Anatomy of a Recession:

Economic and Market Outlook

Fourth Quarter 2023
As of November 1st

Anatomy of a Recession (AOR): US Recession Risk Indicators

ClearBridge Investments, one of Franklin Templeton’s specialist investment managers, utilizes 12 different economic indicators
to assess the risk of recession. Each individual indicator can signal expansion, caution or recession in the economy. The
signals from each of the 12 indicators are combined into an overall dashboard signal. The indicators, signals and changes are
based on ClearBridge’s interpretation of the data. The dashboard is not a crystal ball but can serve as a tool to evaluate the risk
of recession in the US economy.

Retail Sales has changed from Red to Yellow with the October 31st update.

Current1

October 2023 September 2023 June 2023

Housing Permits

Job Sentiment
Consumer

Jobless Claims

Retail Sales
Expansion
Wage Growth
Caution
Commodities
Business Activity

Recession
ISM New Orders

Profit Margins

Truck Shipments

Credit Spreads
Financial

Money Supply

Yield Curve

Overall Signal

1. Data as of October 31, 2023. 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.
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Where are we in the economic and market cycle?

When could the economy turn?

Length of time from rate hike pause to recession start (months)2

• Historically, it has taken 8.5 months on average for the onset of a recession following the Fed’s final rate hike.
• More recent cycles have seen a much longer calm before the storm, although these were set against a low inflation backdrop.

Delinquency rates rising3

16%
Transition into Early Delinquency

14%
(30 Days) by Loan Type

12%

10%

8%
Auto
Other
6% Credit
Card
4%
Mortgage
2% HELOC
Student
0%
Loan
2003 2006 2009 2012 2015 2018 2021

• Rising delinquency rates are typically a sign of consumer balance sheet fatigue and increasing recession odds.
• With the moratorium on student loan repayment expired, many borrowers are now facing additional pressure heading into
the holidays.
2. Note: Time from Pause to Recession Start uses actual Last Rate Hike dates and mid-month of Recession Start. Source: FactSet
and NBER. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.
3. HELOC stands for Home Equity Line of Credit. Data as of March 31, 2023, latest available as of June 30, 2023. Source: NY Fed, Equifax. Past performance is not a guarantee of future
results.
Where are we in the economic and market cycle?

Who’s right?
S&P 500 EPS growth YoY4 Nominal GDP YoY4

• Consensus estimates for equity markets and the economy have diverged, providing fuel for both the bulls and the bears.

Peak Fed, peak 10-year5

Peak Fed Funds Peak 10-Year

Date Fed Funds 10-year Date Number of Months 10-year

Aug. 1971 5.75% 6.41% Jul. 1971 -1 6.95%

May 1974 13.00% 7.62% Aug. 1974 4 8.16%

Mar. 1980 20.00% 12.79% Feb. 1980 0 13.65%

May 1981 20.00% 14.23% Sep. 1981 5 15.84%

Aug. 1984 11.75% 12.57% May 1984 -3 13.95%

Feb. 1989 9.75% 9.38% Mar. 1989 1 9.54%

Feb. 1995 6.00% 7.66% Nov. 1994 -3 8.03%

May 2000 6.50% 6.42% Jan. 2000 -4 6.79%

Jun. 2006 5.25% 5.19% Jun. 2006 0 5.24%

Dec. 2018 2.50% 2.75% Nov. 2018 -1 3.24%

Average 0

• With the end of the Fed's tightening cycle on the horizon, history suggests that the 10-Year Treasury is also approaching its
apex.

4. EPS Growth YoY is YoY growth of current constituents. Data as of Sept. 30, 2023. Source: Bloomberg, BEA, FactSet, S&P. 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.
5. Number of months may not add up due to rounding. Source: Bloomberg, Federal Reserve. 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..
Possible market implications

Peak CD Rates, Now What?

12-Month Forward Annual Returns after CD Rate Peaks6
Short-Term Municipal Core/Core Investment-Grade
Peak CDs Bonds Bonds Plus Bonds Corporate Bonds
Aug. 1984 11.2% 17.5% 20.1% 23.9% 27.2%
Apr. 1989 9.2% 10.6% 10.6% 12.3% 11.8%
Feb. 1995 5.7% 10.4% 15.1% 16.9% 20.5%
Sept. 2000 5.5% 10.0% 10.2% 12.4% 13.8%
Sept. 2006 3.8% 5.4% 2.3% 5.3% 4.3%
June 2019 1.0% 4.6% 4.0% 9.4% 10.0%

Average 6.1% 9.8% 10.4% 13.4% 14.6%

• With the Fed’s tightening cycle approaching its conclusion, short-term interest rates (including CDs) are likely to peak as well.
• Although short-term yields are attractive, history suggests that longer duration credit tends to outperform in the year following
peak CD rates.

Dividend growers have historically dominated

Average return after initial Fed rate hikes, during cycle, and following end of Fed rate hike cycle since 19947

• Dividend growth has historically 40% 36.8

been a desirable trait for After Initial During Length After Final Hike 30.2
equities during and after Fed 30% Hike of Cycle
hiking cycles. 20.5
20% 17.4
11.1 9.2 10.6 9.8
10% 7.8
5.3

0%
+12M Annualized +3M +6M +12M
Dividend Growers S&P 500 Index
6. InInvestment-Grade Corporate Bonds represented by the Bloomberg US Corporate Total Return Value Unhedged Index, Core/Core Plus Bonds represented by the Bloomberg US Agg Total
Return Value Unhedged Index, Short-Term Bonds represented by the Bloomberg 1-3 Yr US Gov/Credit Total Return Index, and Municipal Bonds represented by the Bloomberg Municipal Bond
Total Return Index. Source: Bloomberg, Bankrate.com. Past performance does not guarantee future results. Investors cannot invest directly in an index, and unmanaged index returns do not
reflect any fees, expenses or sales charges.
7. Source: BMO Capital Markets Investment Strategy Group, FactSet, Compustat, FRB. Dividend Growth Screening Methodology: S&P 500 stocks screened each month end, no dividend cuts
in the past five years, latest one-year dividend per share growth greater than the S&P 500, current dividend yield greater than the S&P 500, free cash flow yield greater than the dividend yield,
dividend payout ratio lower than the 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.
All investments involve risks, including possible loss of principal. Stocks historically have outperformed other asset classes over the long term but tend to fluctuate more dramatically over the
short term. This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any
security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are
rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country,
region or market. Data from third party sources may have been used in the preparation of this material and Franklin Templeton has not independently verified, validated or audited such data.
Franklin Templeton accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole
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