Charles Schwab

CHARLES SCHWAB on the US Market

From an overall market perspective, the year 2012 has been quite something. We have seen the market focus on the European debt crisis to the US Presidential election, the current focus on the fiscal cliff; and markets have traded on the ups and downs of news regarding each situation. However, an important lesson to take from this past year is that the market, and the broader economy, especially in the United States, have exhibited remarkable resiliency. For the future, there is potential for pullbacks, but we believe the long-term success of equities will beat inflation over time.

From an employment standpoint, jobs will likely continue to be in focus. The outcome of the current Washington negotiations could impact the direction we're headed in the near future, however, improved auto sales and positive retail sales numbers reported by the National Association of Retailers do show us that consumer demand is steady. With plenty of cash on companies' balance sheets, we believe that hiring could accelerate moving into next year if some certainty is provided to businesses through a credible tax policy, spending cuts, and deficit reduction plans. In addition to employment, housing now appears to be in recovery mode and we believe there remains ample demand for housing growth; which could also offset some of the impact from tightening on the fiscal side.

The Fed continues to foster economic growth, and it seems unlikely to change that stance in the near future. Most recently, the Fed replaced the expiring "Operation Twist" with additional purchases of long-term Treasury securities in the amount of $45 billion per month to start 2013. That will be in addition to the $40 billion of mortgage-backed securities (MBS) they are buying through QE3.

Overall, we do not believe in market target-setting. As each year brings many unforeseen events that can impact the economy and the market over the course of a twelve- month period, we don’t believe that it serves investors well. Who could have predicted the way the European situation played out, or the impact of Hurricane Sandy in the northeast, or how Middle East tensions would develop, or even how

the current fiscal cliff negotiations come to conclusion?

There is no doubt that the United States, regardless of the

outcome of the current fiscal cliff negotiations, will undergo some form of fiscal

tightening in 2013.

There is no doubt that the United States, regardless of the outcome of the current fiscal cliff negotiations, will undergo some form of fiscal tightening in 2013. The net is that there will be at least some drag on economic

growth.

However, there are always many factors influencing economies and markets that can serve as fiscal tightening offsets; and psychology always plays an important role. For

example, while negative initially, the impact of Hurricane Sandy to start 2013 could help to offset some of the fiscal drag as the rebuilding kicks into high gear. Depending on how the cliff is resolved, or not, businesses with more certainty could begin to invest in delayed projects, which could also be a boost to the economy.

In sum, looking back at the past year in order to learn and better prepare for the future can be a valuable

exercise. However, when you take a broad look at what the US economy, and the world as a whole, has experienced, it’s apparent that numerous phases that were at least as challenging historically. There is one thing that all crises have in common: they do eventually come to an end. Here’s to a happy and successful 2013 for us all.

Kully Samra,

UK Branch Director, Charles Schwab