economic and market outlook - legg mason€¦ · economic and market outlook second quarter 2020...

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

Economic and Market Outlook

Second Quarter 2020

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

2

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. 1987 peak despite trough coming in Dec. 1987. Source: S&P, NBER, and Bloomberg. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

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

Sept. 2018 Dec. 2018 82 -19% No

Average 150 -18% 29%

557

150

Days

3.7x longer than a pullback

-42%

-18%

S&P 500 Drawdown

Market Crashes Pullbacks

2.3x assevere

83%

29%

Recession Probability

2.9x more likely to coincide with a recession

3

U.S. Recession Risk Indicators

Data as of March 31, 2020. Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg. The ClearBridge Recession Risk Dashboard was created in January 2016. References to the signals it would have sent in the years prior to January 2016 are based on how the underlying data was reflected in the component indicators at the time.

• 12 variables have historically foreshadowed a looming recession• The overall dashboard signals a recession

March 31, 2020 March 15, 2020 January 2020Fi

nanc

ial Yield Curve

Credit Spreads

Money Supply

Infla

tion Wage Growth

Commodities

Cons

umer

Housing Permits

Jobless Claims

Retail Sales

Job Sentiment

Busi

ness

A

ctiv

ity

ISM New Orders

Profit Margins

Truck Shipments

Overall Signal

Expansion Caution Recession

4

U.S. Recession Risk Indicators

Data as of March 31, 2020. Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg. The ClearBridge Recession Risk Dashboard was created in January 2016. References to the signals it would have sent in the years prior to January 2016 are based on how the underlying data was reflected in the component indicators at the time.

• 12 variables have historically foreshadowed a looming recession

• The overall dashboard signals a recession

Recession

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

Fina

ncia

l Yield Curve

Credit Spreads

Money Supply

Infla

tion Wage Growth

Commodities

Cons

umer

Housing Permits

Jobless Claims

Retail Sales

Job Sentiment

Busi

ness

Act

ivity

ISM New Orders

Profit Margins

Truck Shipments n/a n/a

Overall

Expansion Caution Recession

5

Profit Margins Under Pressure

BEA = Bureau of Economic Analysis. Data as of Dec. 31, 2019, most recent as of March 31, 2020. Source: U.S. Bureau of Labor Statistics. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

1-19

20-49

50-499500-999

41%1000+

Employees

% of Workforce by Employer Size

Companies with fewer than 1000 workers employ 59% of the U.S. labor force. The average company in the Russell 2000 employs 3,679 workers.

July’s BEA revisions show that corporate profits have been flat for over 5 years and many small businesses are struggling to combat higher compensation costs.

59%<1000 Employees

500

750

1,000

1,250

1,500

1,750

2,000

2,250

1995 1998 2001 2004 2007 2010 2013 2016 2019$

(Bill

ions

)

U.S. Corporate Profits

RecessionCorp. Profits (Prior to Jul. 2019 Revision)Corp. Profits (Post Revision)

6

Has the Fed Saved the Day?

Source: BMO Investment Strategy Group, FRB, FactSet.Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

Rece

ssio

n

So

ft L

andi

ng

S&P 500 Performance Following Third Fed Rate Cut

Date of Third Fed Cut +3 Months +6 Months +12 Months +18 Months

Jan. 31, 1996 2.9% 0.6% 23.6% 50.0%

Nov. 17, 1998 7.4% 17.6% 23.8% 27.1%

Average 5.2% 9.1% 23.7% 38.6%

March 20, 2001 7.0% -13.8% 0.8% -26.0%

Dec. 11, 2007 -10.6% -9.6% -40.9% -36.1%

Average -1.8% -11.7% -20.1% -31.1%

Equity performance in the six months following the Fed's third rate cut can be an important barometer of recessionary risk.

7

Selloffs Occur Much Quicker than the Ascension to the Prior PeakStairs Up, Elevator Down

Note: For this slide, we are looking at selloffs of 15% or higher.Source: FactSet. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

S&P 500 Drawdowns

Peak Trough % Change Months to Climb to Peak

Months Peak to Trough

Months Back to Previous High

Jul-57 Oct-57 -20.7% 5 3 8Nov-61 Jun-62 -27.9% 36 6 10Feb-66 Oct-66 -22.2% 27 7 5Nov-68 May-70 -36.1% 64 17 15Jan-73 Oct-74 -48.3% 121 20 49Sep-76 Mar-78 -19.4% 10 17 13Feb-80 Mar-80 -17.1% 11 1 3Dec-80 Aug-82 -27.1% 9 20 2Aug-87 Dec-87 -33.5% 18 3 15Jul-90 Oct-90 -19.9% 16 3 3Jul-98 Aug-98 -19.3% 6 1 2

Mar-00 Oct-02 -49.1% 35 29 39Oct-07 Mar-09 -56.8% 132 16 34Apr-10 Jul-10 -16.0% 7 2 3May-11 Oct-11 -19.4% 8 5 3Sep-18 Dec-18 -19.8% 16 3 3

Median 16 6 7

After a major selloff, it typically takes 7 months to regain the former highs.

8

Fastest Bear Market From Peak in U.S. History

As of March 31, 2020. Source: FactSet. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

451

445

426

353

320

274

201

167

87

55

42

22

0 100 200 300 400 500

Nov. 1980

Aug. 1956

Nov. 1968

Mar. 2000

Jan. 1973

Oct. 2007

Feb. 1966

Dec. 1961

Jul. 1990

Aug. 1987

Sep. 1929

Mar. 2020

Number of Days

Days from Market Peak to Bear Market (-20%)

The speed of the recent market decline is unprecedented, surpassing even the selloff heading into the Great Depression.

9

Typical Market Leadership in a Downturn

Note: Average performance: average performance during selloffs of 5% or more, Hit Rate: Hit rate of outperformance during 5%+ selloffs, 2005 – present. Benchmarks used: Large Value: S&P 500 Value, Large Blend: S&P 500, Large Growth: S&P 500 Growth; Mid Value: S&P 400 Value, Mid Blend: S&P 400, Mid Growth: S&P 400 Growth; Small Value: S&P 600 Value, Small Blend: S&P 600, Small Growth: S&P 600 Growth. Outperformance frequency calculated relative to S&P 1500 index. Source: S&P, Bloomberg. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

Mar

ket C

ap

Smal

lM

idLa

rge

Value Blend Growth

Investment Style

Large Cap Value

-12.9%Avg. Perf.

38% Hit Rate

Mid Cap Value

-13.9%Avg. Perf.

21% Hit Rate

Small Cap Value

-14.6%Avg. Perf.

17% Hit Rate

Large Cap

-12.3%Avg. Perf.

83% Hit Rate

Mid Cap

-13.6%Avg. Perf.

25% Hit Rate

Small Cap

-14.1%Avg. Perf.

21% Hit Rate

Large Cap Growth

-11.6%Avg. Perf.

75% Hit Rate

Mid Cap Growth

-13.2%Avg. Perf.

33% Hit Rate

Small Cap Growth

-13.5%Avg. Perf.

42% Hit Rate

Most Defensive

LeastDefensive

Less

Def

ensi

ve

Less Defensive

10

Which Equities Do Well During Periods of Market Volatility?During the Last Seven Major Market Drawdowns, Some Sectors Held Up Better than Others

Source: FactSet. Note: Market Drawdowns defined as declines of 15% or greater in S&P 500 since 1987. Hit rate defined as % of severe declines with relative outperformance vs. S&P 500. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

100%

100%

100%

57%

86%

29%

29%

14%

29%

14%

0% 20% 40% 60% 80% 100% 120%

Consumer Staples

Utilities

Health Care

Energy

Comm. Services

Materials

Cons. Discretionary

Industrials

IT

Financials

Hit Rate

20%

14%

12%

7%

5%

1%

-2%

-4%

-6%

-7%

-10% -5% 0% 5% 10% 15% 20% 25%

Consumer Staples

Utilities

Health Care

Energy

Comm. Services

Materials

Cons. Discretionary

Industrials

IT

Financials

Relative Performance

During periods of market turmoil, defensive sectors such as Staples, Utilities, and Health Care have historically tended to deliver better relative performance.

11

How Long Does the Typical Recession Last?On Average, Recessions Have Lasted 13 Months

As of March 2020. Source: National Bureau of Economic Research, Wikipedia and Deutsche Bank Global Research. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

7

18

14 13

43

13

811 10

810 11

16

6

16

8 8

18

13

0

5

10

15

20

25

30

35

40

45

50

1918

1920

1923

1926

1929

1937

1945

1948

1953

1957

1960

1969

1973

1980

1981

1990

2001

2007

Aver

age

Mon

ths

Number of Months U.S. Economy in Recession

The 1918 recession, which occurred amidst the Spanish Flu, lasted about half as long as a typical recession.

Average Length

of a Recession

12

Stocks Anticipate Economic Recoveries

Data as of March 2020.Source: National Bureau of Economic Research, FactSet. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

Economic Recessions vs. Market Lows

Recession Start

Recession End

Length of Recession (Months)

Market Low

Market Low to End of Recession

S&P 500 Peak to Trough

Nov-48 Oct-49 11 Jun-49 4 Months Prior -30%

Jul-53 May-54 10 Sep-53 8 Months Prior -15%

Aug-57 Apr-58 7 Oct-57 6 Months Prior -22%

Apr-60 Feb-61 9 Oct-60 4 Months Prior -14%

Dec-69 Nov-70 10 May-70 6 Months Prior -36%

Nov-73 Mar-75 16 Oct-74 5 Months Prior -48%

Jan-80 Jul-80 6 Mar-80 4 Months Prior -17%

Jul-81 Nov-82 15 Aug-82 3 Months Prior -27%

Jul-90 Mar-91 8 Oct-90 5 Months Prior -20%

Mar-01 Nov-01 7 Oct-02 11 Months After -49%

Dec-07 Jun-09 17 Mar-09 3 Months Prior -57%

Average 3 Months Prior -30%

13

Counter Trend Rallies Are CommonplaceRecessionary Bear Markets Often See Pockets of Strength

Source: National Bureau of Economic Research, FactSet. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

Largest Historical Recessionary Counter Trend Rallies

Recession Begin Recession End Largest Counter Trend Rally

Dec. 1969 Nov. 1970 6%

Nov. 1973 Mar. 1975 10%

Jan. 1980 July 1980 4%

Jul. 1981 Nov. 1982 12%

Jul. 1990 Mar. 1991 6%

Mar. 2001 Nov. 2001 19%

Dec. 2007 Jun. 2009 24% 600

800

1,000

1,200

1,400

1,600

1,800

Oct. 2007 Feb. 2008 Jun. 2008 Oct. 2008 Feb. 2009

S&P 500 Counter Trend Rallies: 2007-2009

11 Days8%

9 Days7%

51 Days12%

31 Days24%

7 Days19%

2 Days12%

3 Days9%

20 Days7%

14

U.S. Recession Recovery Dashboard

Data as of March 31, 2020. Source: FactSet, Bloomberg, Conference Board, Census Bureau, Federal Reserve, FRBPA, Chicago Fed, ISM, Dept. of Labor, Bloomberg/Barclays, AAII, Investors Intelligence, and Moody’s.

• 9 variables have historically foreshadowed a durable recovery• The overall signal suggests the economy remains in a recession

March 2020Co

nfid

ence Consumer Confidence

Business Confidence (ISM)

Investor Sentiment

Econ

omic Building Permits

Initial Jobless Claims

Philly Fed

Fina

ncia

l Credit Spreads

Fed Policy

Financial Conditions

Overall Signal

Expansion Improvement Recession

15


Data as of March 31, 2020. Source: Source: FactSet, Bloomberg, Conference Board, Census Bureau, Federal Reserve, FRBPA, Chicago Fed, ISM, Dept. of Labor, Bloomberg/Barclays, AAII, Investors Intelligence, and Moody’s. The ClearBridge Recession Risk Dashboard was created in January 2016. References to the signals it would have sent in the years prior to January 2016 are based on how the underlying data was reflected in the component indicators at the time.

• 9 variables have historically foreshadowed a durable recovery

• The overall signal suggests the economy remains in a recession

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

Conf

iden

ce Consumer Confidence

Business Confidence (ISM)

Investor Sentiment

Econ



Philly Fed

Fina

ncia

l Credit Spreads

Fed Policy


n/a

Overall

Months From Green to End of Recession ? +5 -1 0 -2 +1 -1 +6


16


Data as of March 31, 2020. Source: FactSet, Bloomberg, Conference Board, Census Bureau, Federal Reserve, FRBPA, Chicago Fed, ISM, Dept. of Labor, Bloomberg/Barclays, AAII, Investors Intelligence, and Moody’s.

Case Study: 2007-2010

1,468

1,280

903919

1,115

600

800

1,000

1,200

1,400

1,600

Q42007

Q22008

Q42008

Q22009

Q42009

S&P

500

Overall Signal:

Overall Signal:

Overall Signal:

Overall Signal:

Overall Signal:

Conf

iden

ce Consumer Confidence Business Confidence

(ISM)

Investor Sentiment

Econ



Philly Fed

Fina

ncia

l Credit Spreads

Fed Policy



17

Global Monetary Policy is Accommodative

Data as of March 31, 2020. Note: Share of banks cutting rates over the prior 3 months. Source: BSI. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

0%

20%

40%

60%

80%

100%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Share of Central Banks Cutting

In response to the COVID-19 crisis, the share of global central banks that are easing policy is approaching levels last seen during the global financial crisis.

18

Fiscal Stimulus Taking the Reins

Source: JP Morgan. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

Global Fiscal Stimulus Announced, % of GDP

Country Fiscal Stimulus, % 2019 GDP Weight in Global GDP (%) Contribution to Global

Fiscal Stimulus, % GDP

U.S. 9.3 24.8 2.3

China 1.4 16.3 0.2

Japan 18.4 6.0 1.1

Germany 18.9 4.5 0.8

UK 4.0 3.2 0.1

France 1.9 3.1 0.1

Italy 1.4 2.3 0.0

Canada 3.6 2.0 0.1

Korea 2.6 1.9 0.1

Spain 1.4 1.6 0.0

Australia 0.8 1.6 0.0

Total 67.3% 4.8%

With global central banks pushing up on the limits of monetary policy, fiscalstimulus will likely play a larger role moving forward.

19

U.S. Credit Quality Deterioration

As of March 31, 2020. Source: Bloomberg/Barclays. Past performance is not a guarantee of future results. Investors cannot investdirectly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

Baa41.5%

A38.9%

Aa10.6%

Aaa9.0%

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

In 1973, only 9% of credits were rated Baa versus 42% today.

20

BBB Spread Widening Presents Opportunity

Data as of Mar. 31, 2020. Source: Bloomberg. *Percentiles captured since inception (June 1989). Spread is between Moody’s corporate yields for bonds rated BBB and the U.S. Government 10-year yield. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

0

100

200

300

400

500

600

700

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Basi

s Po

ints

U.S. Corporate BBB 10 Year Spread

Investment Grade Spreads to Treasurys

5th

50th

95th

March 23, 2020Spread: 434 bpsPercentile*: 98%

Average S&P 500 2 Year Forward Return from the 95% Percentile: 15% (Annualized)

When credit spreads have risen to current levels historically, stock returns have been above-average over the next 24 months.

Percentile

21

Which Equities Do Well Following Selloffs? Following the Last Seven Major Market Drawdowns, Some Sectors Have Rebounded More Strongly

Source: FactSet. Note: Market Drawdowns defined as pullbacks of 15% or greater in S&P 500 since 1987. Hit rate defined as % of severe declines with relative outperformance vs. S&P 500 12 months after each decline. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

86%

71%

71%

71%

57%

29%

57%

14%

14%

14%

0% 20% 40% 60% 80% 100%

IT

Financials

Industrials

Cons. Discretionary

Materials

Health Care

Comm. Services

Energy

Consumer Staples

Utilities

Hit Rate

23%

15%

6%

6%

0%

-9%

-11%

-15%

-15%

-18%

-30% -20% -10% 0% 10% 20% 30%

IT

Financials

Industrials

Cons. Discretionary

Materials

Health Care

Comm. Services

Energy

Consumer Staples

Utilities

Relative Performance

Following periods of market turmoil, more cyclical sectors such as IT, Financials, Industrials, and Consumer Discretionary have historically tended to deliver better relative performance.

22

Dividend Paying Equities Attractive

As of March 31, 2020. Source: FactSet. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

0%

10%

20%

30%

40%

50%

60%

70%

80%

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019% o

f S&

P 50

0 St

ocks

w/

Div

iden

d Yi

eld

> 3

0 Ye

ar T

reas

ury

Yiel

d

69% of S&P stocks now have a dividend yield greater than the 30-year Treasury.

23

Can You Time the Market?

Data as of April 30, 2019, 10 months before current prior market peak. Source: Yardeni Research. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

10

100

1,000

10,000

100,000

1936 1946 1956 1966 1976 1986 1996 2006 2016

Cum

ulat

ive

Retu

rns

(Log

Sca

le) (

$)

Buy & Hold vs. Market-Timing Since 1936 (Growth of $100)

Cumulative Return: Buy & Hold Cumulative Return: Sell 10 Months Before Peak, Buy 10 Months After Trough

Since 1936, an investor that consistently sold 10 months prior to a market peak and bought back 10 months after the trough was worse overall than a buy and hold investor.

Cumulative Return: $21,934

Cumulative Return: $8,848

24

Missing the Best Days Can Drastically Reduce Returns

Data as of March 31, 2020. Source: FactSet. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

Cumulative Annualized

Decade Price Return Excluding 10 Best Days Per Decade Price Return Excluding 10 Best Days

Per Decade

1930 -42% -79% -5% -15%

1940 35% -14% 3% -2%

1950 257% 167% 14% 11%

1960 54% 14% 4% 1%

1970 17% -20% 2% -2%

1980 227% 108% 13% 8%

1990 316% 186% 15% 12%

2000 -24% -62% -3% -10%

2010 190% 95% 11% 7%

Average Since 1930 114% 44% 6% 1%

Investors that missed the 10 best days in a given decade would have seen 70% lower returns over the course of that decade on average.

28% of the best days (5% or more) took place in the first two months of a bull market.

25

Bear Markets Should Not Be Feared

Data as of March 31, 2020. Annualized return for the S&P since Jan. 2, 1928. Source: FactSet. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

1

10

100

1,000

10,000

1928 1938 1948 1958 1968 1978 1988 1998 2008 2018

S&P

500

Inde

x (L

og-S

cale

)

S&P 500

Since 1928, the S&P 500 has been 20% below the previous peak 39% of the time.

26

New Secular Bull Market?

Secular bear market average drawdown includes selloff beginning September 1929. Data as of March 31, 2020. Source: Bloomberg,FactSet. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

1

5

25

125

625

3125

1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

S&P

500

Inde

x (L

og-S

cale

)

S&P 500

1930-1950All-Time Highs: 0

Cumulative Return: -22.2%


Cumulative Return: 451.9%


Cumulative Return: 17.2%

1980-2000All-Time Highs: 500Cumulative Return:

1,261.2%


Cumulative Return: -24.1%

2010-PresentAll-Time Highs:

255Cumulative

Return: 132%

Secular Bear: Average Drawdown -46.1%Secular Bull: Average Drawdown -25.3%

27

International Outlook

28

Home Country Bias

Morningstar Category Assets as of Feb. 29, 2020. GDP as of Dec. 31, 2019. MSCI World Index as of March 31, 2020. Source: Morningstar, IMF, FactSet. Data most recent available as of Mar. 31, 2020. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

U.S.

International

% Assets

The U.S. represents 75% of U.S. investor portfolios

U.S.

International

% GDP

The U.S. represents only 33% of Global GDP

Investors tend to over-allocate to their home country.

U.S.

International

% Market Cap

The U.S. represents 62% of Global Market Cap

29

Dollar Regimes Coincide With Global Equity Leadership

Data as of March 31, 2020. *MSCI U.S. Index vs. MSCI All Country World ex.-U.S. Index in U.S. dollar terms. One year rolling periods. Source: FactSet. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

-40

-30

-20

-10

0

10

20

30

40

1993 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

U.S

. vs.

Res

t of W

orld

One

-Yea

r Rel

ativ

e Pe

rfor

man

ce (%

)

Relative Stock Price: U.S. vs. Rest of World(Rolling 1-Year Periods)

Dollar Bull Dollar Bear Dollar Bull

Periods of sustained dollar strength have aligned with U.S. equity outperformance. Dollar weakness could lead to a shift in global equity market leadership.

30

Twin Deficits: Budget and Trade

Data as of Dec. 31, 2019, most recent available as of March 31, 2020. Source: BEA, Federal Reserve, FactSet. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

-10

-8

-6

-4

-2

0

2

4

6

8

10

-30%

-20%

-10%

0%

10%

20%

30%

40%

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Twin D

eficits -5 Year ChangeRe

al T

rade

Wei

ghte

d D

olla

r -5

Year

Cha

nge

Real Trade Weighted Dollar (Lagged 2 Years, LHS) Twin Deficits as a % of GDP (RHS)

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

31

IFO Expectations vs. DAX

Data as of March 31, 2020; represents period from 2005-present. Source: IFO, Deutsche Boerse, Bloomberg. Past performance is not a guarantee of future results. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

15.7%

7.4% 6.5%

-10.2%

-15

-10

-5

0

5

10

15

20

<96 96-100 100-104 >104

Ger

man

DAX

12M

For

war

d Pr

ice

Retu

rn

German IFO Business Expectations

CurrentLevel

More Bearish More BullishExpectations

When IFO expectations are at current levels, returns tend to be above average.

32

Glossary of Terms

EPS: Earnings Per Share

GDP: Gross Domestic Product

P/E Ratio: Price/Earnings ratio

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.

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

Shibor: Shanghai Interbank Offered Rate

33

Additional Important InformationPast performance is no guarantee of future results.

©2020 Legg Mason Investor Services, LLC, member FINRA, SIPC. “Anatomy of a Recession” is a trademark of ClearBridge Investments, LLC. 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 April 2020 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. Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation, and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed-income securities falls. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

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