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M A R K E T C O M M E N T A R Y INTRODUCTION December 2015 Market Commentary The End of an Era: 2016 Outlook Part I Presented by: E. William Stone, CFA®, Chief Investment Strategist for PNC Wealth Management® and Institutional Asset ManagementSM M A R K E T C O M M E N T A R Y Changing World Dynamics INTRODUCTION As we do each year in the December Investment Outlook, and continue with the January issue, we take a look at the current year and provide a brief outlook for the next. Basically, for the remainder of 2015, we believe we will continue to see economic expansion in the United States. We are also keeping eye on the changing dynamics in economies around the world, including the Eurozone, Japan, and China. Currency movements and ongoing uncertainty about oil prices are both key. M A R K E T C O M M E N T A R Y Economy Should Continue to Grow in 2016 Interest Rate Hike Probability December Futures Implied Rate Increase Probability 10/29/15 through 11/24/15 Source: Bloomberg L.P., PNC INTRODUCTION M A R K E T C O M M E N T A R Y Economy Rebounding Real GDP 1Q08 through 3Q15 Source: Bureau of Economic Analysis, Bloomberg L.P., PNC INTRODUCTION M A R K E T C O M M E N T A R Y Assessing the Economic Recovery We use several indicators to assess the sustainability of the economic recovery, including: SUSTAINABILITY INDICATORS • housing; • consumer spending; and • jobs. M A R K E T C O M M E N T A R Y Housing Data Reflect Recovering Sector Home Sales Monthly, 1/31/99 through 10/31/15 Source: National Association of Realtors®, U.S. Census Bureau, Bloomberg L.P., PNC SUSTAINABILITY INDICATORS M A R K E T C O M M E N T A R Y Consumers Becoming More Confident U.S. Personal Consumption Expenditures Monthly, 1/31/05 through 9/30/15 Source: Bureau of Economic Analysis, PNC SUSTAINABILITY INDICATORS M A R K E T C O M M E N T A R Y Auto Sales Having Best Year Ever U.S. Vehicle Sales Monthly, 1/31/00 through 10/31/15 Source: Bloomberg L.P., PNC SUSTAINABILITY INDICATORS M A R K E T C O M M E N T A R Y Labor Market Improving Nonfarm Payrolls Monthly, 1/31/07 through 10/31/15 Source: Bureau of Labor Statistics, PNC SUSTAINABILITY INDICATORS M A R K E T C O M M E N T A R Y Volatility in the Markets S&P 500 and CBOE VIX 12/31/14 through 11/24/15 Source: Bloomberg L.P., PNC EQUITY MARKETS M A R K E T C O M M E N T A R Y Effects of Falling Energy Prices EQUITY MARKETS Fundamentally speaking, the most direct impact to the S&P 500 this year has been the negative effect of falling oil prices on earnings. Currently, the Street consensus for S&P 500 earnings is forecast to be relatively flat compared with 2014, despite a hard hit to the Energy sector’s earnings. M A R K E T C O M M E N T A R Y Uncertainties in the Market As we consider the markets in 2016, we focus on a few uncertainties that we believe are of concern to investors, including: EQUITY MARKETS • the timing of Fed interest rate hikes; • global growth concerns; • ongoing impact of low oil prices; • divergence in monetary policy; • geopolitics and terrorism threats; and • wages and inflation expectations. M A R K E T C O M M E N T A R Y GDP Growth Expected to be Above Trend Housing Starts Monthly, 1/31/05 through 10/31/15 Source: U.S. Census Bureau, PNC CONCLUSION M A R K E T C O M M E N T A R Y Interest Rate Hike a Near-Term Event FOMC Projected Federal Funds Rate and Market Implied Trajectory As of 11/15/15 Source: Federal Reserve, Bloomberg L.P., PNC CONCLUSION M A R K E T C O M M E N T A R Y First Rate Hike Likely in December CONCLUSION Finally, the markets have been focused on the Fed’s stance on interest rates. Thus, we expect that with rising rates and the slow removal of extraordinary monetary policy, that volatility will likely rise. PNC economists predict that after the first rate hike in December 2015, there will likely be three more in 2016. M A R K E T C O M M E N T A R Y December 2015 Market Commentary The End of an Era: 2016 Outlook Part I Presented by: E. William Stone, CFA®, Chief Investment Strategist for PNC Wealth Management® and Institutional Asset ManagementSM M A R K E T C O M M E N T A R Y The PNC Financial Services Group, Inc. (“PNC”) provides investment and wealth management, fiduciary services, FDIC-insured banking products and services and lending of funds through its subsidiary, PNC Bank, National Association (“PNC Bank”), which is a Member FDIC, and provides certain fiduciary and agency services through PNC Delaware Trust Company. This report is furnished for the use of PNC and its clients and does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific investment objectives, financial situation or particular needs of any specific person. Use of this report is dependent upon the judgment and analysis applied by duly authorized investment personnel who consider a client’s individual account circumstances. Persons reading this report should consult with their PNC account representative regarding the appropriateness of investing in any securities or adopting any investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. The information contained in this report was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness or completeness by PNC. The information contained in this report and the opinions expressed herein are subject to change without notice. Past performance is no guarantee of future results. Neither the information in this report nor any opinion expressed herein constitutes an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument. Accounts managed by PNC and its affiliates may take positions from time to time in securities recommended and followed by PNC affiliates. PNC does not provide legal, tax or accounting advice and does not provide services in any jurisdiction in which it is not authorized to conduct business. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Act"). Investment management and related products services provided to a “municipal entity” or “obligated person” regarding "proceeds of municipal securities" (as such terms are defined in the Act) will be provided by PNC Capital Advisors, LLC, a wholly-owned subsidiary of PNC Bank and SEC registered investment adviser. Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC, or the Federal Reserve Board. Securities involve investment risks, including possible loss of principal. ©2015 The PNC Financial Services Group, Inc. All rights reserved.