income less transfer payments, industrial production, and manufacturing and trade sales) designed to capture turning points in aggregate economic activity better than any individual component. The Consumer Confidence Index is a survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future. The Institute for Supply Management (ISM) Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. The Institute for Supply Management (ISM) Non-manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms by the Institute of Supply Management. The ISM Non-manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.

Index definitions

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Indexes are unmanaged, do not incur management fees, costs and expenses (or "transaction fees or other related expenses"), and cannot be invested in directly. The S&P 500 Index is a capitalization-weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. (0315-1739)

Index definitions

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