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S C H W A B C E N T E R F O R F I N A N C I A L R E S E A R C H

Schwab’s market experts share their perspectives and provide investment guidance.

SCHWAB 2016 MIDYEAR MARKET

OUTLOOK

Schwab 2016 Midyear Market Outlook

Preparing for Change

The second half of 2016 is likely to see changes in the political landscape,

monetary policy and market trends. Donald Trump and Hillary Clinton are set

to face off for the U.S. presidency and their respective policy proposals and a

contentious campaign season may contribute to market volatility as the

election nears. Adding to the turmoil is Britain’s vote to leave the European

Union. We believe it will take time for the shock of the so-called “Brexit”

to fully work through the economic, financial and political systems in the

United Kingdom and Europe. In the United States, the vote could be another

reason for the Federal Reserve to hold off on raising interest rates. These

factors, along with any change in the trajectory of the dollar’s value against

other global currencies, may result in a change in the relative performance

of various asset classes and sectors.

SCHWAB 2016 MIDYEAR OUTLOOK

Executive summary• We expect U.S. economic growth will remain sluggish and for stock prices to

remain range-bound. Utilities and telecommunications stocks could enticeyield-chasing investors amid the continuing low interest rate environment,but we believe downside risk for those sectors may be elevated.

• Global economic growth remains weak and uncertainty lingers about the eventualimpact of Britain’s decision to leave the Europe Union. Recent shocks in theUnited States, Japan and Europe suggest the negative market impact could lingerfor months and may heighten the potential for a recession in Europe. Central bankpolicies will diverge and politics are likely to spark further market volatility.

• Returns in every major fixed income asset class are positive for the year so far, butthis unusual pattern of performance is unlikely to continue. Britain’s vote to leavethe European Union may be a catalyst for a change. Bond yields have droppedfurther in major developed countries considered safe havens such as Germany andJapan, but yields on riskier bonds are likely to rise in the latter part of the year.

Schwab 2016 Midyear Market Outlook Page 1

Stocks Grapple With BrexitThe Federal Reserve is unlikely to raise rates this year in light of weak growth and the deteriorating financial conditions associated with Britain’s vote to leave the European Union, known as Brexit. We expect the U.S. economy and stock market to continue produc-ing mixed results. One silver lining is that sluggish growth has kept interest rates low and inflation at bay.

Stock market valuations are slightly elevated, while earnings growth remains weak. The aftermath of Brexit, along with the highly con-tentious presidential election, are likely to bring continued bouts of volatility and uncertainty. But this uncertainty and pessimism of investors represents the most compelling support for stock prices longer term in terms of sentiment.

Volatility—recently and prospectively—has been partly a function of Fed policy uncer-tainty as it relates to the “loop” in which financial conditions have been over the past year or so (as shown in the graphic below).

Driven largely by the direction of the U.S. dollar, financial conditions have been waffling between easy and tight. This in turn has kept the Fed moving between a “hawkish” and “dovish” stance. The Brexit-related hit to financial conditions sup-ports a more dovish Fed and suggests a continuation of the frustrating range-bound and volatile stock market behavior.

The U.S. economy continues to move like a SLUG—with Slow, Lumbering, Unstable Growth. Every time it seems to take two steps forward, it falters. This phenomenon is not new. There has been a meaningful slowdown in growth every year since the economic expansion began in June 2009, including this year.

U.S. MARKETS & ECONOMY

Liz Ann Sonders @LizAnnSonders

Chief Investment Strategist, Charles Schwab & Co., Inc.


In a narrow range

In a couple of those years, recession risk appeared elevated. Yet the U.S. stock market has had an incredible run, with a total return of about 250% in the S&P 500 Index from the March 2009 low through the close on the ugly market day after the Brexit decision. That said, during the past two years, U.S. stocks have traded in a remarkably narrow range. In the near term, we expect more of the same, with volatility.

A sluggish pace of economic growth, accompanied by low interest rates and low inflation, is not an unfavorable backdrop for equities longer-term. This is why we don’t believe a major bear market is likely…remember, the tortoise beats the hare in Aesop’s fable.

However, slightly elevated valuations, the earnings contraction, and uncertainty/volatility associated with Federal Reserve policy—and more recently Brexit and the presidential election—represent the rationale for our continued “neutral” rating on U.S. stocks. By “neutral” we mean that investors should remain at their strategic equity allocations while taking advantage of bouts of volatility to consider tactical rebalancing of their portfolios.

Fed likely on hold this year

The Fed appeared itchy to raise rates until recently, following its initial move off the zero bound last December. However, the cortisone of an extremely weak May jobs number and Brexit is likely sufficient to scratch that itch for the remainder of this year.

Clearly, given that the Fed has only raised rates once so far, this cycle is likely to be an extremely slow one. As we highlighted in the beginning-of-year outlook, slower rate hike cycles were historically rewarded by stronger stock market returns relative to faster cycles.

There are risks are associated with Fed policy: that the Fed gets behind the curve if economic growth and/or wage growth and inflation heat up, or it misreads a much slower economy and continues to signal rate hikes ahead. Ideally, we have a “Gold-ilocks” scenario with economic growth not too hot and not too cold, but that could be elusive longer term.

Awaiting earnings growth

Another stumbling block for U.S. equities is at least slightly elevated valuations (depending on the metric) alongside still-negative corporate earnings growth. Low interest rates and inflation continue to be supportive of higher-than-median valua-tion levels, but investor patience will wear thin if earnings growth doesn’t move into positive territory, which will be less likely if the dollar’s recent strength persists.


Bouts of market volatility are likely to persist. Valuations are slightly elevated, so earnings growth likely needs to pick up. But the pessi-mism of investors remains a positive support for stocks longer term.


One other factor is the presidential election. Election years historically have gen-erated solid average gains for U.S. stocks, but this is not a typical election year. Voters are choosing between two of the least-popular candidates in history and it is also an “open election.” President Obama is only the fifth president to make it to his eighth year since term limits went into effect in 1953. As such, there are no incumbent candidates in the race.

Interestingly, year eight has been the worst of the election cycle, with a median de-cline for the S&P 500 of 6.6% since 1953 (the worst year of the eight). “Presidents’ lack of incentive to stimulate the economy for re-election has dampened returns…stimulus has been much less in the back half of second terms,” notes Ned Davis Research, which compiles data on election cycles.

Hope on the horizon

All is not lost. The dearth of investor confidence is one of the more positive in-dicators for the market looking into the second half of the year. As shown in the chart below, the American Association of Individual Investors (AAII) survey recently showed the lowest level of bullish sentiment in more than 10 years, and the highest level of neutral sentiment in more than 13 years.

Following occurrences like this in the past, the stock market generally had excep-tionally strong returns a year later, with a consistent track record. The combination of very few bulls and very high neutrals is even rarer. In the post-1987 history of the AAII data, there were only five similar occurrences historically—all of which were within the 18 months following the crash of 1987. Here, too, the market was up more than 20% within the following year.



In Focus: U.S. Stock Sectors

Refrain From Yield ChasingThe continued low interest rate environment has led to outperformance of traditionally higher dividend paying sectors such as utilities. Unfortunately, we believe some of that money has come from the fixed income world as investors tired of the low yields available in that arena have shifted funds into equities in the form of utilities and telecom.

Given the Brexit vote, and market volatility that followed, it seems likely that the low interest rate environment will continue in the second half of the year. This could entice

investors into chasing potential dividends in the utilities and telecom sectors.

But investors need to remember that equities carry higher risks than most fixed income instruments and the loss of principal is quite possible. In fact, given the elevated valuations we believe exist in the utilities sector due to the yield chasing, we also believe the potential downside is elevated.

The sector is a traditionally defensive sector, and given that the U.S. economy continues to expand, investors could lose interest in that group. Additionally, fixed income yields can reverse relatively quickly, which, as we’ve seen over the past year, could result in a sharp downturn in those higher yielding equity sectors.

We suggest investors refrain from chasing the utilities and telecom sec-tors higher, especially with money that should be allocated to fixed income. These sectors can play a part in a diversified portfolio but should not, in our view, make up an outsized portion.


Brad Sorensen, CFA @SchwabResearch

Managing Director of Market and Sector Analysis, Schwab Center for Financial Research

Be careful when chasing yield in the traditionally de-fensive sectors as sharp reversals are possible.

GLOBAL MARKETS & ECONOMY

Page 5

Changing LeadershipFour factors may define the performance of global markets in the second half of 2016. The key issues to watch for the rest of the year are tied to economic growth, politics, currency movements and corporate earnings.

1. Global growth is slow and vulnerable to shocks

The first half of the year saw improvement in developed interna-tional economies, seen most clearly in the solid first quarter GDP reports for Europe and Japan, despite challenges from negative interest rate policies and rising currencies. This lifted the Eurozone economy to an all-time high eight years after the peak in the first

quarter of 2008, as shown in the chart below. However, this likely overstated the underlying pace of growth, which remains below average and vulnerable to a shock. Just such a shock came at the end of the first half of the year in the form of the United Kingdom voting to leave the European Union. Consumer spending and busi-ness investment may slow further in the U.K. and Europe in the second half of the year due to the heightened uncertainty. However, the fallout may be limited if the Bank of England and European Central Bank can stabilize financial conditions and the U.K. and Eurozone economies capitalize on the weakness in their currencies.

2. Politics will add volatility to markets and economies

The political upheaval may elevate concerns about the market and economic out-look in Europe. Like Brexit, the 2012 European debt crisis was a shock that was fueled by fears of a breakup of the Eurozone and led to a bear market and reces-sion in Europe. Anti-establishment parties in other countries could hold similar referendums on EU membership and Scotland is likely hold another referendum on leaving the U.K. to remain in the EU. The Italian constitutional reform referendum in October and the polling on the upcoming 2017 French and German elections may offer measures of whether political risk continues to rise or begins to recede as politicians address concerns driving anti-establishment sentiment.


Jeffrey Kleintop, CFA @JeffreyKleintop

Chief Global Investment Strategist, Charles Schwab & Co., Inc.


3. Currency is driving stock market performance

The world’s central banks embraced a cautious view of the global economy in early 2016, contributing to a weaker dollar. But the Brexit may put an end to the dollar’s decline as investors seek dollar-denominated safe havens. Stock markets have performed inversely with currency movements in the first half of the year, as shown in the chart below. This makes sense since currency is a measure of how well a country is faring in the battle for trade market share and against deflation, or falling prices. The end of dollar weakness eliminates a first half tailwind for stocks in emerging markets, like India and Mexico.

4. Downward earnings revisions may resume

Global earnings expectations may take another leg down in the second half of the year with weaker consumer and business confidence weighing on growth along with the potential impact from trade negotiations. Some companies may see transition costs from changes in supply chains and operations. A continuation in the strong rise in the yen may reduce earnings for Japanese multinational companies. Finan-cials is the sector most impacted by the Brexit and the financials sector contributes four times as much to global EPS as it does to global GDP. A profit rebound, may not materialize until better economic growth drives faster sales.



Emerging Markets

Emerging market performance has been dollar dependent, as shown in the chart below. This is due in part to dollar-denominated debt owed by companies in emerg-ing markets and capital flows into and out of emerging market economies from the United States. In the second half of the year, we don’t see renewed weakness in the U.S. dollar that would help emerging market stocks outperform as they did in much of the first half.

Maintain global diversification

The unexpected outcome of the U.K. referendum prompted a sharp decline in stock markets around the world and we believe it may take some time for the shock to fully work through the economic, financial, and political systems in the United King-dom and Europe. Fortunately, market shocks in recent years in Japan, the U.S. and Europe were short-term in nature. These included as the devastating earthquake and related nuclear accident in Japan, the congressional standoff over the U.S. debt ceiling and credit rating downgrade of the United States, and the European debt crisis. While the stock market losses were sharp and a recession resulted in two of the three shocks, the time stocks took to recover was 3-4 months. It remains to be seen how long it will take for the markets to recover from the Brexit shock.

Short-term focused traders should be prepared for further stock market declines over the next three to six months, similar to past shocks. We continue to believe volatility will remain a major characteristic of markets in 2016. Longer-term inves-tors may want to maintain their globally diversified asset allocations intended to weather volatility on the way to longer-term goals.


Longer-term investors may want to maintain their globally diversified asset allocations intended to weather volatility on the way to longer-term goals.


In Focus: China

Fear of a rapid drop in economic growth in China—and what policy makers may do about it—has roiled global mar-kets over the past year.

China faces a choice between supporting reform efforts focused on securing long-term growth vs. pursuing short-term growth initiatives that may undermine reform. China’s overall debt as a percentage of GDP grew to 247% in 2015 from 164% in 2008.

New leadership in 2013 unveiled reforms aimed at reduc-ing reliance on debt-funded construction and favor con-sumer-driven growth. The sharp economic slowdown over

the past year, however, forced policy makers to choose stimulus over reform.

The stimulus in early 2016 fueled construction, funded in part by $1 trillion in new credit, and resulted in a 25% rise in residential construction starts in April and a 15% gain in infrastructure spending in April. The impact was quickly felt, as seen with the rise in the Purchasing Managers Index (PMI) in the chart below.

This boom does not appear to be sustainable. Signs indicate growth is slow-ing anew. Britain’s vote to leave the European Union could result in slower export growth to Europe, China’s largest customer. But we do not expect a bust. Rapid income growth for China’s consumers and a sharp rise in retail spending can act as buffer to a slowdown in exports, and China’s government has the flexibility to continue investing in infrastructure.

Our view on China’s economy supports weighting emerging market stocks equal to an investor’s long-term asset allocation.


Michelle Gibley, CFA @SchwabResearch

Director of International Research, Schwab Center for Financial Research

Our current view on China’s economy supports weighting emerging market stocks equal to an investor’s long-term asset allocation.


A Different Path AheadReturns in every major fixed income asset class are positive so far in 2016 – some quite substantially. Longer-duration bonds have outperformed shorter-duration bonds and riskier high-yield bonds have outperformed “core” bonds, which include Treasuries, invest-ment-grade corporate bonds and securitized bonds.

International bonds have also rallied sharply – both developed market bonds and emerging market bonds. Even Treasury Infla-tion-Protected Securities (TIPS) have done well. In some cate-gories, such as international and emerging market bonds, 2016 returns represent a sharp turnaround from losses in 2015. Do-mestically, however, bond returns year to date are generally an extension of good performance last year.

FIXED INCOME

Kathy A. Jones @KathyJones

Chief Fixed Income Strategist, Schwab Center for Financial Research

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The message from the fixed income markets is mixed. Typically, these various types of bonds don’t all perform well at the same time. Long-duration Treasury bonds tend to do well when economic growth is slowing and inflation is declining, while riskier high yield and emerging market bonds along with TIPS tend to do well when the economy is in an upswing.

While there are reasons for the unusual pattern of performance year to date, it is unlikely to continue in the second half of the year, in our view.

Britain’s vote to leave the European Union may prove to be a catalyst for a change. Bond yields have dropped further in major developed countries considered safe havens such as Germany and Japan, adding to the gains driven in the first half of the year by European Central Bank and Bank of Japan aggressively bond-buying programs. Yields in the non-core developed countries such as Spain and Portu-gal, however, have risen since the vote. We see the potential for that divergence to continue.

The rise of negative yields

Yields in the core developed countries are down so sharply year to date that they are unattractive for investors. Fitch estimates that $10 trillion of bonds globally now bear negative yields1. Yet in the non-core countries, risks are rising leaving those bonds vulnerable to further price declines. Emerging market bonds, which had ben-efited from a drop in the dollar since the start of the year, could decline now that the dollar has rebounded.

Consequently, we expect that performance will diverge in the second half of the year.

Potential for rate increases diminished

Although we expect the U.S. economy to grow at about a 2% pace this year, the likelihood of further rate increases by the Federal Reserve has diminished since the Brexit vote.

In that case, we would anticipate that the yield curve will flatten as a result of short-term rates holding steady or edging higher while long-term rates remain low. Weak economic growth and deflationary pressures abroad coupled with relatively high rates domestically should mean that U.S. bonds remain in demand by global investors. Ten-year Treasury yields are currently near the lows seen over the past few years, but a further decline is possible in the near term.

FIXED INCOME

Consider adding intermediate-term bonds to portfolios. Strategies such as bond ladders and barbells also can be useful in managing through a changing interest rate environment.

1 Source: Wall Street Journal, “Negative-Yielding Debt Tops $10 Trillion,” June 2, 2016.


Finding a focus

Considering the mixed signals from the bond market, we suggest investors focus on intermediate-duration investment grade corporate and municipal bonds along with some allocation to Treasuries for the majority of their fixed income holdings.

For those concerned about a potential rise in inflation, some allocation to TIPS may make sense with yields in positive territory.

For the more aggressive income asset classes such as high yield, emerging market and international developed market bonds, we would stay with a strategic allocation for diversification purposes – but caution that returns are not likely to be as high in the second half of the year as they were in the first half.

FIXED INCOME

In Focus: Corporate Bonds

Corporate bond yields dropped sharply in the first half of 2016, as waning recession fears and a rebound in commodity prices pushed prices higher for both investment grade and high-yield bonds. Valuations are at their historical averages, but risks appear elevated, especially with high-yield bonds.

We think investors should stick with their long-term allocations for both types of corporate bonds, and wait for more compelling entry points to boost exposure.

High-yield bonds continue to suffer from low oil prices, de-spite the price of oil nearly doubling from the January 2016 lows. Bonds issued by energy companies have made up a

growing share of the high-yield market, and the low price of oil has weighed on cash flows. The default rate continues to rise, driven by the energy and natural resources sectors.

The recent boom in high-yield issuance also poses a risk as high-yield bond issuers attempt to refinance their maturating debt over the next few years. Over the ten-year period ending May 31, 2016, Barclays U.S. Corporate High-Yield Bond Index more than doubled in size, to over $1.3 trillion, up from $600 billion outstanding. The pace has slowed recently, however, and new issuance fell on a yearly basis in both 2014 and 2015.

Broad market volatility stemming from the “Brexit” vote can also affect the riskier parts of the market like high-yield bonds. As such, we expect high-yield bond prices to be volatile in the second half of the year, with the potential to decline. Investors who cannot stomach such volatility should consider moving up in quality to investment-grade corporate bonds.


FIXED INCOME

Collin Martin, CFA @SchwabResearch

Director of Fixed Income, Schwab Center for Financial Research

Consider sticking with long-term allocations for both types of corporate bonds.

In Focus: Municipal Bonds

U.S. economic growth, especially in the real estate sector, has supported solid performance in the muni market, excluding areas with significant economic exposure to oil-and-gas pro-duction. The pace of growth in state tax revenues has slowed, however, a trend to watch as a warning sign for state credit quality. We are cautious of states and municipalities with a high reliance on the oil-and-gas industry or states where employment growth has been weak.

We favor local general obligation bonds because of their higher reliance on property tax revenues, which have been supported by a strong housing market. Property taxes are generally the bedrock of local government revenues. Since the lows in 2012, home prices have increased by more than

37%, as represented by the S&P/Case-Shiller 20-City Composite Home Price Index.

Relative values for municipal bonds compared with taxable bonds are below their long-term averages. We believe, however, that they are still attractive for high-income investors in their taxable accounts.

Most municipalities appear to be in good shape but there are weak spots. We believe there is a high probability of additional defaults by Puerto Rico, includ-ing its government agencies, in the second half of 2016. This could be the larg-est default by a U.S. municipality. We do not believe that additional defaults will have a significant impact on the rest of the muni market.


FIXED INCOME

Rob Williams, CFP®

@SchwabResearch

Managing Director of Income Planning, Schwab Center for Financial Research

Consider local general obligation bonds in states and municipalities that have stable employment growth and are not heavily reliant on the oil-and-gas industry.


Liz Ann SondersSenior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc. Senior Vice President, Chair of the Investment Committee, Windhaven Investment Management, Inc.*

Liz Ann Sonders’ investment strategy responsibilities range from market analysis to economic strate-gies for individual, corporate, and institutional investors. She is a keynote speaker at many Schwab client and corporate events. Sonders earned a bachelor’s degree in economics and political science from the University of Delaware and an MBA in finance from Fordham University.

Kathy A. JonesSenior Vice President, Chief Fixed Income Strategist, Schwab Center for Financial Research, Charles Schwab & Co., Inc.

Kathy A. Jones is responsible for interest rate, credit market and currency analysis and

fixed income education for investors. She works with both institu-tional and retail clients and is a frequent speaker at Schwab client and industry events. Jones received her undergraduate degree with honors in English literature from Northwestern University and her MBA in finance from Northwestern University’s Kellogg Graduate School of Management.

Jeffrey Kleintop, CFASenior Vice President, Chief Global Investment Strategist, Charles Schwab & Co., Inc.

Jeffrey Kleintop analyzes and discusses international markets, trends, and events to help investors understand their significance

and financial implications. Kleintop has served as a chief strategist for nearly two decades in the financial services industry, serving individual and institutional investors. He earned his B.S. degree in Business Administration from the University of Delaware and received his M.B.A. degree from Pennsylvania State University.

Michelle Gibley, CFADirector, International Research, Schwab Center for Financial Research, Charles Schwab & Co., Inc

Michelle Gibley conducts stock market research and analysis, specializing in international markets. She writes regularly

on specific international topics and frequently quoted in national media outlets. Gibley has 19 years of experience in the invest-ment industry, including pension fund investment consulting and equity analysis. She graduated with honors from the University of Colorado with a bachelor’s degree in finance and is a Chartered Financial Analyst (CFA) charter holder.

Brad Sorensen, CFAManaging Director, Market and Sector Analysis, Schwab Center for Financial Research, Charles Schwab & Co., Inc.

Brad Sorensen heads market and sector analysis for the Schwab Center for Financial Research and writes for several Schwab

publications. Sorensen graduated from the University of Colorado with a bachelor’s degree in finance and master’s degrees in busi-ness administration and finance. He holds a Chartered Financial Analyst designation.

Rob Williams, CFPManaging Director, Income Planning, Schwab Center for Financial Research, Charles Schwab & Co., Inc.

Rob Williams focuses on fixed income and income-planning issues, including key topics of interest to individual investors seeking to

increase income from their portfolios. He also provides analysis of bonds, fixed-income strategies and other income-oriented issues. Williams earned his bachelor’s degree from Princeton University and his M.B.A. from the University of California, Berkeley.

Collin Martin, CFADirector, Fixed Income, Schwab Center for Financial Research, Charles Schwab & Co., Inc.

Collin Martin is responsible for providing analysis and investor education in fixed income, with a focus on the credit markets.

Prior to joining Schwab in 2012, Collin was a fixed income strate-gist with Morgan Stanley Smith Barney, where he published fixed income model portfolios for individual investors. He also contrib-uted to monthly fixed income strategy publications, focusing on international debt markets. Martin received his undergraduate degree in finance from Saint Joseph’s University in Philadelphia. He is a Chartered Financial Analyst charter holder

SCHWAB’S TEAM OF EXPERTS

* Schwab and Windhaven are affiliated companies and subsidiaries of The Charles Schwab Corporation.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc

Schwab Center for Financial Research, @SchwabResearch

The Schwab Center for Financial Research (SCFR) provides individual investors with quality research, insightful perspective and practical guidance to help them make better informed investment decisions. Schwab’s experts are published in respected business and academic journals and cited regularly by the media on investing issues.

Important Disclosures

Past performance is no guarantee of future results. Forecasts contained herein are for illustrative purposes, may be based upon proprietary research and are developed through analysis of historical public data.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation.

Data here is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions.

Indices are unmanaged; do not incur management fees, costs, or expenses; and cannot be invested in directly.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Tax-exempt bonds are not necessarily a suitable investment for all persons. Information related to a security’s tax-exempt status (federal and in-state) is obtained from third-parties and Schwab does not guarantee its accuracy. Tax-exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.

High-yield bonds and lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

Treasury Inflation Protected Securities (TIPS) are inflation-linked securities issued by the US Government whose principal value is adjusted periodically in accordance with the rise and fall in the inflation rate. Thus, the interest amount payable is also impacted by variations in the inflation rate as it is based upon the principal value of the bond. It may fluctuate up or down. Repayment at maturity is guaranteed by the US Government and may be adjusted for inflation to become the greater of either the original face

amount at issuance or that face amount plus an adjustment for inflation.

Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability. Rebalancing a portfolio cannot assure a profit or protect against a loss in any given market environment

Index and Term Definitions

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.

The Global Manufacturing Purchasing Managers Index is an indicator of the economic health of the manufacturing sector. It is based on based on the results of surveys covering over 10,000 purchasing executives in 32 countries. Together these countries account for an estimated 89% of global manufacturing output. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Barclays U.S. Corporate High-Yield Bond Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

Barclays U.S. Corporate Bond Index covers the USD-denominated investment grade, fixed-rate, taxable corporate bond market. Securities are included if rated investment-grade (Baa3/BBB-/BBB-) or higher using the middle rating of Moody’s, S&P, and Fitch. This index is part of the U.S. Aggregate.

S&P Case-Shiller 20-City Composite Home Price Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan areas: Atlanta, Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, New York, Phoenix, Portland, San Diego, San Francisco, Seattle, Tampa and Washington, The Chicago Board Options Exchange Volatility Index® (VIX®) reflects a market estimate of future volatility. VIX is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward-looking and is calculated from both calls and puts.

MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

Barclays U.S. Treasury: 20+ Year Index Includes all public obligations of the U.S. Treasury, excluding foreign-targeted issues with maturities of 20 years or longer.

The Barclays U.S. Agency Index includes native currency agency debentures from issuers such as Fannie Mae, Freddie Mac, and Federal Home Loan Bank. It is a subcomponent of the Government-Related Index and the U.S. Government Index. The index includes callable and non-callable agency securities that are publicly issued by U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government (such as USAID securities).

Barclays U.S. Corporate High-Yield Bond Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

Barclays EM Local Currency Government Bond Index is comprised of local currency treasury debt from 22 countries with a sovereign rating of A1/A+ or World Bank income classification of Low, Low/Middle, or Upper/Middle.

Barclays U.S. Corporate Bond Index covers the USD-denominated investment grade, fixed-rate, taxable corporate bond market. Securities are included if rated investment-grade (Baa3/BBB-/BBB-) or higher using the middle rating of Moody’s, S&P, and Fitch. This index is part of the U.S. Aggregate.

Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index is a market value-weighted index that tracks inflation-protected securities issued by the U.S. Treasury. To prevent the erosion of purchasing power, TIPS are indexed to the non-seasonally adjusted Consumer Price Index for All Urban Consumers, or the CPI-U (CPI).

The Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis.

Barclays U.S. Treasury Bond Index includes public obligations of the U.S. Treasury excluding Treasury Bills and U.S. Treasury TIPS. The index rolls up to the U.S. Aggregate. Securities have USD250 million minimum par amount outstanding and at least one year until final maturity.

Barclays Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term tax-exempt bond market.

Barclays U.S. MBS Index covers agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).

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Contacts

Please reach out to the contacts below if you would like additional information or to schedule an interview with an expert from the Schwab Center for Financial Research.

Schwab Public RelationsHibah Yousuf [email protected] 415-667-0507

Michael Cianfrocca [email protected] 415-667-0344 Addis [email protected]

Erin Montgomery [email protected] 212-403-9271

Kaitlyn [email protected]


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