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4Q | 2012 As of September 30, 2012
®
Guide to the Markets
Table of Contents
EQUITIES
4
ECONOMY
17
FIXED INCOME
32
INTERNATIONAL
41
ASSET CLASS
55
U.S. Market Strategy Team Dr. David P. Kelly, CFA
[email protected]
Andrew D. Goldberg
[email protected]
Joseph SS. Tanious Tanious, CFA
joseph s tanious@jpmorgan com
[email protected]
Andrés Garcia-Amaya
[email protected]
Brandon D. Odenath
[email protected]
David M. Lebovitz
[email protected]
Anthony M. Wile
[email protected]
www.jpmorganfunds.com/mi Past performance is no guarantee of comparable future results.
2
Page Reference Equities 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 3 14. 15. 16.
Returns by Style Returns by Sector S&P 500 Index at Inflection Points Bull and Bear Markets Stock Valuation Measures: S&P 500 Index Earnings Estimates and Valuations by Style Corporate Profits Sources of Earnings per Share Growth Confidence and the Capital Markets Deploying ep oy g Corporate Co po ate Cas Cash Broad Market Lagged Price to Earnings Ratio P/E Ratios and Equity Returns Equity Correlations and Volatility
Economy 17. 18 18. 19. 20. 21. 22. 23. 24. 25 25. 26. 27. 28. 29. 30. 31.
Economic Growth and the Composition of GDP Cyclical Sectors Consumer Finances Federal Finances: Outlays and Revenues Federal Finances: Deficits and Debt Tax Rates and the Distribution of Income & Taxes U.S. Political Perspectives The Aftermath of the Housing Bubble Employment Employment and Income by Educational Attainment Consumer Price Index Returns in Different Inflation Environments – 40 years Oil and the Economy Global Oil Supply Consumer Confidence and the Stock Market
Fixed Income 32. Fixed Income Sector Returns 33. Interest Rates and Inflation
3
34. 35. 36. 37. 38. 39. 40.
Fixed Income Yields and Returns The Fed and the Money Supply The Fed Funds Rate: History and Expectations Credit Conditions High Yield Bonds Municipal Finance Emerging Market Debt
International 41. 42. 43. 44. 45. 46. 47. 48. 49. 50 50. 51. 52. 53. 54.
Global Equity Markets: Returns and Composition Global Economic Growth Global Monetaryy Policyy The Importance of Exports The Impact of Global Consumers European Crisis: Fiscal Challenges European Crisis: Sovereign Bond Yields European Crisis: Financial System Risks Chinese Growth and Economic Policy Global Equity Valuations – Developed Markets Global Equity Valuations – Emerging Markets Emerging Market Equity Composition International Economic and Demographic Data Current Account Deficit and U.S. Dollar
Asset Class 55. 55 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66.
Asset Class Returns Correlations: 10-Years Mutual Fund Flows Dividend Income: Domestic and Global Global Commodities Gold Historical Returns by Holding Period Diversification f and the Average Investor Annual Returns and Intra-year Declines Cash Accounts Corporate DB Plans and Endowments The Dow Jones Industrial Average Since 1900
Returns by Style Charts reflect index levels (price change only). All returns and annotations reflect total return, including dividends.
Large
6.5%
6.4%
6.1%
Mid
5.8%
5.6%
5.3%
Small
1,450
2012: +16.4%
1,400
3Q12: +6.4%
1,350
5.7%
5.3%
4.8%
Value
Blend
Growth
Large
Growth
15.7%
16.4%
16.8%
Mid
Blend
14.0%
14.0%
13.9%
Small
Value
1,500 ,
Equities
2012 YTD
3Q 2012
S&P 500 Index
14.4%
14.2%
14.1%
1 300 1,300 1,250 Dec-11 Feb-12 Apr-12 Jun-12
Aug-12
Sep-12
Blend
Growth
Large
-6.9%
2.7%
14.2%
Large
132.2% 129.6% 132.9%
5.8%
8.3%
9.8%
Mid
170.3% 161.4% 153.8%
2.3%
6.2%
9.6%
Small
1,400
Value
Mid
Since 10/9/07 Peak: 2.7%
1 600 1,600
Since Market Low (March 2009)
Small
Since Market Peak (October 2007)
S&P 500 Index
Value
Blend
Growth
153.1% 156.2% 158.7%
1,200 1,000
Since 3/9/09 Low: +129.6%
800 600 Dec-06 Feb-08
Apr-09
Jun-10 Aug-11 Sep-12
Source: Russell Investment Group, Standard & Poor’s, FactSet, J.P. Morgan Asset Management. All calculations are cumulative total return return, including dividends reinvested for the stated period period. Since Market Peak represents period 10/9/07 – 9/28/12, illustrating market returns since the most recent S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09 – 9/28/12, illustrating market returns since the S&P 500 Index low on 3/9/09. Returns are cumulative returns, not annualized. For all time periods, total return is based on Russell-style indexes with the exception of the large blend category, which is reflected by the S&P 500 Index. Past performance is not indicative of future returns. Data are as of 9/30/12.
4
ex In d 50 0
9.8% 11.8% 9.1%
11.3% 4.1% 16.9%
11.0% 16.4% 7.9%
10.9% 12.7% 7.3%
3.3% 2.3% 3.8%
3.5% 0.2% 6.8%
3.5% 3.8% 3.9%
100.0% 100.0% 100.0%
3Q 2012
6.9
7.4
6.2
3.6
10.1
7.5
3.8
8.1
-0.5
5.1
6.4
2012 YTD
21.6
21.8
17.8
11.2
7.6
21.4
12.7
25.9
4.3
12.0
16.4
Since Market Peak
-51.4
22.8
23.3
-4.9
4.2
34.7
47.7
13.5
8.5
-3.2
2.7
165.1
157.3
98.7
161.4
90.9
211.7
107.1
116.8
90.0
130.6
129.6
1.39
1.24
0.64
1.17
0.92
1.11
0.52
0.84
0.51
1.28
1.00
(October 2007)
Since Market Low (March 2009)
Beta to S&P 500 Forward P/E Ratio
10 7x 10.7x
12 7x 12.7x
12 8x 12.8x
12 5x 12.5x
11 5x 11.5x
15 1x 15.1x
15 8x 15.8x
18 3x 18.3x
14 9x 14.9x
12 7x 12.7x
12 9x 12.9x
15-yr avg.
12.9x
24.0x
18.6x
17.0x
14.8x
18.7x
18.3x
17.5x
13.6x
16.2x
16.8x
Trailing P/E Ratio
12.4x
15.9x
18.2x
14.5x
10.9x
15.7x
18.6x
47.1x
16.5x
16.8x
15.2x
20-yr avg.
15.9x
26.7x
24.1x
20.4x
18.2x
19.6x
21.1x
19.4x
14.3x
19.6x
19.6x
Dividend Yield 20-yr avg.
1.8% 2.1%
1.5% 0.6%
2.2% 1.5%
2.5% 1.8%
2.3% 1.8%
1.6% 1.0%
2.9% 2.0%
4.6% 3.8%
4.2% 4.4%
2.5% 2.1%
2.1% 1.7%
Returrn
12.0% 11.9% 11.7%
β
20.1% 32.6% 6.3%
Weight
S& P
at er ia ls M
Ut il
iti
es
es Te le co m
Co n
s.
St ap l
Di sc r. Co n
s.
y En er g
du st ria ls In
ar e C He al th
og ol Te ch n
14.6% 4.3% 26.4%
P/E
S&P Weight Russell Growth Weight Russell Value Weight
Div
Equities
Fi
na nc ia ls
y
Returns by Sector
S Source: Standard St d d & P Poor’s, ’ R Russellll IInvestment t tG Group, F FactSet, tS t J.P. J P Morgan M Asset A t Management. M t All calculations are cumulative total return, not annualized, including dividends for the stated period. Since Market Peak represents period 10/9/07 – 9/28/12. Since Market Low represents period 3/9/09 – 9/28/12. Forward P/E Ratio is a bottom-up calculation based on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Trailing P/E ratios are bottom-up values defined as month-end price divided by the last 12 months of available reported earnings. Historical data can change as new information becomes available. Note that P/E ratios for the S&P 500 may differ from estimates elsewhere in this book due to the use of a bottom-up calculation of constituent earnings (as described) rather than a top-down calculation. This methodology is used to allow proper comparison of sector level data to broad index level data. Dividend yields are bottom-up bottom up values defined as the annualized value of the most recent cash dividend as a percent of month-end price. Beta calculations are based on 10 years of monthly price returns for the S&P 500 and its sub-indices. Past performance is not indicative of future returns. Data are as of 9/30/12.
5
S&P 500 Index at Inflection Points S&P 500 Index Mar. 24, 2000 P/E (fwd.) = 25.6x
1,600
Equities
Characteristic
1 527 1,527
Mar-2000
Oct-2007
1,527 25.6x 1 1% 1.1% 6.2%
1,565 15.2x 1 8% 1.8% 4.7%
Index level P/E ratio (fwd.) Dividend yield 10-yr. Treasury
Sep-2012 Oct. 9, 2007 P/E (fwd.) = 15.2x
1,441 12.9x 2 1% 2.1% 1.6%
1,565
Sep. p 28,, 2012 P/E (fwd.) = 12.9x
1,441
1,400
+101% +106%
1,200
-57% -49% 1 000 1,000
+113% 113%
800 Dec. 31, 1996 P/E (fwd.) = 16.0x
Oct. 9, 2002 Oct 00 P/E (fwd.) = 14.1x
741
M Mar. 9, 9 2009 P/E (fwd.) = 10.3x
777
677
600 '97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
Source: Standard & Poor’s, First Call, Compustat, FactSet, J.P. Morgan Asset Management. Dividend y yield is calculated as the annualized dividend rate divided by y price, p as p provided by y Compustat. p Forward Price to Earnings g Ratio is a bottom-up p calculation based on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future results. Data are as of 9/30/12.
6
Bull and Bear Markets Bear Market Cycles vs. Subsequent Bull Runs
Historical Bull Markets: Duration and Magnitude* 400% 600%
Equities
'87 - '00 350% 550%
Market Peak
Market Low
Bear Market Return
Yrs. to Length of Length Bull Run Reach Old Decline of Run Peak
5/29/46
5/19/47
-28.6%
12
257.6%
122
3.1 yrs.
7/15/57
10/22/57
-20.7%
3
86.4%
50
0.9 yrs.
12/12/61
6/26/62
-28 28.0% 0%
6
79 8% 79.8%
44
1 2 yrs 1.2 yrs.
2/9/66
10/7/66
-22.2%
8
48.0%
26
0.6 yrs.
11/29/68
5/26/70
-36.1%
18
74.2%
31
1.8 yrs.
1/5/73
10/3/74
-48.4%
21
125.6%
74
5.8 yrs.
11/28/80
8/12/82
-27.1%
20
228.8%
60
0.2 yrs.
8/25/87
12/4/87
-33.5%
3
582.1%
148
1.6 yrs.
3/24/00
10/9/02
-49.1%
31
101.5%
60
4.6 yrs.
10/9/07
3/9/09
-56.8%
17
112.9%
43*
-35.0%
14 mo's
Bull Ma arket Return (%)
300%
'47 - '57
250% '82 - '87 200%
Average
150%
Current Run
100%
'74 - 80
'02 - '07 '57 - '61 62 - '66 66 '70 70 - '73 73 '62
50% '66 - '68 0% 0
50
100
Bull u Market a et Length e gt ((months) o t s)
150
Average:
176.0% 68 mo's
Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Chart is for illustrative purposes only. Past performance does not guarantee future results. A bear market is defined as a peak-to-trough decline in the S&P 500 Index (price only) of 20% or more. The bull run data reflect the market expansion from the bear market low to the subsequent market peak. All returns are S&P 500 Index returns and do not include dividends. *Current bull run from 3/9/09 through 9/28/12.
7
Data are as of 9/30/12.
2.2 yrs.
Equities
Stock Valuation Measures: S&P 500 Index S&P 500 Index: Valuation Measures Valuation Measure Description P/E Price to Earnings P/B Price to Book P/CF Price to Cash Flow P/S Price to Sales PEG Price/Earnings to Growth Div. Yield Dividend Yield
Historical Averages 3-year 5-year avg. avg.
Latest
1-year ago
10-year avg.
15-year avg.
12.9x
10.8x
12.8x
13.0x
14.3x
16.8x
2.3
2.0
2.1
2.2
2.5
3.0
9.0
7.5
8.5
8.5
9.8
11.1
1.3
1.0
1.2
1.1
1.3
1.5
1.7
0.8
0.9
1.1
1.2
1.2
2.3%
2.4%
2.2%
2.3%
2.1%
1.9%
S&P 500 Shiller Cyclically Adjusted P/E
S&P 500 Earnings Yield vs. Baa Bond Yield
Adjusted using trailing 10-yr. avg. inflation adjusted earnings
10%
50x
S&P 500 Earnings Yield: ((Inverse of fwd. P/E)) 7.7%
9%
40x
8%
3Q12: 22.2x
30x
6%
Average: 19.0x
20x
7%
5%
10x 0x
8
Moody’s Baa Yield: 4.7%
4%
'55
'60
'65
'70
'75
'80
'85
'90
'95
'00
'05
'10
3% '94
'96
'98
'00
'02
'04
'06
'08
'10
'12
Source: (Top) Standard & Poor’s, FactSet, Robert Shiller Data, J.P. Morgan Asset Management. Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months. Price to Book is price divided by book value per share. Data post-1992 post 1992 include intangibles and are provided by Standard & Poor’s Poor s. Price to Cash Flow is price divided by consensus analyst estimates of cash flow per share for the next 12 months. Price to Sales is calculated as price divided by consensus analyst estimates of sales per share for the next 12 months. PEG Ratio is calculated as NTM P/E divided by NTM earnings growth. Dividend Yield is calculated as consensus analyst estimates of dividends for the next 12 months divided by price. All consensus analyst estimates are provided by FactSet. (Bottom left) Cyclically adjusted P/E uses as reported earnings throughout. (Bottom right) Standard & Poor’s, Moody’s, FactSet, J.P. Morgan Asset Management. Data are as of 9/30/12.
Earnings Estimates and Valuations by Style S&P 500 Index: Forward P/E Ratio
Current P/E vs. 20-year avg. P/E
28x
Larg ge
Value 11.6
12.9 14.0
Growth 15.2
16.2
21.0
20x
16x
Mid
Average: 16.2x
12x
Sep. 2012: 12.9x
Small
Equities
24x
Blend
8x '00
'02
'04
'06
'08
'10
13.0
16.3 14.4
14.2
21.8 16.2
17.1
21.3
'12
Current P/E as % of 20-year avg. P/E
S&P 500 Operating Earnings Estimates Consensus estimates of the next twelve months’ rolling earnings
3Q12: $111.86
$120 $100 $80 $60
E.g.: g Large g Cap p Blend stocks are 20.3% cheaper than their historical average. Value Blend Growth
Large
'98
14.0
16.6
82.7%
79.7%
72.3%
Mid
'96
14.1
87.8%
86.3%
75.9%
Small
'94
12.3
91.2%
84.6%
75.8%
$40 $20 $0
9
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
Source: (Top and bottom left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Right) Russell Investment Group, IBES, FactSet. Earnings estimates are for calendar years and taken at quarter end dates throughout the year. Forward Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months. P/E ratios are calculated and provided by Russell based on IBES consensus estimates of earnings over the next 12 months except for large blend, which is the S&P 500. Data are as of 9/30/12.
Corporate Profits S&P 500 Earnings Per Share
Most recent: $25.43
Operating basis, quarterly
2Q07: $24.06
Equities
$26
Adjusted After-Tax Corporate Profits (% of GDP) Includes inventory and capital consumption adjustments 2Q12: 9 4% 9.4%
11%
$23
10%
$20
9%
$17 8% $14 7% $11
50-yr. avg.: 6.2% 6%
$8 5%
$5
4%
$2 -$1
3% '02
'04
'06
'08
'10
'12
Source: Standard & Poor’s, Compustat, BEA, J.P. Morgan Asset Management. EPS levels are based on operating earnings per share. Most recently available data is 2Q12. Past performance is not indicative of future returns. Data are as of 9/30/12.
10
'65
'70
'75
'80
'85
'90
'95
'00
'05
'10
Sources of Earnings per Share Growth S&P 500 Year-Over-Year EPS Growth
Growth broken into revenue growth and margin expansion, quarterly
Equities
50%
Margin Share of EPS Growth Revenue Share of EPS Growth
40% 30% 20% 10% 0% -10% -20% -30% -40% 2Q94
2Q96
2Q98
2Q00
2Q02
2Q04
2Q06
2Q08
Source: Standard & Poor’s, Compustat, J.P. Morgan Asset Management. EPS levels are based on operating earnings per share. Most recently available data is 1Q12. *2Q12 data are Standard & Poor’s estimates. Past performance is not indicative of future returns. 4Q2008, 1Q2010 and 2Q2010 reflect -101%, 92% and 51% growth in operating earnings, and are adjusted on the chart. Data are as of 9/30/12.
11
2Q10
2Q12
Confidence and the Capital Markets Multiple Expansion and Contraction
Est. impact of a 10pt. rise in sentiment: +2.0 multiple points*
S&P 500 forward P/E based on consensus EPS estimates 26x
120
Consumer Sentiment
Forward P/E
Equities
24x
110
22x
100
20x
90
18x 80
16x
70
14x
Correlation Coefficient: 0.75
12x 10x
'93
'94
'95
'96
'97
'98
'99
'00
'01
'02
Sentiment & Real Yields
'04
'05
'06
'07
'08
'09
'10
'11
'12
50
120
Consumer Sentiment
Real 10-year Yield
5%
110
4%
100
3%
90
2%
80
1%
70
Correlation Coefficient: 0.68
0% -1%
12
'03
Est impact of a 10pt. Est. 10pt rise in sentiment: +54 basis points*
Real yield based on nominal 10-yr. yield minus year-over-year core CPI 6%
60
'93
'94
'95
'96
'97
'98
'99
'00
'01
'02
60 '03
'04
'05
'06
'07
'08
'09
'10
Source: (Top) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Bottom) U.S. Treasury, BLS, University of Michigan, J.P. Morgan Asset Management. Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next twelve months. Real 10year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month. *Estimated impact based on coefficients from regression analysis. Data are as of 9/30/12.
'11
'12
50
Deploying Corporate Cash Corporate Cash as a % of Current Assets
Corporate Growth
Nonfarm nonfinancial capex in billions USD, quarterly deal volume
Equities
S&P 500 companies – cash and cash equivalents, quarterly 30%
$1,300
28%
$1 200 $1,200
26%
$1,100
24%
Capital Expenditures
M&A Activity
1 400 1,400 1,200 1,000
$1,000
800
22% $900
20%
600
$ $800
18%
400
$700
16% 14%
1,600
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
Dividend Payout y Ratio
200
$600
0 '00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
Cash Returned to Shareholders
S&P 500 companies, rolling 4-quarter averages, billions USD
S&P 500 companies, LTM
$30
60%
$160
Dividends per Share
$140
$27
50%
$120 $24
$100
$21
$80
40% $60
30%
20%
$18
Share Buybacks
$15
'00 '01
'02
'03
'04
'05 '06
'07
'08 '09
'10
'11 '12
$20 '00
'01
'02
'03
'04
'05
'06
'07
'08
Source: Standard & Poor’s, FRB, Bloomberg, FactSet, J.P. Morgan Securities, J.P. Morgan Asset Management.
13
$40
(Top left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Top right) M&A activity is quarterly number of deals of any value and capital expenditures are for nonfarm nonfinancial corporate business. (Bottom left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Bottom right) Standard & Poor’s, Compustat, FactSet, J.P. Morgan Asset Management. Data are most recent as of 9/30/12.
'09
'10
'11
'12
Broad Market Lagged Price to Earnings Ratio Lagged P/E Ratio – All U.S. Corporations
Ratio of market value of all U.S. corporations to adjusted after-tax corporate profits for prior four quarters
Equities
35x
30x
P/E Ratios
25x
Avg. During Recessions
12.6x
Avg. During Expansions
13.9x
September 30, 2012
13.2x
20x
15x
Average: 13.7x
Sep. 30, 2012*: 13.2x
10x
5x
0x '52
'55
'58
'61
'64
'67
'70
'73
'76
'79
'82
'85
'88
'91
'94
'97
'00
Source: BEA, Federal Reserve Board, Wilshire Associates, J.P. Morgan Asset Management. *The September 28, 2012 price is a J.P. Morgan Asset Management estimated based on the daily value of the Wilshire Total Market Index. Data are as of 9/30/12.
14
'03
'06
'09
'12
P/E Ratios and Equity Returns P/E and Total Return Over 1-yr. Periods
P/E and Total Return Over 5-yr. Annualized Periods
Quarterly, 1Q 1952 to 2Q 2011
Quarterly, 1Q 1952 to 2Q 2007
60%
60%
Current P/E: 13.2
Equities
Current P/E: 13.2 9/30/12 Implied Annual Return 14.9% Standard Error 17.2%
40%
20%
9/30/12 Implied Annual Return 13.1% Standard Error 5.7%
40%
20%
0%
0% 5x
10x
15x
20x
25x
30x
5x
-20%
-20%
-40%
-40%
10x
15x
20x
Source: BEA, FRB, J.P. Morgan Asset Management. Prices are based on the market value of all U.S. corporations and include quarterly dividends. Valuation based on long-term PE ratio. Note: Orange line denote results of linear regression with R-squared of 0.15 for 1-yr. returns (left) and 0.35 for 5-yr. returns (right). Data are as of 9/30/12.
15
25x
30x
Equity Correlations and Volatility Large Cap Stocks
Sovereign Debt Crisis
Correlations Among Stocks
Equities
70%
Great Depression / World War II
60%
1987 Crash Cuban Missile Crisis OPEC Oil Crisis
50% 40%
Lehman Bankruptcy
Tech Bust & 9/11
30% 20%
Sep. 2012: 40.9%
Average: 26.7%
10% 0% '26
'32
'38
'44
Daily Volatility of DJIA 3.5% 3.0% 2.5%
DJIA vol. shown in 3-month moving average
'50
'56
'62
'68
'74
'80
'86
Volatility Measure ’08 Peak DJIA (Left) 3.30% VIX (Right) 80.9
'92
Average 0.72% 20.5
'98
'04
'10
Latest 0.51% 15.7
90 75 60
2 0% 2.0% 45 1.5% 30
1.0%
15
0.5% 0.0%
16
'30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 Source: (Top) Empirical Research Partners LLC, Standard & Poor’s, J.P. Morgan Asset Management. Capitalization weighted correlation of top 750 stocks by market capitalization, daily returns, 1926 – Sep. 28, 2012. (Bottom) CBOE, Dow Jones, J.P. Morgan Asset Management. DJIA volatility are represented as three-month moving averages of the daily absolute percentage change in the Dow Jones Industrial Average. Charts shown for illustrative purposes only. Data are as of 9/30/12.
0 '10
Economic Growth and the Composition of GDP Components of GDP
Real GDP % chg at annual rate
20-yr avg. 2Q12
10%
Real GDP:
2.5%
2Q12 nominal GDP, billions, USD
8%
$16,000 $14,000 $625 bn of output p lost
4%
$12 000 $12,000
2%
19.6% G ’t Spending Gov’t S di
$10,000
0%
$8,000
2% -2%
$848 bn b off output recovered
-4%
$6,000
71.0% Consumption
$4,000
-6%
$2,000
-8%
$0
- 3.7% Net Exports
-10% '04
'06
'08
'10
'12
Source: BEA, FactSet, J.P. Morgan Asset Management. GDP values l shown h iin llegend d are % change h vs. prior i quarter t annualized li d and d reflect fl t 2Q12 GDP. GDP Data are as of 9/30/12.
17
2.4% Housing 10.7% Investment ex-housing
6%
Econom my
$18,000
1.3%
-$2,000
Cyclical Sectors Light Vehicle Sales
Change in Private Inventories
Millions, seasonally adjusted annual rate
Billions of 2005 dollars, seasonally adjusted annual rate
24
150
22
100
20
50
18
Aug. 2012: 14.5
16
Econom my
2Q12: Q 41.4
Average: 28.3
-50
Average: 15.1
14
0
100 -100
12
-150
10 8
-200
'94
'96
'98
'00
'02
'04
'06
'08
'10
'95
'12
'00
'05
'10
Real Capital Goods Orders
Housing Starts
Non defense capital goods orders ex. Non-defense ex aircraft, aircraft $ bn bn, seasonally adjusted
Th Thousands, d seasonally ll adjusted dj t d annuall rate t
75
2,400 70
2,000 65
1,600
Average: 57.4
60
Average: 1,388 1 388
1,200
55
800
50
400
Aug. 2012: 750
Aug. 2012: 53.4
45 40
0 '95
'00
'05
'10
'98
'00
'02
'04
'06
'08
'10
Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom left) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom right) Census Bureau, FactSet, J.P. Morgan Asset Management. Capital goods orders deflated using the producer price index for capital goods. Data are as of 9/30/12.
18
'12
Consumer Finances Consumer Balance Sheet Trillions of dollars outstanding, not seasonally adjusted
Personal Savings Rate Annual, % of disposable income 12%
$80
Total Assets: Assets $76.1 $76 1 tn
2Q-’07 Peak: $81.5tn 1Q-’09 Low: $65.2tn
8%
$70
Econom my
Homes: 25%
6% 4%
$60
2%
Other tangible: 7% $50
$40
0%
Deposits: 10%
'60
Other financial assets: 40%
'70
'75
'80
'85
'90
15%
Revolving (e.g.: credit cards): 6% Non-revolving: 14% Other Liabilities: 7%
$20
'65
Total Liabilities: $13.5 tn
$10
'00
'05
'10
3Q07: 14.1%
14% 13% 12%
1Q80: 11.1%
11%
Mortgages: 73%
3Q12*: 10.5%
10% '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Source: (Left) FRB, J.P. Morgan Asset Management. Data includes households and nonprofit organizations. (Right) BEA, FRB, J.P. Morgan Asset Management. Personal savings rate is calculated as personal savings (after-tax income – personal outlays) divided by after-tax income. Employer and employee contributions to retirement funds are included in after-tax income but not in personal outlays, and thus are implicitly included in personal savings. Savings rate data as of August 2012. *3Q12 Household Debt Service Ratio is a J.P. Morgan Asset Management estimate. All other data are as of 2Q12 which is most recently available as of 9/30/12.
19
'95
Household Debt Service Ratio Debt payments as % of disposable personal income, seasonally adjusted
Pension funds: 18%
$30
$0
YTD 2012: 4.2%
10%
Federal Finances: Outlays and Revenues The 2012 Federal Budget
Federal Outlays and Receipts
CBO Baseline forecast, trillions USD
1960 – 2012, % of GDP
$4.0
26%
Total Spending: $3.6tn $ $3.5
Econom my
$3.0
$2.5
$2.0
Other $482bn (14%) Net Int.: $220bn (6%)
24%
Borrowing: $1,128bn (32%)
2012*: 24.3%
Non defense Non-defense Discretionary: $620bn (17%)
22%
Defense: $669bn (19%)
20%
Average: 20.5%
$1.5
$1.0
Social Security: $768bn (22%)
Revenues: $2,435bn (68%)
18%
Average: 17.9% 16%
$0.5
Medicare & Medicaid: $804bn (23%)
$0.0 Total Government Spending
Sources of Financing
14% 1960
Revenues Outlays
1970
1980
1990
2000
S Source: U.S. US T Treasury, BEA, BEA CBO CBO, J.P. J P Morgan M Asset A M Management. 2012 Federal Budget is based on the CBO’s August 2012 Baseline Scenario. *2012 revenues and outlays are forecasts from the Congressional Budget Office (CBO). Note: Years shown are fiscal years (Oct. 1 through Sep. 30). Data are as of 9/30/12.
20
2012*: 15.8%
2010
Federal Finances: Deficits and Debt Federal Debt (Accumulated Deficits) % of GDP, 2007 – 2022
Federal Budget Surplus/Deficit % of GDP, 2007 – 2022 -12%
Fiscal Cliff
-10%
Fiscal Ledge Fiscal Ladder
2011 Actual
-8.7% 8 7%
-8.7% 8 7%
-8.7% 8 7%
2012 Est.
-7.3%
-7.3%
-7.3%
2013 Proj.
-4.0%
-5.7%
-6.5%
Forecast
100%
2022*: 83.2% 2011 actual: 67.7%
Econom my
80%
Forecast
2022*:: 75.1% 2022
-8%
Fiscal Ladder Scenario Fiscal Ledge Scenario Fiscal Cliff
-6%
60%
2022: 58.5% Fiscal Ladder Scenario Fiscal Ledge Scenario Fiscal Cliff
40% -4%
20% -2%
Fiscal Cliff
Fiscal Ledge Fiscal Ladder
2011 Actual
67 7% 67.7%
67 7% 67.7%
67 7% 67.7%
2012 Est.
72.8%
72.8%
72.8%
2022 Proj.
58.5%
75.1%
83.2%
0%
0% '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
Source: U.S. Treasury, BEA, CBO, J.P. Morgan Asset Management.
21
2011 numbers are actuals. actuals Fiscal Cliff is based on the CBO Baseline scenario scenario. *Fiscal Fiscal ledge scenario assumes Bush tax cuts are extended only for households earning less than $250k per year, the AMT is fixed, dividend and capital gain tax rates increase to 20%, the payroll tax cut expires, extended unemployment benefits expire on schedule, higher Medicare taxes take effect and both sets of spending cuts agreed to last fall are implemented. Fiscal Ladder scenario assumes Bush tax cuts are extended in full for 2013 and for households earnings less than $250k per year for 2014 the AMT fix, dividend and capital gain tax rates increase to 20% in 2014 payroll tax cut is maintained in 2013, phased down to 1% in 2014 and eliminated in 2016 extended unemployment benefits expire on schedule higher Medicare taxes take effect and only the first round of spending cuts take effect. Note: Years shown are fiscal years (Oct. 1 through Sep. 30). Chart on the left displays federal surplus/deficit (revenues – outlays). Data are as of 9/30/12.
Tax Rates and the Distribution of Income & Taxes Historical Average Maximum Tax Rates by Decade
Share of Income and Taxes by Income Level
100%
Based on adjusted gross income and federal taxes, 2009 Income
80%
Dividends
5% to 25% 34.1%
60%
Wage Income
Econom my
40%
Top 5% 31.7%
Capital Gains 20% 0%
1930's
1940's
1950's
1960's
1970's
1980's
1990's
2000's
Current
Potential Tax Rate Changes
Taxes
Current and scheduled 2013 maximum federal tax rates under current law 60%
2012
50% 40%
55.0%
Scheduled 2013
43.4%
43.4%
37.9%
35.0%
30%
Top 5% 58.7%
23.8% 15.0%
20%
Bottom 75% 34.2%
15.0%
5% to 25% 28.6%
10.4% 12.4%
10% 0% Wage Income
22
Capital Gains*
Dividends*
Payroll Tax**
Estate Tax***
Bottom 75% 12.7%
Source: (Top left) IRS, IRS J.P. J P Morgan Asset Management Management. Wage income tax rates include employer and employee contributions to the Medicare tax tax. (Bottom left) IRS, IRS The Tax Foundation, J.P. Morgan Asset Management. Tax rates based on maximum U.S. individual income tax. Wage income tax rates include employer and employee contributions to the Medicare tax. *Includes recently enacted healthcare tax of 3.8%. **In 2011 and 2012, the payroll tax cut reduced the employee’s share of Social Security taxes by 2%. Rates shown include both employer and employee contributions to the payroll tax. ***In 2013, the estate tax exemption amount was expected to fall to $1 million from $5.12 million in 2012. (Right) IRS, J.P. Morgan Asset Management. Taxes paid are based on federal individual income taxes, which are responsible for about 25% of the nation's taxes paid. Data are as of 9/30/12.
U.S. Political Perspectives Political Polarization
Congressional & Presidential Approval Ratings
% of Representatives voting with the majority of their party*
90%
100%
80%
Senate
95%
70%
House
60%
90%
50%
Econom my
85%
40% 80% 30% 75% 70% 1901
Presidential Congressional
20%
1919
1937
1955
1973
1991
Political Party Dominance
2009
10% 1941
1951
1961
1971
1981
1991
2001
2011
Annual Market Returns by Political Party Control
Democratic % of major party seats
Parties identified as President/Senate/House, President/Senate/House number of years years, 1937 1937-2011 2011
80%
20% 18%
70%
Democratic President
Senate House
16%
17.4% 15.4%
14% 12%
60%
10%
10.6%
8% 50%
6% 4%
6.5%
2% 0% RRR (6) 1939 1951 1963 1975 1987 1999 2011 Source: U.S. House of Representatives, U.S. Senate, Gallup Inc., FactSet, J.P. Morgan Asset Management. 40%
RSPLIT (30)
*In roll call votes where the majority in one party voted the opposite way to the majority in the other. Data compiled by Professors Keith T. Poole and Howard Rosenthal, available at www.voteview.com. Stock market returns are total return and calculated by calendar year. RSPLIT denotes Republican president and split government, and DSPLIT denotes Democratic President and split government.
23
Data are as of 9/30/12.
DDD (30)
DSPLIT (9)
The Aftermath of the Housing Bubble Monthly Rent vs. Monthly Mortgage Payment
Home Prices
Vacant properties
Indexed to 100, seasonally adjusted 160
$1,100
Case Shiller 20-city
Monthly Mortgage Payment
$ $950
FHFA Purchase Only Average Existing Home
150
$800
3Q12*: $725
Econom my
$650 $500
140
Monthly Rent
$350
3Q12*: $477
$200
130
'88
'90
'92
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
Home Inventories Milli Millions, annuall rate, t seasonally ll adjusted dj t d
120
4.5 4.0
110
3.5 30 3.0
100
2.5
Aug. 2012: 2.4
2.0
90 '03
'04
'05
'06
'07
'08
'09
'10
'11
'12
1.5
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
Sources: (Left) National Association of Realtors, Standard & Poor’s, FHFA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, J.P. Morgan Asset Management. Monthly mortgage payment assumes a 20% down payment at prevailing 30-year fixed-rate mortgage rates; analysis based on median asking rent and median mortgage payment based on asking price. (Bottom right) Census Bureau, National Association of Realtors, J.P. Morgan Asset Management. *3Q12 rent and mortgage payment values are J.P. Morgan Asset Management estimates.
24
Data are as of 9/30/12.
Employment Civilian Unemployment Rate
Employment – Total Private Payroll
Seasonally adjusted
Total job gain/loss (thousands)
12%
600
11%
400
Econom my
10%
8.9mm jobs lost
200
9% 0
Aug. 2012: 8.1%
8%
4.6mm jobs gained
-200 7% -400 6% -600
50-yr. avg.: 6.1%
5%
-800
4%
3%
-1,000 '70
'80
'90
Source: BLS BLS, FactSet, FactSet J.P. J P Morgan Asset Management Management. Data are as of 9/30/12.
25
'00
'10
'03
'04
'05
'06
'07
'08
Source: BLS BLS, FactSet, FactSet J.P. J P Morgan Asset Management Management.
'09
'10
'11
'12
Employment and Income by Educational Attainment Average Annual Earnings by Highest Degree Earned
Unemployment Rate by Education Level
Full-time workers aged 25 and older, 2009, USD
18%
$87,194
$90,000
Less than High School Degree High School No College Some College College or Greater
16%
Econom my
14%
$80,000
+31K $70,000
Aug 2012: Aug. 12.0%
12%
Aug. 2012: 8.8%
10%
$50,000
+26K
8%
$40 000 $40,000
6%
Aug. 2012: 6.6%
4%
Aug. g 2012: 4.1% 2%
$30,627 $30,000
$20,000
$10,000
0% '92
'94
'96
'98
'00
'02
'04
'06
Source: BLS BLS, FactSet, FactSet J.P. J P Morgan Asset Management Management. Unemployment rates shown are for civilians aged 25 and older. Data are as of 9/30/12.
26
$56,665
$60,000
'08
'10
'12
$0 High School Graduate
Bachelor's Degree
Source: Census Bureau Bureau, JJ.P. P Morgan Asset Management Management.
Advanced Degree
Consumer Price Index CPI and Core CPI
% change vs. prior year, seasonally adjusted
50-yr. Avg. Aug. 2012
15%
Headline CPI:
4.2%
1.7%
Core CPI:
4.1%
1.9%
Econom my
12%
9%
6%
3%
CPI Components
Weight in CPI
12-month Change
Food & Bev.
15.3%
2.0%
Housing
41.0%
1.4%
Apparel
3.6%
1.6%
Transportation
16.9%
1.4%
Medical Care
7.1%
4.1%
Recreation
6.0%
1.2%
Educ. & Comm.
6.8%
1.5%
Other
3.4%
2.4%
100.0%
1.7%
Energy
9.7%
-0.6%
Food
13.7%
2.0%
Core CPI
76.6%
1.9%
Headline CPI Less:
0%
-3% '65
'70
'75
'80
'85
'90
'95
'00
'05
'10
Source: BLS, FactSet, J.P. Morgan Asset Management. CPI values shown are % change vs. 1 year ago and reflect August 2012 CPI data. CPI component weights are as of December 2011 and 12-month change reflects non-seasonally adjusted data through August 2012. Core CPI is defined as CPI excluding food and energy prices. Data are as of 9/30/12.
27
Returns in Different Inflation Environments – 40 years Rising inflation scenarios
Falling inflation scenarios
High and Rising Inflation
High and Falling Inflation
Occurred 14 times since 1972
O Occurred d 6 times ti since i 1972
25%
25% 13%
15%
Econom my
10%
7%
5%
8%
5%
0%
0%
-5%
-5%
-10%
-10%
-15%
-15%
-15% Bonds
Equities
Cash
Commodities
Bonds
Equities
Low and Falling Inflation
Occurred 7 times since 1972
Occurred 13 times since 1972
25%
25%
20%
17%
10%
10%
6% 3%
5%
Commodities
20% 12%
15%
15%
Cash
8%
4%
5%
0%
0%
-5%
-5%
-10%
-10%
6%
-15%
-15% Bonds
Equities
Cash
Commodities
Bonds
Equities
Cash
Commodities
Source: BLS BLS, Barclays Capital Capital, Robert Shiller, Shiller Federal Reserve, Reserve Strategas/Ibbotson, Strategas/Ibbotson Standard & Poor Poor’s s, FactSet, FactSet J.P. J P Morgan Asset Management Management. High or low inflation distinction is relative to median CPI-U inflation for the period 1971 to 2011. Rising or falling inflation distinction is relative to previous year CPI-U inflation rate. Bond returns are based on the Barclays U.S. Aggregate index since its inception in 1976 and a composite bond index prior to that. Equity returns based on S&P 500 price return and annual dividend yield. Cash returns are based on the Barclays 1-3 Month T-Bill index since its inception in 1992 and 3-month T-Bill rates prior to that. Commodities returns based on GSCI. For illustrative purposes only. Past performance is not indicative of comparable future returns. Data are as of 9/30/12.
Median Inflation: 3.3%
Below mediian
Low and Rising Inflation
20%
28
15% 10%
2%
5%
20%
Above e median
20%
23% 18%
Oil and the Economy WTI Crude Oil & Retail Gasoline Prices $4.50
Gas Oil Gas
12/31/00 $26.72 $1 41 $1.41
9/30/12 $92.19 $3 83 $3.83
Economic Drag From Oil Prices $160
Oil
U.S. petroleum imports as a % of GDP
3Q12*: 2.9%
4%
$4.00
3Q08: 3.8%
$140
Econom my
3%
$3.50
$120
$3.00
$100
$2.50
$80
2%
1%
0% '70
'75
'80
'85
'90
'95
'00
'05
'10
Oil Prices and Consumption p per p Country y
Gasoline price per gallon, USD, annual barrels of oil consumed per capita
$2.00
$60
$1.50
$40
Energy Spending by Income Level $12
30bbls
$10
25bbls
Annual Barrels of Oil Consumed per Capita (Right)
% of after-tax income Gasoline Price per Gallon (Left) $8.67
$8.06
$8.48
20bbls
$8 $5.38
$6
$5.22
15bbls
$3.97 $1.00
$0.50 '94
$20
$0 '96
'98
'00
'02
'04
'06
'08
'10
'12
Source: U.S. Department of Energy, FactSet, J.P. Morgan Asset Management. Price of gas based on U.S. retail national average of all formulations and WTI for crude. Data are as of 9/30/12.
29
$4
10bbls
$2
5bbls
$$
0bbls US
UK
France
Germany
China
Source: (Top) BEA, FactSet, J.P. Morgan Asset Management. (Bottom) EIA, J.P. Morgan Asset Management. *3Q12 drag on growth is a J.P. Morgan Asset Management estimate.
India
Global Oil Supply Middle East Energy Production & Chokepoints Percent of global liquid fuel production, 2011
U.S. Commercial & Strategic Oil Stocks
Aug. 2012: 235 days
Days of net imports 250
Syria 0.5%
Suez Canal 2.2%
Econom my
Kuwait 3.1%
Iraq 3.0% Libya 0.6%
Egypt 0.8%
200 150
Iran 4.9%
50
U.S. Strategic Petroleum Reserve 0
Strait of Hormuz 17 0% 17.0% UAE 3.6%
'96
'98
'00
'02
'04
'06
'08
'10
'12
OPEC Surplus Production Capacity Millions of barrels per day 6
EIA forecast
5
Average: 2.7mm bbl/day
3
Major Producers
Major Consum ers
Percent of global total, 2011
Percent of global total, 2011 5% 5% 4%
United States 22% India 4% China 10% Saudi Arabia 3% Japan 5% Brazil 3%
Source: EIA, J.P. Morgan Asset Management. Forecast from the September EIA Short Term Energy Outlook. Data are as of 9/30/12.
'94
4
Bab el el-Mandeb Mandeb 3.4%
30
U.S. Commercial Oil Stocks
100
Saudi Arabia 12.8%
Sudan S d 0.5%
Saudi Arabia 13% China Russia 12% Iran United States 12% Canada
Oct. 2005: 129 days
2 1 0 '01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
Consumer Confidence and the Stock Market Consumer Sentiment Index – University of Michigan 130 Average 12-month S&P 500 index return… After a peak: +1 +1.1% 1%
After a trough: +22.2% +22 2%
Total period: +6.6% +6 6%
120
Jan. 2000 -2.0%
Econom my
110
Aug. 1972 100 Aug -6.2%
Jan. 2004 +4.4% Jan. 2007 -4.2%
Mar. 1984 Mar +13.5%
May 1977 +1.2%
90
Average: 85.3 80
Mar. 2003 +32.8% Oct. 2005 +14.2%
70
Oct. 1990 +29.1%
60
Feb. 1975 +22.2%
50
Nov. 2008 +22.3%
May 1980 +19.2%
Aug. 2011 +15.4%
40 '72
'74
'76
'78
'80
'82
'84
'86
'88
'90
'92
'94
'96
'98
'00
'02
'04
Source: University of Michigan, FactSet, J.P. Morgan Asset Management. Peak is defined as the highest index value before a series of lower lows, while a trough is defined as the lowest index value before a series of higher highs. Subsequent 12-month S&P 500 returns are price returns only, which excludes dividends.
31
Data are as of 9/30/12.
'06
'08
'10
'12
Fixed Income Sector Returns 2003
2004
2005
2006
2007
2008
2009
2010
2011
2012 YTD
3Q12
TIPS
High Yield
EMD
EMD
High Yield
TIPS
Treas.
High Yield
High Yield
TIPS
EMD
EMD
EMD
EMD
16.6%
29.0%
11.9%
12.3%
11.8%
11.6%
13.7%
58.2%
15.1%
13.6%
14.2%
6.8%
185.6%
11.1%
EMD
EMD
High Yield
12.2%
26.9%
Treas. 11 8% 11.8%
Fixed In ncome
10-yrs '02 - '11 Cum. Ann.
2002
Barclays Agg 10.3%
Asset Alloc. 9 7% 9.7% TIPS 8.4%
EMD
Treas.
MBS
EMD
EMD
Muni
High Yield
High Yield
High Yield
High Yield
11.1%
Asset Alloc. 3.6%
10.0%
9.0%
8.3%
34.2%
12.8%
10.7%
12.1%
4.5%
133.6%
8.9%
TIPS
Muni
MBS
Corp.
Treas.
Corp.
Corp.
TIPS
TIPS
3 5% 3.5%
Barclays Agg 5 2% 5.2%
Corp.
8 5% 8.5%
Barclays Agg 7 0% 7.0%
18 7% 18.7%
9 0% 9.0%
9 8% 9.8%
8 7% 8.7%
3 8% 3.8%
107 5% 107.5%
7 6% 7.6%
Asset Alloc. -1.4%
Asset Alloc. 15.8%
Asset Alloc. 7.6%
Asset Alloc. 8.9%
Asset Alloc. 6.7%
Asset Alloc. 2.7%
Asset Alloc. 96.0%
Asset Alloc. 7.0%
TIPS
Muni
Corp.
TIPS
Muni
Corp.
Corp.
-2.4%
12.9%
8.1%
6.2%
2.3%
Asset Alloc. 6.3%
TIPS 2.8%
Corp.
Corp.
Corp.
Treas.
10.1%
8.2%
5.4%
2.8%
Asset Alloc. 10.0%
Muni
MBS
High Yield
5.3%
4.7%
2.7%
9.6%
Barclays Agg 4.1%
MBS
MBS
8.7%
3.1%
Barclays Agg 4.3%
High Yield
Treas.
Treas.
Muni
5 2% 5.2% Asset Alloc. 5.1% Muni 4.8% Barclays Agg 4.3%
MBS 6.9% Asset Alloc. 6.2% EMD
Muni
5.2%
-2.5%
TIPS
TIPS
11.4%
6.3%
Muni
MBS
Corp.
Corp.
Corp.
4.5%
2.6%
4.3%
4.6%
-4.9%
Barclays Agg 5.9%
Barclays Agg 2.4%
Treas.
Muni
EMD
3.1%
3.4%
-14.7%
Corp.
TIPS
High Yield High Yield
Barclays Agg 6.5%
Barclays Agg 7.8%
Muni
TIPS
6.1%
2.1% Barclays Agg 1.6%
85.2%
6.4%
Barclays Agg 75.4%
Barclays Agg 5.8%
Treas.
Treas.
74.3%
5.7%
Treas.
EMD
5.9%
7.0%
Barclays Agg 4.0%
MBS
MBS
MBS
MBS
MBS
MBS
MBS
5.9%
5.4%
6.2%
2.8%
1.1%
73.9%
5.7%
Treas.
Muni
High Yield
Treas.
Treas.
Muni
Muni
-1.4% 2.2% 3.5% 1.7% 0.4% 1.9% -26.2% -3.6% 2.4% 5.0% 2.1% 0.6% 68.8% 5.4% Source: Barclays Capital, FactSet, J.P. Morgan Asset Management. Past performance is not indicative of future returns. Fixed income sectors shown above are provided by Barclays Capital and are represented by: Barclays Capital U.S. Aggregate Index; MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index; Treasuries: Barclays Capital U.S. Treasury; TIPS: Barclays Capital TIPS. The “Asset Allocation” portfolio assumes the following weights: 10% in MBS, 20% in Corporate, 15% in Municipals, 10% in Emerging Debt, 10% in High Yield, 25% in Treasuries, 10% in TIPS. Asset allocation portfolio assumes annual rebalancing.
32
Data are as of 9/30/12.
Interest Rates and Inflation Nominal and Real 10-year Treasury Yields 20%
Sep. 30, 1981: 15.84% 15%
Nominal Yields Real Yields
Nominal 10-year Treasury Yield
10%
Fixed In ncome
Average 9/30/12 6.46% 1.65% 2.58% -0.27%
Sep. 30, 2012: 1.65%
5%
0%
Sep. 30, 2012: -0.27%
-5%
Real 10-year Treasury Yield
-10% 10% '60
'65
'70
'75
'80
'85
'90
'95
'00
'05
Source: Federal Reserve, BLS, J.P. Morgan Asset Management. Real 10-year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month except for September 2012, where real yields are calculated by subtracting out August 2012 year-over-year core inflation.
33
Data are as of 9/30/12.
'10
Fixed Income Yields and Returns Yield U.S. Treasuries
# of issues
Mkt. Value Avg. Maturity
2-Year 5-Year
# of issues: 164
10-Year
Total value: $5.067 tn
Source: U.S. Treasury, Barclays Capital, FactSet, J.P. Morgan Asset Management.
Return
9/30/2012
9/30/2011
2012 YTD
3Q12
2 years
0.23%
0.25%
0.25%
0.21%
5
0.62
0.96
2.30
0.83
10
1.65
1.92
4.37
0.93
30
2.82
2.90
3.66
-0.28
30-Year Sector Broad Market
7,967
$16,815 bn
6.7 years
1.61%
2.35%
3.99%
1.58%
861
5,052
3.8
1.77
2.82
2.80
1.13
Corporates
4,231
3,551
10.7
2.79
3.83
8.66
3.83
Municipals
46,180
1,339
13.7
2.17
3.02
6.06
2.32
525
798
11 1 11.1
4 61 4.61
6 59 6.59
14 19 14.19
6 77 6.77
1,931
1,082
6.7
6.51
9.51
12.13
4.53
33
823
9.2
1.46
1.86
6.25
2.12
Fixed In ncome
MBS
Emerging Debt High Yield TIPS
Price Impact of a 1% Rise/Fall in Interest Rates 25% 20.1% 20% 15% 9.1% 10% 3.0% 5% 0.5% 0% -5% -2.0% -4.9% -10% -9.1% 9 1% -15% -20% -20.1% -25% 2-Year 5-Year 10-Year 30-Year
34
+1% -1%
2.3% -2.4%
4.0%
-4.0%
4.8%
-4.9%
5.3%
-5.3%
6.8%
6.8% -6.8%
6.9%
-6.9% 6.9%
7.2%
-7 7.2% 2%
Fixed income sectors shown above are provided by Barclays Capital and are represented t d by b – Broad B d Market: M k t U.S. US Barclays Capital Index; MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index. TIPS: Treasury Inflation Protection Securities (TIPS). T Treasury securities iti d data t ffor # off issues i and market value based on U.S. Treasury benchmarks from Barclays Capital. Yield and return information based on Bellwethers for Treasury securities. Change in bond price is calculated using i b both th d duration ti and d convexity it according to the following formula: New Price = (Price + (Price * -Duration * Change in Interest Rates))+(0.5 * Price * Convexity * (Change in Interest Rates)^2) *Calculation assumes 2-year Treasury iinterest t t rate t ffalls ll 0.23% 0 23% to t 0.00% 0 00% and d the 5-year Treasury falls 0.62% to 0.00%, as interest rates can only fall to 0.00%. Chart is for illustrative purposes only. Past performance is not indicative of comparable future results. Data are as of 9/30/12.
MBS
High Yield Broad Mkt.
TIPS
EMD
Munis
Corp.
The Fed and the Money Supply Money Multiplier
Fed’s Balance Sheet: Assets $ trillions
M2 / Monetary Base
$3.5tn
10x
$ $3.0tn
Oth Other
9x
$2.5tn
U.S. Treasuries
8x
Agency MBS
7x
$2.0tn
6x
Fixed In ncome
$1.5tn
Aug. 2012: 3.8x
5x
$1 0t $1.0tn
4x
$0.5tn
3x 2x
$0.0tn '03
'04
'05
'06
'08
'09
'10
'03
'11
Fed’s Balance Sheet: Liabilities
'04
'05
'06
'07
'08
'09
'10
'11
'12
Money Supply Growth
$ trillions t illi
Year-over-year growth in M2
$3.0tn
14%
$2.5tn
Aug. 2012: 6.3%
12%
$2.0tn
10%
Monetary Base $1 5tn $1.5tn
8%
Excess Reserves
6%
$1.0tn
4%
$0.5tn $0.0tn
2%
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
0% '85 85
'90 90
'95 95
'00 00
Source: Federal Reserve, FactSet, J.P. Morgan Asset Management. Monetary base is defined as the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. Money multiplier defined as M2 divided by the monetary base. Data are as of 9/30/12.
35
'05 05
'10 10
The Fed Funds Rate: History and Expectations Federal Funds Rate & FOMC Interest Rate Projections 12%
10%
Fixed In ncome
8%
6%
Long-term Fed projection
4%
Sep. 30, 2012: 0.0%-0.25%
2%
0% '84
'88
'92
'96
'00
'04
Source: Federal Reserve, J.P. Morgan Asset Management. Fed Funds Rate projections are based on an average of the FOMC interest rate projections for a given year. Data are as of 9/30/12.
36
'09
'12
'14
Credit Conditions Lending Standards for Approved Mortgage Loans
Consumer & Industrial Loan Demand
Average FICO score based on origination date
Net percent of banks reporting stronger demand
Aug. 2012: 750
Fixed In ncome
760
60%
740
40%
720
20%
700
0%
680
-20%
660
-40%
640
-60% -80%
620 '00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
31%
22% Small Firms Large & Medium Firms '94
'96
'98
'00
'02
All bbanks, k seasonally ll adjusted dj t d
All FDIC insured institutions institutions, 1934 – 2011
12%
14%
10.6%
Residential Mortgages Consumer Loans Commercial and Industrial Loans
8%
'06
'10
'12
2011: 11.1%
12% 10%
6%
8%
2.8%
4% 2%
1.4% '92
'94
'96
'98
'00
'02
'04
'06
'08
'10
Average: 7.6%
6% 4%
'12
'34 34 '41 41 '48 48 '55 55 '62 62 '69 69 '76 76 '83 83 '90 90 Source: (Top left) McDash, J.P. Morgan Securitized Product Research, J.P. Morgan Asset Management. (Top right) Federal Reserve, FactSet, J.P. Morgan Asset Management. (Bottom left): Federal Reserve, FactSet, J.P. Morgan Asset Management. (Bottom right) FDIC, J.P. Morgan Asset Management. All data reflect most recently available releases. Data are as of 9/30/12.
37
'08
Common Equity as a % of Total Assets
Delinquency Rates
10%
'04
'97 97
'04 04
'11 11
High Yield Bonds High Yield Spreads and Defaults 20%
Average 5.9% 4.2%
HY Spreads HY Defaults
Latest 5.9% 1.8%
S Spreads d
15%
Default Rates 10%
5%
Fixed In ncome
0% '88
'90
'92
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
Historical High Yield Recovery Rates g yyield e d bo bonds, ds, ce cents ts oon tthee do dollar a High
Annual Flows into High Yield Mutual Funds & ETFs Billions o s US USD YTD 2012: $35 $35.0 0
70¢
$40bn
60¢
$30bn
50¢
$20bn
Average: 39.2¢
40¢
$10bn
30¢ $bn
20¢
-$10bn
10¢
-$20bn
0¢ '88
38
'90
'92
'94
'96
'98
'00
'02
'04
'06
'08
'10
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
Source (Top chart): U.S. Treasury, J.P. Morgan, J.P. Morgan Asset Management. Default rates are defined as the par value percentage of the total market trading at or below 50% of par value and include any Chapter 11 filing, prepackaged filing or missed interest payments. (Bottom left): J.P Morgan, Moody’s, J.P. Morgan Asset Management. (Bottom right): Strategic Insight, J.P. Morgan Asset Management. Yield to worst is defined as the lowest potential yield that can be received on a bond without the issuer actually defaulting and reflects the possibility of the bond being called at an unfavorable time for the holder. Spreads indicated are benchmark yield to worst less comparable maturity Treasury yields. Past performance is not indicative of comparable future results. 2011 recovery rates are as of March 30, 2012. Data are as of 9/30/12.
Municipal Finance Muni/Treasury Ratio Ratio of Barclays 10-year Municipal Bond yield to 10-year Treasury 240%
State & Local Government Debt Service Percent of current expenditures 8%
7%
220%
6%
2Q12: 5.1%
200% 5%
Fixed In ncome
180%
Sep. 30, 2012: 122%
160%
4% '90
'92
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
Municipal Bond Issuance* o s US USD,, revenue e e ue aandd GO issues ssues Billions
140%
$500
120%
$400 $300
100% $200 80% $100 60% '98
'00
'02
'04
'06
'08
'10
'12
$0 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Source (Left chart): Barclays Capital, U.S. Treasury, FactSet, J.P. Morgan Asset Management. (Top right) BEA, J.P. Morgan Asset Management. (Bottom right) SIFMA, J.P. Morgan Asset Management. *Excludes maturities of 13 months or less and private placements. 2012 issuance data is as of August 2012. Data are as of 9/30/12.
39
Emerging Market Debt Emerging Markets Debt Spreads
Index Breakdown – USD Denominated EMD 100%
Spread to Treasuries of USD-denominated debt, percent
Middle East & Africa 10%
Middle East & Africa 7%
12%
80%
Latin America 43%
Latin America 39%
60%
Average Spread Spread (9/30/12)
Index
10%
EMBIG CEMBI
8%
3.9% 3.3%
3.1% 3.6%
6% Europe 16%
40%
Europe 32%
4%
20%
Asia 35%
2%
Asia 18%
Fixed In ncome
0% EMBIG
0%
CEMBI
'01
'03
'04
'05
'06
'07
'08
'09
'10
'11
Annual Flows into EMD Mutual Funds & ETFs
Emerging Market Debt Credit Rating EMBIG average g monthlyy credit rating, g inverse scale
'02
Aug 2012: BBB Aug. BBB-
BBB-
Billions USD
BB+
$16bn
BB
$12bn
BB-
$8bn
B+
$4bn
B
YTD 2012 2012: $16 $16.7 7
$20bn
$bn
B-
-$4bn
'93
40
'95
'97
'99
'01
'03
'05
'07
'09
'11
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
Source: J.P. Morgan, IMF, MorganMarkets, FactSet, Strategic Insight, J.P. Morgan Asset Management. Spreads measure the credit risk premium over comparable maturity U.S. Treasury bonds. The J.P. Morgan EMBI Global (EMBIG) Index is a USD-denominated external debt index tracking bonds issued by sovereigns and quasi-sovereigns in developing nations. The J.P. Morgan Corporate Emerging Bond Index (CEMBI) is a USD-denominated external debt index tracking bonds issued by corporations. The J.P. Morgan GBI-EM index is a local currency-denominated index tracking bonds issued by emerging market governments. Past performance is not indicative of comparable future results. Data are as of 9/30/12.
Global Equity Markets: Returns and Composition 3Q12 Country / Region
Local
YTD 2012 USD
Local
Weights in MSCI All Country World Index % global market capitalization
USD
Europe ex exU.K. 15%
Regions / Broad Indexes USA (S&P 500)
-
6.4
-
16.4
EAFE
4.7
7.0
9.6
10.6
Europe ex ex-U.K. UK
80 8.0
97 9.7
13 1 13.1
12 8 12.8
Pacific ex-Japan
9.5
11.0
15.5
17.6
Emerging Markets
6.0
7.9
11.4
12.3
Emerging Markets 13% Japan 7%
Based on purchasing power parity
United Kingdom
4.0
7.1
6.5
10.7
France
5.9
7.4
11.7
10.7
Germany
12.4
13.9
22.8
21.7
Japan
-3 2 -3.2
-0 8 -0.8
36 3.6
24 2.4
China
4.7
4.7
8.9
9.1
India
9.0
15.4
24.5
25.4
Brazil
5.3
4.8
5.4
-3.1
R Russia i
60 6.0
94 9.4
89 8.9
11 6 11.6
United States 19% Emerging Markets 50%
Source: Standard & Poor’s, MSCI, IMF, FactSet, J.P. Morgan Asset Management.
41
U.K. 8%
Share of Global GDP
MSCI: Selected Countries
International
United States 47%
All return values are MSCI Gross Index (official) data. Share of global GDP based on purchasing power parity (PPP) as calculated by the IMF for 2012. Definition of emerging markets is based on MSCI and IMF data sources, respectively. Percentages may not sum to 100% due to rounding. Data as of 9/30/12.
Japan 5% Europe exU.K. 17% U.K. 3%
Canada 2%
Other Developed 4%
Global Economic Growth Emerging Market Country Real GDP Growth
JPMSI Forecast
Historical
Year-over-year % chg. – forecasts from JPMSI 10%
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
8% 6% 4% 2% 0% -2% -4% Emerging Markets
China
India
Russia
Mexico
Developed Market Country Real GDP Growth
South Africa
10%
3Q11
4Q11
1Q12
Brazil
JPMSI Forecast
Historical
Year-over-year % chg. – forecasts from JPMSI
Korea
2Q12
3Q12
4Q12
1Q13
2Q13
International
8% 6% 4% 2% 0% -2% -4% Developed Countries
Japan
Canada
U.S.
Source: J.P. Morgan Global Economic Research, J.P. Morgan Asset Management. Forecast and aggregate data come from J.P. Morgan Global Economic Research. Data are as of 9/30/12.
42
Germany
France
U.K.
Italy
Global Monetary Policy Central Bank Assets – Percent of Nominal GDP
Real Policy Rates – Monthly
35%
4%
30%
3%
25%
2%
Bank of Japan
1%
20%
European Central Bank
15%
0%
10%
-1%
5%
-2%
U.S. Federal Reserve
Emerging Markets Developed Markets
-3%
0% '99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
Country Level Monetary Policy and Inflation
'02
'12
'03
'04
Target Policy Rate
14.0%
'05
'06
'07
'08
Inflation Rate
'09
'10
'11
'12
Real Policy Rate
10.5%
3.5% 0.0%
D Developed l dM Markets k t
43
E Emerging i M Markets k t
Source: J.P. Morgan Global Economics Research, J.P. Morgan Asset Management. (Top charts) Emerging and Developed Economy GDP growth and real policy rates represent GDP weighted aggregates estimated by J.P. Morgan Global Economics Research. (Bottom chart) Target policy rates are the short-term target interest rates set by central banks. Inflation rates shown represent year-over-year quarterly rates for 2Q12. Real policy rates are short-term target interest rates set by central banks minus year-over-year inflation. Data are as of 9/30/12.
China
Brazil
Russia
Colombia
Indonesia
Poland
Mexico
Korea
Thailand
Taiwan
South Africa
India
Turkey
Australia
Japan
Canada
Euro area
U.S.
-7.0%
U.K.
-3.5%
Hong Kong
International
7.0%
The Importance of Exports Exports as a % of GDP – 2011 Goods exports only Brazil India
1 0% 2.1% 1.0% 2 1%
2.0%
China Russia
International
U.S.
2 2% 2.2%
3.1%
2.3%
4.5%
0.8%
Japan
2.2%
U.K.
1.9%
France
1.1%
Italy
1.4%
1.7%
1.7%
2.1%
14.0%
6.2%
10.0%
1.3%
12.7%
4.8%
1.5%
12.4%
2.0%
2.2%
0%
18.0% 21.1%
5.8%
10%
2.5%
15%
20%
Numbers represent exports of goods only and would be higher if services were included.
44
1.6%
26.0%
2.8%
4.2%
Source: IMF, IMF J.P. J P Morgan Asset Management Management.
Data are as of 9/30/12.
23.4%
7.6%
21.8%
5%
Total
26.8% 6 8%
14.4%
19.2%
Germany
Other
9.8%
4.0%
Canada
BRIC
26.1%
15.5%
9.5%
6.9%
Eurozone
17.6%
10.2%
4.4%
1.5% 1.4%
US
10 3% 10.3%
4 9% 4.9%
25%
38.9%
10.7%
30%
35%
40%
The Impact of Global Consumers Foreign Sales, % of Total Sales
Share of Global Nominal Consumption
35%
40%
35%
30%
30%
25%
25%
20%
Mega Cap (Russell 200)
International
Large Cap (Russell 1000)
U.S. Consumption % of Global
20%
EM Consumption % of Global Small Cap (Russell 2000) 10%
15% 1990
1994
1998
2002
2006
2010
'90
'92
'94
'96
'98
'00
'02
'04
Source: FactSet, Compustat, Russell, J.P. Morgan Global Economics Research, J.P. Morgan Asset Management. Estimates of global consumption for 2010 and 2011 provided by J.P. Morgan Global Economics Research. Foreign g sales as a p percentage g of total sales is calculated as an unweighted g average g of individual index constituent companies’ p reported p sales figures g and does not capture all index members due to differences in reporting practices. Data are as of 9/30/12.
45
15%
'06
'08
'10
European Crisis: Fiscal Challenges GDP Growth, Debt to GDP and Borrowing Costs Bubble size = 10-year government bond yield
8%
Example of Fiscal Redistribution in the U.S.
= 10% 6%
EM
Real GDP Growth (2011 – 20 013)
International
= 5% 4%
U.S. 2%
Germany France
0%
The E.U. Lacks a Similar Fiscal Mechanism
Ireland
E.U.
Italy
Spain
Portugal -2%
Greece
-4%
-6% 20%
40%
60%
80%
100%
120%
140%
160%
Net Debt-to-GDP Ratio (2012 est.) Source: IMF, BLS, J.P. Morgan Asset Management. Maps are for illustrative purposes only and are intended to show the current sources of stress in each region. The U.S. state colors are based on level of unemployment rate. European country colors are based on levels of sovereign stress, including but not exclusively, the measure shown in the above chart on the left. Growth and debt data based on the April 2012 World Economic Outlook. Bond yields as of 9/30/12.
46
Data are as of 9/30/12.
European Crisis: Sovereign Bond Yields European Sovereign Funding Costs
10-year benchmark bond yields, daily 16%
Portugal Ireland Spain Italy France Germany
Introduction of the Euro
14%
9/30/12 8.39% 7.19% 5.97% 5.03% 2.18% 1.46%
12%
10%
8%
International
6%
4%
2%
0% '94
'96
'98
Source: FactSet, ECB, J.P. Morgan Asset Management. Data are as of 9/30/12.
47
'00
'02
'04
'06
'08
'10
'12
European Crisis: Financial System Risks Euribor and Libor Spreads
European Bank Exposure Billions USD
3M Euribor - EONIA, 3M Libor - OIS 4.0%
Spain Spain
3.5%
Greece Ireland Italy
3.0%
Libor Spread
Portugal U.K.
2.5%
2.0%
International
Germany
1.5%
Euribor Spread 1.0%
France
0.5%
0.0%
$0
$100
$200
$300
$400
$500
$600
07 '07
'08 08
'09 09
'10 10
Source: Bloomberg, BIS, J.P. Morgan Asset Management.
48
The Libor OIS spread is the difference between the interest rate at which banks borrow unsecured funds from other banking institutions and overnight indexed swaps at the effective federal funds rate. The Euribor EONIA spread is the difference between the interest rate at which European Union banks borrow unsecured funds from other Euro banking institutions and the standard interest rate for Euro area deposits calculated by the European Central Bank. Both are standard measures of perceived risk in banking institutions. Data are as of 9/30/12.
'11 11
'12 12
Chinese Growth and Economic Policy China and U.S. Contribution to Global GDP Growth
Chinese Inflation and the Money Supply
40%
10%
Share of year-over-year change in nominal global GDP
China U it d States United St t
35%
Year-over-year % change CPI (LHS) M2 (RHS)
% 8%
30%
30%
Most Recent 2 0% 2.0% 13.5%
25%
6%
25%
20%
4%
20% 15%
2% 15%
10% 0%
5%
-2%
0% '81
'84
'87
'90
'93
'96
'99
'02
'05
'08
'11
China Export Growth
'02
'04
'06
'08
'10
'12
Mortgage Debt
3 month moving average year-over-year 3-month year over year %
Percentage of GDP 18%
45% 35%
International
10% '00
'14
16%
Aug. 2012: 5.0%
25% 15% 5%
United States (Right)
1Q12: 14.0%
14%
71% 69%
China (Left)
67%
-5%
-25% eb 08 Feb-08
75% 73%
12%
65%
10%
-15%
77%
1Q12: 62.9%
63%
61% 05 '06 06 '07 07 '08 08 '09 09 '10 10 '11 11 '12 12 '05 Source: (Top left) IMF, J.P. Morgan Asset Management. (Top right) National Bureau of Statistics, J.P. Morgan Economics, J.P. Morgan Asset Management. (Bottom left) IMF, J.P. Morgan Asset Management. (Bottom right) Barclays Capital, Federal Reserve, J.P. Morgan Asset Management. *In 2009, global growth was negligible, while Chinese growth was robust, which resulted in China contributing more than 1200% to global growth. Calculations based on PPP exchange rates and 2012 – 2016 growth forecasts are from the IMF.
49
8%
Sep-08 Sep 08 Apr-09 p 09 Nov-09 o 09 Ju Jun-10 0
Data are as of 9/30/12.
Jan-11 Aug-11 Ja ug Mar-12 a
Global Equity Valuations – Developed Markets
Std d Dev from Global A Average
Developed Market Countries
Expensive relative to world
+5 Std Dev +4 Std Dev +3 3 Std D Dev +2 Std Dev
Expensive relative to own history
+1 Std Dev Average -1 Std Dev
Cheap relative to own history
-2 Std Dev -3 Std Dev -4 Std Dev -5 Std Dev
World (ACWI)
Internatio onal
Example
+6 Std Dev
World (ACWI) EAFE Index France Japan U.K. G Germ any Australia Canada Sw itzerland United States
EAFE Index
France
Japan
U.K.
Germany Australia Canada Switzerland United States
Cheap relative to world
Fw d. d P/E
P/B
P/CF
Div Yld Div. Yld.
Fw d. d P/E
P/B
P/CF
Div Yld Div. Yld.
-0.88 -1.88 -2.39 -2.00 -1.78 -1.69 1 69 -1.48 -0.92 0.34 0.55
12.0 10.9 10.2 11.5 10.2 98 9.8 12.1 12.7 12.2 12.6
1.7 1.3 1.1 0.9 1.6 14 1.4 1.7 1.8 2.0 2.2
6.9 5.5 5.2 3.9 6.1 66 6.6 6.5 5.1 11.9 8.2
2.8% 3.7% 4.2% 2.7% 4.1% 3 6% 3.6% 4.9% 2.8% 3.5% 2.0%
13.4 12.9 11.5 17.9 11.4 11 8 11.8 13.4 13.8 13.7 14.4
2.1 1.7 1.6 1.4 2.0 15 1.5 2.2 2.1 2.4 2.4
7.0 6.2 5.8 6.2 7.1 46 4.6 8.2 7.2 9.8 8.4
2.5% 3.3% 3.7% 1.9% 3.9% 3 3% 3.3% 4.5% 2.4% 2.9% 2.0%
Current
10-year avg.
Note: Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (Fwd. P/E), price to current book (P/B), price to last 12 months’ cash flow (P/CF) and price to last 12 months’ dividends. Results are then normalized using means and average variability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). See disclosures page at the end for metric definitions. Data are as of 9/30/12.
Average
Current Com posite Index
Source: MSCI, FactSet, J.P. Morgan Asset Management.
50
Current
Global Equity Valuations – Emerging Markets Emerging Market Countries
Example
Std Dev from Global Avverage
+6 Std Dev
Expensive relative to world
+5 Std Dev +4 Std Dev +3 Std Dev +2 Std Dev
Expensive relative to own history
+1 Std Dev Average -1 Std Dev
Cheap relative to own history
-2 Std Dev -3 3 Std Dev -4 Std Dev -5 Std Dev
Internatio onal
World (ACWI)
World(ACWI) EM Index Russia China Brazil Taiw an South Africa Korea Mexico India
EM Index Current posite Com p Index -0.88 -1.43 -3.71 -2.28 -1.92 -0.74 -0.21 0.19 1.76 2.69
Russia
China
Brazil
Taiwan
South Africa
Korea
Mexico
Current
Cheap relative to world
10-year avg.
Fw d. P/E
P/B
P/CF
Div. Yld.
Fw d. P/E
P/B
P/CF
Div. Yld.
12.0 10.3 5.2 9.0 10.8 15.0 11.6 8.7 16.7
1.7 1.6 0.8 1.5 1.4 1.8 2.3 1.3 2.9
6.9 6.1 3.6 4.5 6.2 5.9 9.7 5.7 6.3
2.8% 2.9% 3.6% 3.3% 4.1% 3.3% 3.5% 1.1% 1.6%
13.4 10.9 7.9 12.2 9.6 15.2 10.9 9.4 13.4
2.1 1.9 1.3 2.1 1.9 1.8 2.3 1.5 2.6
7.0 5.7 4.9 4.1 5.5 6.5 7.5 5.0 5.6
2.5% 2.7% 2.2% 2.8% 3.5% 3.5% 3.4% 1.8% 2.0%
14.0
2.5
12.7
1.5%
15.1
3.2
12.0
1.5%
Note: Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (Fwd. P/E), price to current book (P/B), price to last 12 months’ cash flow (P/CF) and price to last 12 months’ dividends. Results are then normalized using means and average variability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). See disclosures page at the end for metric definitions. Data are as of 9/30/12.
Average
India
Source: MSCI, FactSet, J.P. Morgan Asset Management.
51
Current
Emerging Market Equity Composition MSCI EM Index by Sector
MSCI EM Index by Region
22%
8% 16%
Other
20%
Africa/Mideast
Commodities
Asia/Pacific ex Japan 10%
14%
Financials
Europe 60%
25%
Latin America
Tech
25%
Consumer
MSCI EM Country y Index by y Sector 100% 16%
12%
17%
24%
International
80%
16% 34%
21% 60%
22%
37% 69%
19% 28%
40%
37%
26%
9%
13%
33%
20%
4%
0% Brazil
15%
18%
7% 11%
India
China
4% Russia
38% 23% Mexico*
Source: MSCI, FactSet, J.P. Morgan Asset Management. “Other” is comprised of Healthcare, Industrials, Telecom, and Utilities sectors. *Mexican Telecom sector accounts for 28% of the country’s market capitalization. Values may not sum to 100% due to rounding. Data are as of 9/30/12.
Other Commodities Financials Tech
16% 17%
52
14%
Korea
Consumer
International Economic and Demographic Data Economics
Demographics GDP USD GDP Per (B$s) p Capita
GDP Growth
Unempl. Rate
Inflation
C.A.
(CPI)
(%GDP)
Population
Population Growth
Median Age g
Migration per 1000 p
Developed U.S.
$15,094
$48,387
1.3%
8.1%
1.7%
-3.6%
314 mm
0.9%
37.1 yrs
+3.6
Canada
1,737
50,436
1.9
7.3
1.4
-2.5
34
0.8
41.2
+5.7
U.K.
2,418
38,592
2.0
8.1
2.5
-2.3
63
0.6
40.2
+2.6
Germany
3 577 3,577
43 742 43,742
03 0.3
68 6.8
20 2.0
53 5.3
81
-0.2 02
45 3 45.3
+.7 7
France
2,776
44,008
-0.3
10.2
2.2
-1.9
66
0.5
40.4
+1.1
Japan
5,869
45,920
-2.0
4.3
-0.4
1.5
127
-0.1
45.4
-
Italy
2,199
36,267
-2.5
10.6
3.2
-2.3
61
0.4
43.8
+4.7
Russia
1,850
12,993
2.0
5.2
6.9
5.4
143
-0.5
38.8
+0.3
Mexico
1,155
10,153
3.5
5.4
4.6
-0.4
115
1.1
27.4
-3.1
Brazil
2,493
12,789
4.8
5.3
5.3
-2.1
199
1.1
29.6
-0.1
China
7,298
5,414
7.4
4.1
2.0
2.8
1,343
0.5
35.9
-0.3
India
1 676 1,676
1 389 1,389
52 5.2
98 9.8
77 7.7
-2.5 25
1 205 1,205
13 1.3
26 5 26.5
-0.1 01
International
Emerging
Source: FactSet, Eurostat, CIA, J.P. Morgan Securities, J.P. Morgan Asset Management. GDP levels represent 2011 data and are from the April 2012 World Economic Outlook published by the IMF, except for the U.S. levels, which come directly from the BEA. All GDP Growth data are from J.P. Morgan Economics and expressed as % change versus prior quarter annualized. All GDP growth data are for 3Q12. India unemployment is from CIA estimates and is as of 2011. CPI Inflation is shown as % change versus a year ago and all data are for August 2012, except for Japan, which is as of July 2012. Unemployment rate for developed countries comes from FactSet Economics, Eurostat and Statistics Canada and represent the most recently available data. Demographic data provided by CIA World Factbook at CIA.gov. Current Account (C.A.) represents each country’s current account balance as of 6/30/12. Russia, China and Brazil’s current accounts are as of 12/31/11. Data are as of 9/30/12.
53
Current Account Deficit and U.S. Dollar Current Account Balance, % of GDP
U.S. Dollar Index Nominal trade-weighted exchange index: major currencies
-8%
115
4Q05: -6.5%
110 105
-6%
100
2Q12: -3.0%
-4%
95 90
Mar 2009: Mar. 84.0
85
International
-2% 80 75 0%
Sep. 2012: 72.5 '94
54
Mar. 2008: 70.3
70
'96
'98
'00
'02
'04
'06
'08
'10
'12
65 '94
'96
'98
'00
'02
'04
'06
'08
Source: BEA, FactSet, J.P. Morgan Asset Management.
Source: Federal Reserve, FactSet, J.P. Morgan Asset Management.
Data are as of 9/30/12 and are reported quarterly.
Data are as of 9/30/12.
'10
'12
Asset Class Returns 2002
2003
DJ UBS Cmdty 23.9%
MS CI EME 56.3%
Ba rc la ys Agg 10 . 3 %
Russe ll 2000 47.3%
Ma rke t Ne utra l 7.4%
MS CI EAFE 39.2%
Asset Class
2005
2006
2007
2008
2009
2010
2011
Ba rc la ys Agg 5.2%
MS CI EME 79.0%
REITs
REITs
27.9%
8.3%
MS CI EAFE 32.5%
Russe ll 2000 26.9%
Ba rc la ys Agg 7.8% Ma rke t Ne utra l 4.5% S &P 500 2 . 1%
3 1. 6 %
MS CI EME 34.5%
3 5 . 1%
MS CI EME 39.8%
MS CI EME 26.0%
DJ UBS Cmdty 17 . 5 %
MS CI EME 32.6%
MS CI EAFE 11. 6 %
MS CI EAFE 20.7%
MS CI EAFE 14 . 0 %
MS CI EAFE 26.9%
DJ UBS Cmdty 11. 1%
Ma rke t Ne utra l 1. 1%
28.0%
MS CI EME 19 . 2 %
Ma rke t N utra Ne t l 9.3%
Asse t All . Alloc - 24.0%
Russe ll 2000 27.2%
DJ UBS C dt Cmdty 16 . 7 %
REITs
REITs
Ca sh 1. 8 %
REITs
2012 YTD
3Q12
S &P 500 16 . 4 %
DJ UBS Cmdty 9.7%
10-yrs '02 - '11 Cum. Ann. MS CI EME 2 7 7 . 1%
MS CI EME 14 . 2 %
REITs
REITs
16 . 1%
MS CI EME 7.9%
16 4 . 2 %
10 . 2 %
Russe ll 2000 14 . 2 %
MS CI EAFE 7.0%
Asse t Alloc . 82.8%
Asse t Alloc . 6.2%
MS CI EME 12 . 3 %
S &P 500 6.4%
Ba rc la ys A Agg 75.4%
Ba rc la ys A Agg 5.8%
Russe ll 2000 5.3%
Russe ll 2000 72.8%
Russe ll 2000 5.6%
REITs
REITs
REITs
3.8%
3 7 . 1%
Russe ll 2000 18 . 3 %
12 . 2 %
Russe ll 2000 18 . 4 %
1. 7 %
S &P 500 28.7%
Asse t Alloc . 12 . 4 %
Asse t Alloc . 8 . 1%
S &P 500 15 . 8 %
Asse t Alloc . 7.2%
Russe ll 2000 - 33.8%
S &P 500 26.5%
S &P 500 15 . 1%
0 . 1%
MS CI EAFE 10 . 6 %
Asse t Alloc . - 5.8%
Asse t Alloc . 25.0%
S &P 500 10 . 9 %
Ma rke t Ne utra l 6 . 1%
Asse t Alloc . 14 . 9 %
Ba rc la ys Agg 7.0%
DJ UBS Cmdty - 36.6%
Asse t Alloc . 22.2%
Asse t Alloc . 12 . 5 %
Asse t Alloc . - 0.6%
Asse t Alloc . 9.8%
Asse t Alloc . 4.5%
Ma rke t Ne utra l 7 2 . 1%
Ma rke t Ne utra l 5.6%
MS CI EME - 6.0%
DJ UBS Cmdty 22.7%
DJ UBS Cmdty 7.6%
S &P 500 4.9%
Ma rke t Ne utra l 11. 2 %
S &P 500 5.5%
S &P 500 - 37.0%
DJ UBS Cmdty 18 . 7 %
MS CI EAFE 8.2%
Russe ll 2000 - 4.2%
DJ UBS Cmdty 5.6%
Ba rc la ys Agg 1. 6 %
MS CI EAFE 64.8%
MS CI EAFE 5 . 1%
MS CI EAFE - 15 . 7 %
Ma rke t Ne utra l 7 . 1%
Ma rke t Ne utra l 6.5%
Russe ll 2000 4.6%
Ca sh
Ca sh
REITs
4.8%
4.8%
- 37.7%
MS CI EAFE - 11. 7 %
Ba rc la ys Agg 4.0%
1. 0 %
DJ UBS Cmdty 58.0%
DJ UBS Cmdty 4.7%
3.0%
Ba rc la ys Agg 4.3%
Russe ll 2000 - 1. 6 %
MS CI EAFE - 4 3 . 1%
Ma rke t Ne utra l 0.8%
S &P 500 33.4%
S &P 500 2.9%
Ba rc la ys Agg 2.4%
DJ UBS Cmdty - 2.7%
Ca sh
Ca sh
Ca sh
0.0%
20.2%
1. 9 %
Ca sh
55
2004
Russe ll 2000 - 20.5% S &P 500 - 2 2 . 1%
Ba rc la ys Ba rc la ys Agg Agg 4 . 1% 4.3% Ca sh
Ca sh
1. 0 %
1. 2 %
REITs
Ca sh
REITs - 15 . 7 %
MS CI EME - 53.2%
Ba rc la ys Ba rc la ys Agg Agg 5.9% 6.5% Ma rke t Ne utra l 4 . 1% Ca sh 0 . 1%
Ca sh
0 . 1%
DJ UBS Cmdty - 13 . 4 %
Ma rke t Ne utra l - 0.8%
MS CI EME - 18 . 2 %
Ca sh
Ca sh 0 . 1% Ma rke t Ne utra l - 0.5%
REITs
Source: Russell, MSCI, Dow Jones, Standard & Poor’s, Credit Suisse, Barclays Capital, NAREIT, FactSet, J.P. Morgan Asset Management. The “Asset Asset Allocation” Allocation portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EMI, 25% in the Barclays Capital Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the CS/Tremont Equity Market Neutral Index, 5% in the DJ UBS Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data except commodities represent total return for stated period. Past performance is not indicative of future returns. Data are as of 9/30/12, except for the CS/Tremont Equity Market Neutral Index, which reflects data through 8/31/12. “10-yrs” returns represent annualized total return. These returns reflect the period from 1/1/02 – 12/31/11. Please see disclosure page at end for index definitions. *Market Neutral returns include estimates found in disclosures. Data are as of 9/30/12.
Correlations: 10-Years
Large Cap Small Cap EAFE
Large Cap
Small Cap
EAFE
EME
Core Bonds
Corp. HY
EMD
Cmdty.
REITs
Hedge Funds
Eq Market Neutral*
1 00 1.00
0 95 0.95
0 92 0.92
0 84 0.84
-0 21 -0.21
0 78 0.78
0 67 0.67
0 53 0.53
0 79 0.79
0 81 0.81
0 59 0.59
1.00
0.88
0.79
-0.27
0.73
0.59
0.46
0.84
0.76
0.55
1.00
0.93
-0.15
0.75
0.66
0.59
0.72
0.87
0.72
1 00 1.00
-0.09 0 09
0 79 0.79
0 73 0.73
0 64 0.64
0 64 0.64
0 90 0.90
0 62 0.62
1.00
-0.03
0.27
-0.27
0.00
-0.22
-0.09
1.00
0.85
0.56
0.70
0.78
0.44
1.00
0.44
0.61
0.65
0.40
1.00
0.40
0.72
0.50
1.00
0.59
0.50
1.00
0.60
EME Core Bonds Corp. HY EMD Commodities REITs
Asset Class
Hedge Funds
1.00
Eq Market Neutral*
Source: Standard & Poor’s, Russell, Barclays Capital Inc., MSCI Inc., Credit Suisse/Tremont, NCREIF, DJ UBS, J.P. Morgan Asset Management. Indexes used – Large Cap: S&P 500 Index; Small Cap: Russell 2000; EAFE: MSCI EAFE; EME: MSCI Emerging Markets; Bonds: Barclays C it l A Capital Aggregate; t C Corp HY HY: B Barclays l C Capital it l C Corporate t Hi High h Yi Yield; ld EMD EMD: B Barclays l C Capital it l E Emerging i M Market; k t Cmdty.: C dt DJ UBS Commodity C dit IIndex; d Real Estate: NAREIT Equity REIT Index; Hedge Funds: CS/Tremont Multi-Strategy Index; Equity Market Neutral: CS/Tremont Equity Market Neutral Index. *Market Neutral returns include estimates found in disclosures. All correlation coefficients calculated based on quarterly total return data for period 9/30/02 to 9/30/12. This chart is for illustrative purposes only.
56
Mutual Fund Flows Fund Flows Billions, USD
AUM
YTD 2012
2011
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998
Domestic Equity World Equity
4 270 4,270 1,492
(77) 18
(132) 4
(81) 58
(28) (148) (65) 28 (80) 139
(0) 149
18 106
101 71
120 24
(26) (3)
55 (22)
261 53
176 11
149 8
Taxable Bond Tax-exempt Bond
2,724 562
169 39
135 (12)
230 11
311 69
22 8
97 11
45 15
26 5
5 (15)
40 (7)
125 17
76 11
(36) (14)
8 (12)
59 15
946
39
31
24
10
(26)
42
18
37
49
38
9
9
(36)
(14)
10
2 554 2,554
(138)
(124)
654
245
62
375
159
194
235
Hybrid Money Market
(525) (539) 637
Cumulative Flows into Stock & Bond Funds
(157) (263) (46)
Includes both mutual funds and ETFs, $ billions
Difference Between Flows Into Stock and Bond Funds Billions, USD, U.S. and international funds, monthly
$1,400
$40
Aug. ’12: $1,288 billion into bond funds and fixed income ETFs since ’07
$1,200
Bond flows exceeded equity flows b $51 billion by billi in i August A t 2012
$20
$1,000 $0
$800
Aug. ’12: Aug 12: $209 billion into stock funds and equity ETFs since ’07
Asset Class
$600
57
$400
Bonds
-$20
-$40 $200
Stocks $0 '07
'08
'09
'10
'11
'12
-$60 M '08 May
M '09 Mar
J '10 Jan
N '10 Nov
Source: Investment Company Institute, J.P. Morgan Asset Management. Data include flows through August 2012 and exclude ETFs. ICI data are subject to periodic revisions. World equity flows are inclusive of emerging market, global equity and regional equity flows. Hybrid flows include asset allocation, balanced fund, flexible portfolio and mixed income flows. Data are as of 9/30/12.
S '11 Sep
J l '12 Jul
Dividend Income: Domestic and Global S&P 500 Total Return: Dividends vs. Capital Appreciation
Capital Appreciation Dividends
Average annualized returns 20% 15%
13.6%
13.9%
10%
3.0% 5% 4.7%
5.1%
0%
15.3%
1.6%
4.4%
6.0%
5.4%
12.6%
5.5% 4.4%
4.2%
3.3%
1.8%
2.5%
4.1%
-2.7%
-5.3% 5 3% -5% -10% 1926 - 1929
1930's
1940's
1950's
1960's
Major world markets by capitalization 5.5%
5.5%
10-year 10 year government bond yield
5.4% 5.0%
5%
4.7%
Asset Class
2000's
1926 to 2011
10-year government bond yield
6% 4.8% 4.1%
4.0% 4%
3.5%
3.8% 3.4% 2 9% 2.9%
3%
3%
58
1990's
Major world markets by capitalization 5%
4.2% 4%
1980's
Equity Dividend Yields
REIT Dividend Yields 6%
1970's
2 8% 2.8%
2.6%
2.2% 2%
2%
1%
1%
0%
U.S.
France
Australia
Singapore
Canada
Japan
Global
U.K.
0%
U.S.
Australia
France
U.K.
Switzerland Canada
Source: (Top chart) Standard & Poor’s, Ibbotson, J.P. Morgan Asset Management. (Bottom left) FactSet, NAREIT, J.P. Morgan Asset Management. Yields shown are that of the appropriate FTSE NAREIT REIT index, which excludes property development companies. (Bottom right) FactSet, MSCI, J.P. Morgan Asset Management. Yields shown are that of the appropriate MSCI index. Data are as of 9/30/12.
ACWI
Japan
Global Commodities Oil Demand: Emerging Markets Share
Commodity Prices
Emerging markets as % of total global oil consumption
Weekly index prices rebased to 100
40%
600
Precious Metals
38% 36%
500
Industrial Metals 34% 32%
400
30% '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Commodity y Prices and Inflation
300
Year-over-year % chg.
Energy
8%
DJ-UBS Commodity Index (Y/Y % chg.) 80%
6%
60%
4%
40%
2%
20%
0%
0%
200
Asset Class
Grains 100
Livestock 0
-20%
-4% Headline CPI (Y/Y % chg.)
-40%
-6%
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
-60% '94
'96
'98
'00
'02
'04
'06
Commodity prices represented by the appropriate DJ/UBS Commodity sub-index.
Source: (Top) BP Statistical Review of World Energy, J.P. Morgan Asset Management. (Bottom) BLS, DJ/UBS, FactSet, J.P. Morgan Asset Management.
Data are as of 9/30/12.
Data are as of 9/30/12.
Source: Dow Jones/UBS, FactSet, J.P. Morgan Asset Management.
59
-2%
'08
'10
'12
Gold Gold Prices $ / oz
Year
World Gold Production Troy Ounces Total Value
$3,000
$2,500
Gold, Inflation Adjusted Gold
Jan. 1980: $2,480.36
Sep. 2012: $1,763.00
$2,000
2000
83.3 mm
$23 bn
2001
83.6 mm
$23 bn
2002
82.0 mm
$25 bn
2003
81 7 mm 81.7
$30 b bn
2004
77.8 mm
$32 bn
2005
79.4 mm
$35 bn
2006
76.2 mm
$46 bn
2007
75.6 mm
$53 bn
2008
73.3 mm
$64 bn
2009
79.1 mm
$77 bn
2010
82.3 mm
$101 bn
2011
86 8 mm 86.8
$136 bn
$1,500
Asset Class
$1,000
Jan. 1980: $850.00
$500
$0 '75
'85
'90
'95
'00
'05
'10
Source: (Left chart) EcoWin, BLS, U.S. Department of Energy, FactSet, J.P. Morgan Asset Management. (Right table) U.S. Geological Survey, World Gold Council, J.P. Morgan Asset Management. CPI adjusted gold values are calculated using month averages of gold spot prices divided by the CPI value for that month. CPI is rebased to 100 at the end of the chart. 2011 world production is a U.S. Geological Survey estimate. Data are as of 9/30/12.
60
'80
Historical Returns by Holding Period Range of Stock, Bond and Blended Total Returns Annual total returns, 1950 – 2011 60% 50%
Annual Avg. Growth of $100,000 Total T t l Return R t over 20 years Stocks
51%
40%
43%
30%
10.8%
$771,337
Bonds
6.3%
$337,713
50/50 Portfolio
8.9%
$552,853
32% 28%
20%
23%
21%
19%
18%
16% 17%
10%
12% 6%
0%
-2% -2% 1% -8%
-10%
-1% 1%
2%
-15%
Bonds 50/50 Portfolio
Asset Class
-37%
-40% 1-yr.
5-yr. rolling
10-yr. rolling
Sources: Barclays Capital, FactSet, Robert Shiller, Strategas/Ibbotson, Federal Reserve, J.P. Morgan Asset Management. Returns shown are based on calendar year returns from 1950 to 2011.
61
5% 1%
Stocks
-20% -30%
14%
Data are as of 9/30/12.
20-yr. rolling
Diversification and the Average Investor Maximizing the Power of Diversification (1994 – 2011) Traditional Portfolio
More Diversified Portfolio Equity Mkt. Neutral Commodities 8% 26%
S&P 500
30%
REIT
8% 8%
55%
MSCI EAFE Barclays y Agg. gg
15%
S&P 500 Russell 2000
4%
22%
13%
MSCI EAFE
9%
MSCI EM Barclays Agg.
Return: 6.75% Standard Deviation: 10.94%
Return: 7.09% Standard Deviation: 9.97%
20-year Annualized Returns by Asset Class (1992 – 2011) 12%
10.9%
10% 8.6% 7 8% 7.8%
Asset Class
8%
7 6% 7.6% 6.5%
6% 4.0% 4% 2.5%
2.5%
Inflation
Homes
2.1%
2% 0% REITs
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Oil
S&P 500
Gold
Bonds
EAFE
Average Investor
(Top) Indexes and weights of the traditional portfolio are as follows: U.S. stocks: 55% S&P 500, U.S. bonds: 30% Barclays Capital Aggregate. International stocks: 15% MSCI EAFE. Portfolio with 25% in alternatives is as follows: U.S. stocks: 22.2% S&P 500, 8.8% Russell 2000; International Stocks: 4.4% MSCI EM, 13.2% MSCI EAFE; U.S. Bonds: 26.5% Barclays Capital Aggregate; Alternatives: 8.3% CS/Tremont Equity Market Neutral, 8.3% DJ/UBS Commodities, 8.3% NAREIT Equity REIT Index Index. Return and standard deviation calculated using Morningstar Direct. Charts are shown for illustrative purposes only. Past returns are no guarantee of future results. Diversification does not guarantee investment returns and does not eliminate risk of loss. Data are as of 9/30/12 9/30/12. (Bottom) Indexes used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays Capital U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz, Inflation: CPI Average asset allocation CPI. investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/11 to match Dalbar’s most recent analysis.
Annual Returns and Intra-year Declines S&P 500 Intra-year Declines vs. Calendar Year Returns Despite average intra-year drops of 14.5%, annual returns positive in 25 of 32 years 50%
34
35% 27
26
26
20%
15
15
-7 -17 -17
-14
4
2
-8 -12
23
20 14
-7 1
26
12
-10
10% -10%
27
26 20
17
5%
31
-8
-9
-6 6
-8
-20
-25%
-6 6
7
13
9 -2
-10 -13 -23
4
3
-38
-3
-5 -9
-8
-8
-11
-12 -19
-7
-8
-10
-14
-17
-16 -19
Asset Class
-26 -34
-40%
-28 -32 32
-47
-55%
'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops over periods of 6 months or less. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2011. Data are as of 9/30/12.
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0
Cash Accounts Annual Income Generated by $100,000 Investment in a 6-month CD
Money Supply Component
$10,000 $8,000
$ Billions
Weight in Money Supply
2006: $5 $5,240 240
$6,000
M2-M1
$4,000
2011: $419
Retail MMMFs
7,688
641
76.7%
6.4%
$2,000
Savings deposits
$0 1986
1990
1994
1998
2002
2006
6,348
63.3%
2010
Cash Accounts as a % of Total Household Financial Assets Cash
Small time deposits
700
Institutional MMMFs
1,723
7.0%
28%
6-month CD rate vs. Core CPI
Mar ’09 Mar. 09 S&P 500 low
Oct. ’02 S&P 500 low
24%
Cash in IRA & Keogh accounts
20%
616
17.2%
6.1%
Asset Class
16%
64
Total
12% '98
'00
'02
'04
'06
'08
'10
'12
Source: Federal Reserve, St. Louis Fed, Bankrate.com, J.P. Morgan Asset Management. All cash measures obtained from the Federal Reserve are seasonally adjusted monthly numbers. All numbers are in billions of U.S. dollars. Small denomination time deposits are those iss Small-denomination issued ed in amo amounts nts of less than $100 $100,000. 000 All IRA and Keogh acco account nt balances at commercial banks and thrift institutions are subtracted from small time deposits. Annual income is for illustrative purposes and is calculated based on the 6-month CD yield on average during each year and $100,000 invested. IRA and Keogh account balances at money market mutual funds are subtracted from retail money funds. Past performance is not indicative of comparable future results. Data are as of 9/30/12.
10,026
100.0%
Corporate DB Plans and Endowments Asset Allocation: Corporate DB Plans vs. Endowments
Defined Benefit Plans – Funded Status: S&P 500 Companies
Underfunded
Overfunded
Endowments
8%
Corporate Defined Benefit Plans
45.3% 13.0%
Fixed Income
Hedge Funds
Private Equity
2.7%
2010
40%
1999: Average 9.2%
33%
12.2% 4.1%
10%
2010: Average 7.4%
30%
4.7% 0%
1999
4.7%
4.0%
Cash
92%
Pension Return Assumptions: S&P 500 companies
10 7% 10.7%
3.1%
Other
78%
21.9%
% of Comp panies
Asset Class
35.5%
6.1%
Real Estate
65
22%
32.0%
Equities
% of total 20%
30%
40%
50%
29%
27% 27%
20% 20%
16%
16%
9%
10%
8%
7%
5% 2%
1%
0%
0%
0%
0% < 7%
7 to 7.5%
7.5 to 8%
8 to 8.5%
8.5 to 9%
Return Assumption
Source: NACUBO (National Association of College and University Business Officers), Towers Watson, Compustat/FactSet, J.P. Morgan Asset Management. Endowments represents dollar-weighted average data of 842 colleges and universities. Pension Return Assumptions based on all available and reported data from S&P 500 Index companies. Funded Status based on 351 companies reporting pension funding status as of 3/31/11. Return assumption bands are inclusive of upper range. All information is shown for illustrative purposes only. Data are as of 9/30/12.
9 to 9.5%
9.5 to 10%
> 10%
The Dow Jones Industrial Average Since 1900 Dow Jones Industrial Index, Price Return (Since 1900) Log Scale
2000 – present 10,000
3,000 1966 – 1982 1,000
400 1937 – 1949
Asset Class
100 1906 – 1924
'10
'20
'30
'40
'50
Source: IDC, FactSet, J.P. Morgan Asset Management. Data shown in log scale to best illustrate long-term index patterns. Past performance is not indicative of future returns. Chart is for illustrative purposes only. Data are as of 9/30/12.
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'60
'70
'80
'90
'00
'10
J.P. Morgan Asset Management – Index Definitions All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. The S&P 400 Mid Cap Index is representative of 400 stocks in the mid-range sector of the domestic stock market, representing all major industries. The Russell 3000 Index® measures the performance of the 3,000 largest U.S. companies based on total market capitalization. The Russell 1000 Index ® measures the performance of the 1,000 largest companies in the Russell 3000. The Russell 1000 Growth Index ® measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Value Index ® measures the performance of those Russell 1000 companies with lower priceto-book ratios and lower forecasted growth values. The Russell Midcap Index ® measures the performance of the 800 smallest companies in the Russell 1000 Index. The Russell Midcap Growth Index ® measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index. The Russell Midcap Value Index ® measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value index. The Russell 2000 Index ® measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 2000 Growth Index ® measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000 Value Index ® measures the performance of those Russell 2000 companies with lower priceto book ratios and lower forecasted growth values. to-book values The MSCI® EAFE (Europe, Australia, Far East) Net Index is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America. The MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2007, the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Co o b a, Czech C ec Republic, epub c, Egypt, gyp , Hungary, u ga y, India, d a, Indonesia, do es a, Israel, s ae , Jo Jordan, da , Korea, o ea, Malaysia, a ays a, Mexico, e co, Morocco, o occo, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
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The MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2009 the MSCI ACWI consisted of 45 country indices comprising 23 developed and 22 emerging market country indices. The MSCI Small Cap IndicesSM target 40% of the eligible Small Cap universe within each industry group, within each country. MSCI defines the Small Cap universe as all listed securities that have a market capitalization in the range of USD200-1,500 USD200 1 500 million million. The MSCI Value and Growth IndicesSM cover the full range of developed, emerging and All Country MSCI Equity indexes. As of the close of May 30, 2003, MSCI implemented an enhanced methodology for the MSCI Global Value and Growth Indices, adopting a two dimensional framework for style segmentation in which value and growth securities are categorized using different attributes - three for value and five for growth including forwardlooking variables. The objective of the index design is to divide constituents of an underlying MSCI Standard Country Index into a value index and a growth index, each targeting 50% of the free float adjusted market capitalization of the underlying country index. Country Value/Growth indices are then aggregated into regional Value/Growth indices. Prior to Mayy 30, 2003, the indices used Price/Book Value ((P/BV)) ratios to divide the standard MSCI country indices into value and growth indices. All securities were classified as either "value" securities (low P/BV securities) or "growth" securities (high P/BV securities), relative to each MSCI country index. The following MSCI Total Return IndicesSM are calculated with gross dividends: This series approximates the maximum possible dividend reinvestment. The amount reinvested is the dividend distributed to individuals resident in the country of the company, but does not include tax credits. The MSCI Europe IndexSM is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of June 2007, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria, Austria Belgium Belgium, Denmark, Denmark Finland, Finland France, France Germany, Germany Greece, Greece Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The MSCI Pacific IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Pacific region. As of June 2007, the MSCI Pacific Index consisted of the following 5 Developed Market countries: Australia, Hong Kong, Japan, New Zealand, and Singapore. Credit Suisse/Tremont Hedge Fund Index is compiled by Credit Suisse Tremont Index, LLC. It is an assetweighted hedge fund index and includes only funds, as opposed to separate accounts. The Index uses the Credit Suisse/Tremont database, which tracks over 4500 funds, and consists only of funds with a minimum of US$50 million under management, a 12-month track record, and audited financial statements. It is calculated and rebalanced on a monthly basis, and shown net of all performance fees and expenses. It is the exclusive property of Credit Suisse Tremont Index, LLC. The NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors - the great majority being pension funds. As such, all properties are held in a fiduciary environment. The NAREIT EQUITY REIT Index is designed to provide the most comprehensive assessment of overall industry performance, and includes all tax-qualified real estate investment trusts (REITs) that are listed on the NYSE, the American Stock Exchange or the NASDAQ National Market List.
J.P. Morgan Asset Management – Index Definitions All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities and represents nineteen separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc. The S&P GSCI Index is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. Individual components qualify for inclusion in the index on the basis of liquidity and are weighted by their respective world production quantities. The Barclays Capital 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 indexes that are calculated and reported on a regular basis. This U.S. U S Treasury Index is a component of the U U.S. S Government index. index West Texas Intermediate (WTI) is the underlying commodity for the New York Mercantile Exchange's oil futures contracts. The Barclays Capital High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, and 144-As are also included. The Barclays Capital 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non convertible. The Barclays Capital General Obligation Bond Index is a component of the Barclays Capital Municipal Bond Index. To be included in the index, bonds must be general obligation bonds rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, th rating the ti mustt bbe iinvestment-grade. t t d Th They mustt hhave an outstanding t t di par value l off att lleastt $7 million illi andd be b issued i d as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives, are excluded from the benchmark. The Barclays Capital Revenue Bond Index is a component of the Barclays Capital Municipal Bond Index. To be included in the index, bonds must be revenue bonds rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment investment-grade. grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives, are excluded from the benchmark. The Barclays High Yield Municipal Index includes bonds rated Ba1 or lower or non-rated bonds using the middle rating of Moody’s, S&P and Fitch.
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The Barclays Capital Taxable Municipal Bond Index is a rules-based, market-value weighted index engineered for the long-term taxable bond market. To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies if all three rate the bond: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate and must be at least one year from their maturity date. Remarketed issues (unless converted to fixed rate), bonds with floating rates, and derivatives, are excluded from the benchmark. Municipal Bond Index: To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives are excluded from the benchmark. The Barclays Capital Emerging Markets Index includes USD-denominated USD denominated debt from emerging markets in the following regions: Americas, Europe, Middle East, Africa, and Asia. As with other fixed income benchmarks provided by Barclays Capital, the index is rules-based, which allows for an unbiased view of the marketplace and easy replicability. The Barclays Capital MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae, Fannie Mae, and Freddie Mac. Aggregate components must have a weighted average maturity of at least one year, must have $250 million par amount outstanding, and must be fixed rate mortgages. The Barclays Capital Corporate Bond Index is the Corporate component of the U.S. Credit index. The Barclays Capital TIPS Index consists of Inflation Inflation-Protection Protection securities issued by the U U.S. S Treasury Treasury. The J.P. Morgan EMBI Global Index includes U.S. dollar denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi-sovereign entities. The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market. The CS/Tremont Equity Market Neutral Index takes both long and short positions in stocks with the aim of minimizing exposure to the systematic risk of the market (i.e., a beta of zero). The CS/Tremont Multi-Strategy Index consists of funds that allocate capital based on perceived opportunities among several hedge fund strategies. Strategies adopted in a multi-strategy fund may include, but are not limited to, convertible bond arbitrage, equity long/short, statistical arbitrage and merger arbitrage. *Market Neutral returns for November 2008 are estimates by J.P. Morgan Funds Market Strategy, and are based on a December 8, 2008 published estimate for November returns by CS/Tremont in which the Market Neutral returns were estimated to be +0.85% (with 69% of all CS/Tremont constituents having reported return data). Presumed to be excluded from the November return are three funds, which were later marked to $0 by CS/Tremont in connection with the Bernard Madoff scandal. J.P. Morgan Funds believes this distortion is not an accurate representation p of returns in the category. g y CS/Tremont later ppublished a finalized November return of 40.56% for the month, reflecting this mark-down. CS/Tremont assumes no responsibility for these estimates.
J.P. Morgan Asset Management – Definitions, Risks & Disclosures Past performance is no guarantee of comparable future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise. The price of equity securities may rise, or fall because of changes in the broad market or changes in a company’s financial condition, condition sometimes rapidly or unpredictably. unpredictably These price movements may result from factors affecting individual companies, sectors or industries, or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to “stock market risk” meaning that stock prices in general may decline over short or extended periods of time. Small-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies since smaller companies generally have a higher risk of failure. Historically, smaller companies' stock has experienced a greater degree of market volatility than the average stock. Mid-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies. Historically, Hi t i ll mid-cap id companies' i ' stock t k hhas experienced i d a greater t ddegree off market k t volatility l tilit th than th the average stock. Real estate investments may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accountingg and taxation ppolicies outside the U.S. can raise or lower returns. Also,, some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in emerging markets can be more volatile. As mentioned above, the normal risks of investing in foreign countries are heightened when investing in emerging markets. In addition, the small size of securities markets and the low trading volume may lead to a lack of liquidity, which leads to increased volatility. Also, emerging markets may not provide adequate legal protection for private or foreign investment or private property. Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss. Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the original investment. The use of derivatives may not be successful, resulting in investment losses, and the cost of such strategies may reduce investment returns. Price to forward earnings is a measure of the price-to-earnings ratio (P/E) using forecasted earnings. Price to book value compares a stock's market value to its book value. Price to cash flow is a measure of the market's expectations of a firm's firm s future financial health. health Price to dividends is the ratio of the price of a share on a stock exchange to the dividends per share paid in the previous year, used as a measure of a company's potential as an investment.
NOT FDIC INSURED ı NO BANK GUARANTEE ı MAY LOSE VALUE
There is no guarantee that the use of long and short positions will succeed in limiting an investor's exposure to domestic stock market movements, capitalization, sector swings or other risk factors. Investing using long and short selling strategies may have higher portfolio turnover rates. Short selling involves certain risks, including additional costs associated with covering short positions and a possibility of unlimited loss on certain short sale positions. Opinions and estimates offered constitute our judgment and are subject to change without notice notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. All cases studies shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. Results shown are not meant to be representative of actual investment results. The views expressed are those of J.P. Morgan Asset Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited which is regulated by the Financial Services Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Switzerland by J.P. Morgan (Suisse) SA, which hi h is i regulated l t d by b the th Swiss S i Financial Fi i l Market M k t Supervisory S i A Authority th it FINMA FINMA; in i Hong H Kong K by b JF Asset A t Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, all of which are regulated by the Securities and Futures Commission; in India by JPMorgan Asset Management India Private Limited which is regulated by the Securities & Exchange Board of India; in Singapore by JPMorgan Asset Management (Singapore) Limited which is regulated by the Monetary Authority of Singapore; in Japan by JPMorgan Securities Japan Limited which is regulated by the Financial Services Agency; in Australia by JPMorgan Asset Management (Australia) Limited which is regulated by the Australian Securities and Investments Commission; in Brazil by Banco J.P. Morgan S.A. which is regulated by The Brazilian Securities and Exchange Commission (CVM) and Brazilian Central Bank (Bacen); and in Canada by JPMorgan Asset Management (Canada) Inc. which is a registered Portfolio Manager and Exempt Market D l in Dealer i Canada C d (including (i l di Ontario) O t i ) andd iin addition, dditi iis registered i t d as an IInvestment t t FFundd M Manager iin B British iti h Columbia. This communication is issued in the United States by J.P. Morgan Investment Management Inc. which is regulated by the Securities and Exchange Commission. Accordingly this document should not be circulated or presented to persons other than to professional, institutional or wholesale investors as defined in the relevant local regulations. The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. JPMorgan Distribution Services, Inc., member FINRA/SIPC. © JPMorgan g Chase & Co.,, October 2012. Unless otherwise stated, all data are as of September 30, 2012 or most recently available. Prepared by: Andrew D. Goldberg, Joseph S. Tanious, Andrés Garcia-Amaya, David M. Lebovitz, Brandon D. Odenath, Anthony M. Wile and David P. Kelly. JP-LITTLEBOOK
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