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Jp littlebook

  1. 1. 4Q | 2011 As of September 30, 2011Guide to the Markets
  2. 2. Table of Contents EQUITIES 4 ECONOMY 15 FIXED INCOME 30 INTERNATIONAL 39 ASSET CLASS 49 U.S. Market Strategy Team Dr. David P. Kelly, CFA david.p.kelly@jpmorgan.com Andrew D. Goldberg andrew.d.goldberg@jpmorgan.com Joseph S. Tanious, CFA joseph.s.tanious@jpmorgan.com Andrés Garcia- Andr és Garcia-Amaya andres.d.garcia@jpmorgan.com Brandon D. Odenath brandon.d.odenath@jpmorgan.com David M. Lebovitz david.m.lebovitz@jpmorgan.com www.jpmorganfunds.com/mi Past performance is no guarantee of comparable future results.2
  3. 3. Page Reference 33. The Fed and the Money Supply Equities 34. Credit Conditions 4. Returns by Style 35. Foreign Ownership of U.S. Treasuries 5. Returns by Sector 36. High Yield Bonds 6. U.S. Equity Indexes 37. Municipal Finance 7. S&P 500 Index at Inflection Points 38. Emerging Market Debt 8. Equity Scenarios: Bull, Bear and In-between 9. Investment Style Valuations International 10. Stock Valuation Measures: S&P 500 Index 39. International Returns: Local Currency vs. U.S. Dollars 11. Earnings Estimates and Valuation Drivers 40. Global Economic Growth 12. Broad Market Lagged Price to Earnings Ratio 41. The Impact of Global Consumers 13. Deploying Corporate Cash 42. Global Monetary Policy 14. Equity Correlations and Volatility 43. European Crisis: Fiscal Challenges 44. European Crisis: Financial System Risks Economy 45. Global Equity Valuations – Developed Markets 15. Economic Expansions and Recessions 46. Global Equity Valuations – Emerging Markets 16. Economic Growth and the Composition of GDP 47. International Economic and Demographic Data 17. Cyclical Sectors 48. Current Account Deficit and U.S. Dollar 18. Consumer Finances 19. Federal Finances Asset Class 20. Political Polarization 49. Asset Class Returns 21. The Aftermath of the Housing Bubble 50. Correlations: 10-Years 22. Employment 51. Mutual Fund Flows 23. Job Growth, Productivity and Labor Force 52. Dividend Income: Domestic and Global 24. Small Business 53. Global Commodities 25. Corporate Profits 54. Gold 26. Consumer Price Index 55. Marginal and Average Tax Rates 27. Returns in Different Inflation Environments – 40 years 56. Historical Returns by Holding Period 28. Oil and the Economy 57. Diversification and the Average Investor 29. Consumer Confidence 58. Annual Returns and Intra-year Declines 59. Alternative Investment Returns Fixed Income 60. Cash Accounts 30. Fixed Income Sector Returns 61. Corporate DB Plans and Endowments 31. Interest Rates and Inflation 62. The Dow Jones Industrial Average Since 1900 32. Fixed Income Yields and Returns3
  4. 4. Returns by Style Charts reflect index levels (price change only). All returns and annotations reflect total return, including dividends. 3Q 2011 2011 YTD S&P 500 Index Value Blend Growth Value Blend Growth 1,400Equities Large Large 1,350 -16.2% -13.9% -13.1% -11.2% -8.7% -7.2% 1,300 3Q11: -13.9% 1,250 Mid Mid -18.5% -18.9% -19.3% -13.0% -12.3% -11.6% 1,200 2011: -8.7% 1,150 Small Small 1,100 -21.5% -21.9% -22.2% -18.5% -17.0% -15.6% Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Sep-11 Since Market Peak (October 2007) Since Market Low (March 2009) S&P 500 Index Value Blend Growth Value Blend Growth 1,600 Since 10/9/07 Peak: Large Large -21.1% -28.9% -21.1% -11.6% 77.3% 76.3% 80.3% 1,400 1,200 Mid Mid 1,000 -18.1% -15.4% -13.3% 109.1% 104.2% 100.3% 800 Since 3/9/09 Small Small Low: +76.3% -22.8% -19.5% -16.4% 90.8% 94.2% 97.2% 600 Dec-06 Dec-07 Nov-08 Nov-09 Oct-10 Sep-11 Source: Russell Investment Group, Standard & Poor’s, FactSet, J.P. Morgan Asset Management. All calculations are cumulative total return, including dividends reinvested for the stated period. Since Market Peak represents period 10/9/07 – 9/30/11, illustrating market returns since the most recent S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09 – 9/30/11, 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 9/30/11.4
  5. 5. Returns by Sector x s de le r. gy e ap sc In ls ar s lo al ls ri a m Di C St 0 es no ci ia 50 gy co th st . . er an iti ns ns ch er du al P le at il n S& En Co Co He Te Te Ut In Fi MEquities S&P Weight 13.6% 19.4% 12.1% 10.3% 11.6% 10.6% 11.7% 3.3% 4.0% 3.4% 100.0% Weight Russell Growth Weight 3.8% 28.8% 11.0% 12.1% 10.3% 14.4% 13.0% 1.2% 0.1% 5.1% 100.0% Russell Value Weight 24.7% 8.9% 13.2% 8.8% 11.8% 8.7% 8.2% 5.1% 8.1% 2.6% 100.0% 3Q 2011 -22.8 -7.7 -10.0 -21.0 -20.4 -13.0 -4.2 -8.0 1.5 -24.5 -13.9 2011 YTD -25.2 -5.8 2.5 -14.7 -11.4 -5.7 3.4 -1.5 10.8 -21.8 -8.7 Return Since Market Peak -64.0 -7.3 -4.9 -26.6 -18.0 -1.4 18.8 -16.4 -3.9 -25.1 -21.1 (October 2007) Since Market Low 96.7 94.3 53.4 101.7 50.2 128.1 66.6 59.6 68.3 78.5 76.3 (March 2009) Beta to S&P500 1.31 1.34 0.63 1.16 0.86 1.14 0.52 0.89 0.61 1.24 1.00 Forward P/E Ratio 8.4x 11.2x 10.5x 10.7x 8.4x 12.3x 13.4x 14.6x 13.5x 9.2x 10.6x 15-yr avg. 13.0x 24.2x 19.2x 17.2x 15.1x 18.7x 19.0x 17.4x 13.5x 16.3x 17.0x P/E Trailing P/E Ratio 9.9x 13.0x 14.5x 12.8x 10.4x 14.8x 14.6x 11.6x 14.3x 11.1x 12.5x 20-yr avg. 16.0x 27.2x 24.4x 20.5x 18.4x 19.9x 21.3x 18.3x 14.2x 19.7x 19.8x Dividend Yield 1.4% 1.1% 2.3% 2.5% 2.1% 1.6% 3.0% 5.5% 4.3% 2.2% 2.3% Div 20-yr avg. 2.2% 0.6% 1.4% 1.8% 2.0% 1.0% 2.0% 3.7% 4.5% 2.1% 1.7% Source: Standard & Poor’s, Russell Investment Group, FactSet, J.P. Morgan Asset Management. All calculations are cumulative total return, not annualized, including dividends for the stated period. Since Market Peak represents period 10/9/07 – 9/30/11. Since Market Low represents period 3/9/09 – 9/30/11. 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 twelve 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 twelve 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 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 9/30/11.5
  6. 6. U.S. Equity Indexes Russell Indexes Growth (587) S&P Indexes Dow Jones Russell Industrials (30) Top 200 S&P 500 Industrials Russell Russell Russell 1000 1000 1000 RussellEquities S&P S&P Mid Mid Cap (800) Cap 400 1500 Russell Russell Value (653) 3000 S&P Small 2000 Cap 600 Mark et Cap W eight Size (Lipper*) Valuation Index W td Av g T otal T op 10 Bottom 100 Large Mid Small Div Yld Fwd P/ E S&P 500 86.9 bn 10,303 bn 20.6% 2.9% 86.9% 12.1% 1.1% 2.4% 10.6x Russell 1000 77.2 11,672 18.1 0.9 77.7 16.2 6.1 2.1 11.0 Large Dow Jones 128.1 3,320 58.1 41.9 100.0 0.0 0.0 2.7 10.6 Russell 1000 Value 66.0 5,793 24.5 0.8 77.9 14.6 7.5 2.6 9.8 Russell 1000 Growth 88.2 5,879 28.5 0.9 77.6 17.8 4.7 1.6 12.5 S&P Mid Cap 400 3.4 953 8.0 9.8 1.3 39.8 58.9 1.6 12.5 Mid Russell Mid Cap 7.0 3,408 4.6 2.9 24.6 54.7 20.8 1.7 12.1 All Sm Russell 2000 1.1 965 2.6 0.5 0.0 0.3 99.7 1.4 14.9 Russell 3000 71.3 12,638 16.7 0.0 71.8 15.0 13.2 2.0 11.2 Market Cap is a bottom-up weighted average based on share information from Compustat and price information from FactSets pricing database as provided by Standard & Poors and Russell Investment Group, respectively. Dividend Yield is calculated based on the trailing 12 months of dividends and is provided by FactSet’s pricing database for S&P and Dow Indexes and Russell for the Russell Indexes. Forward P/E is a bottom-up calculation based on the most recent S&P 500 price, divided by consensus estimates for earnings in the next twelve months (NTM), and is provided by FactSet Market Aggregates. Top 10 represents summed benchmark weight of ten largest stocks in respective index. Bottom 100 represents summed benchmark weight of 100 smallest stocks in respective index. *Lipper mutual fund size parameters are used for illustrative purposes only and are hypothetical distributions based on Lipper mutual fund categories. As of August 2011, Lipper defines large as market cap over $11.6 billion, small as less than $3.8 billion and mid as all values in between. The number of holdings as of 9/30/11 are – Russell 1000: 979; Russell Mid Cap: 782; Russell 2000: 1,959; Russell 3000: 2,938.6 Data are as of 9/30/11.
  7. 7. S&P 500 Index at Inflection Points S&P 500 Index Characteristic Mar-2000 Oct-2007 Sep-2011 Index level 1,527 1,565 1,131 Oct. 9, 2007 Mar. 24, 2000 P/E (fwd) = 15.2x 1,600 P/E (fwd) = 25.6x P/E ratio (fwd) 25.6x 15.2x 10.6x 1,565 1,527 Dividend yield 1.1% 1.8% 2.3%Equities 10-yr. Treasury 6.2% 4.7% 1.9% Sep. 30, 2011 P/E (fwd) = 10.6x 1,400 1,131 +101% 1,200 +106% -57% -49% 1,000 +67% 800 Dec. 31, 1996 Oct. 9, 2002 P/E (fwd) = 16.0x Mar. 9, 2009 P/E (fwd) = 14.1x 741 P/E (fwd) = 10.3x 777 677 600 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Source: Standard & Poor’s, First Call, Compustat, FactSet, J.P. Morgan Asset Management. Dividend yield is calculated as the annualized dividend rate divided by price, as provided by Compustat. Forward Price to Earnings 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 twelve 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 9/30/11.7
  8. 8. Equity Scenarios: Bull, Bear and In-between S&P 500 Index: Return Needed to Reach 2007 Peak Bear Market Cycles vs. Subsequent Bull Runs Analysis as of Sep. 30, 2011. Index has risen 67.1% since low of 677. Bear Yrs to Market Market Length of Length Market Bull Run Reach Old Peak Low Decline of Run 1 Yrs 40.3% 40.3% Return PeakEquities 5/29/46 5/19/47 -28.6% 12 257.6% 122 3.1 yrs 2 Yrs 19.6% 43.1% 7/15/57 10/22/57 -20.7% 3 86.4% 50 0.9 yrs 3 Yrs 13.4% 45.9% 12/12/61 6/26/62 -28.0% 6 79.8% 44 1.2 yrs 4 Yrs 10.5% 48.8% 10/9/07 Peak 1,565 2/9/66 10/7/66 -22.2% 8 48.0% 26 0.6 yrs 3/9/09 Trough 677 5 Yrs 8.7% 51.8% 9/30/11 Level 1,131 11/29/68 5/26/70 -36.1% 18 74.2% 31 1.8 yrs Decline Peak to Trough 888 6 Yrs 7.6% 54.8% 1/5/73 10/3/74 -48.4% 21 125.6% 74 5.8 yrs Recovery So Far 454 Distance Left to Peak 434 11/28/80 8/12/82 -27.1% 20 228.8% 60 0.2 yrs 7 Yrs 6.7% 57.9% 8/25/87 12/4/87 -33.5% 3 582.1% 148 1.6 yrs 8 Yrs 6.1% 61.1% X% Implied avg. annualized total return 3/24/00 10/9/02 -49.1% 31 101.5% 60 4.6 yrs 9 Yrs 5.7% 64.3% X% Implied cumulative total return 10/9/07 3/9/09 -56.8% 17 67.1% 31* 10 Yrs 5.3% 67.6 Average: -35.0% 14 mos 176.0% 68 mos 2.2 yrs Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Left) Data assume 2.0% annualized dividend yield. Implied values reflect the average geometric total returns required for the S&P 500 to reach its 10/9/07 peak of 1,565 over each stated time period. Chart is for illustrative purposes only. Past performance does not guarantee future results. (Right) 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. *Current8 bull run from 3/9/09 through 9/30/11. Data are as of 9/30/11.
  9. 9. Investment Style Valuations Russell 1000 Growth P/E divided by Russell 1000 Value P/E Current P/E vs. 20-year avg. P/E 3.5x Value Blend Growth 10.4 11.8 13.4 Large 3.0x Most recent:Equities R1000 Growth 13.4 14.1 16.8 21.1 2.5x R1000 Value 10.4 11.7 13.2 15.0 Growth / Value 1.29x* Mid 2.0x 14.0 16.3 22.0 12.3 13.8 15.4 Small 1.5x 20-yr. average: 1.47x 14.2 17.1 21.4 1.0x 92 94 96 98 00 02 04 06 08 10 Current P/E as % of 20-year avg. P/E Russell 2000 P/E divided by Russell 1000 P/E E.g.: Large Cap Blend stocks are 30.0% 1.3x cheaper than their historical average. Value Blend Growth 1.2x Large 20-yr. average: 1.04x 73.9% 70.0% 63.5% 1.1x 1.0x Most recent: Mid 83.4% 80.7% 68.1% 0.9x R2000 13.8 R1000 11.8 Small 0.8x Small / Large 1.17x* 86.8% 80.6% 71.9% 0.7x 92 94 96 98 00 02 04 06 08 10 Source: Russell Investment Group, IBES, FactSet, J.P. Morgan Asset Management. P/E ratios are calculated and provided by Russell based on IBES consensus estimates of earnings over the next twelve months. *Represents the Russell 1000 Growth Index P/E ratio divided by the Russell 1000 Value Index P/E ratio (top) and Russell 2000 Index P/E ratio divided by the Russell 1000 Index P/E ratio (bottom). Data reflect P/Es as provided by Russell based on IBES estimates of next twelve months’ earnings. Data are as of 9/30/11.9
  10. 10. Stock Valuation Measures: S&P 500 Index S&P 500 Index: Valuation Measures Historical Averages Valuation 1-year 3-year 5-year 10-year 15-year Latest Measure Description ago avg. avg. avg. avg. P/E Price to Earnings 10.6x 12.4x 12.9x 13.4x 15.0x 17.0xEquities P/B Price to Book 1.9 2.0 2.1 2.3 2.6 3.1 P/CF Price to Cash Flow 7.3 8.2 8.1 8.9 10.2 11.1 P/S Price to Sales 1.0 1.1 1.1 1.2 1.3 1.5 PEG Price/Earnings to Growth 0.8 0.6 1.1 1.2 1.2 1.2 Div. Yield Dividend Yield 2.5% 2.1% 2.3% 2.2% 2.0% 1.9% Q-Ratio: Stock Price Relative to Company Assets S&P 500 Earnings Yield vs. Baa Bond Yield Price to net asset value, all U.S. non-financial corporations Less Attractive 10% 2.0x S&P 500 Earnings Yield: 9% (Inverse of fwd. P/E) 9.5% 8% 1.5x 3Q11*: 0.8x 7% 1.0x More Attractive 40-yr. avg. = 0.8x 6% 5% 0.5x Moody’s Baa Yield: 5.2% 4% 0.0x 3% 75 80 85 90 95 00 05 10 94 96 98 00 02 04 06 08 10 Source: (Top) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next twelve months. Price to Book is price divided by book value per share. Data post-1992 include intangibles and are provided by Standard & Poor’s. Price to Cash Flow is price divided by consensus analyst estimates of cash flow per share for the next twelve months. Price to Sales is calculated as price divided by consensus analyst estimates of sales per share for the next twelve 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 twelve months divided by price. All consensus analyst estimates are provided by FactSet. (Bottom left) Q-Ratio based on data from the Federal Reserve, table B.102. *3Q11 is an estimate provided by J.P. Morgan Asset Management as of 9/30/11. (Bottom right) Standard & Poor’s, Moody’s, FactSet, J.P. Morgan Asset Management. Data are as of 9/30/11.10
  11. 11. Earnings Estimates and Valuation Drivers S&P 500 Index: Forward P/E Ratio S&P 500 Operating Earnings Estimates 28x Consensus estimates of the next twelve months’ rolling earnings $120 3Q11: $109.91 24xEquities $100 20x $80 Average: 16.3x $60 16x $40 12x $20 Sep. 2011: 10.6x 8x $0 94 96 98 00 02 04 06 08 10 02 03 04 05 06 07 08 09 10 11 Multiple Expansion and Contraction Forward P/E based on consensus EPS estimates Correlation Coefficient: 0.74 120 Consumer Sentiment Forward P/E 24x 100 20x 80 16x 60 12x 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Source: (Top left) Standard & Poor’s, Compustat, FactSet, J.P. Morgan Asset Management. (Top right) Standard & Poor’s, Compustat, FactSet, J.P. Morgan Asset Management. Earnings estimates are for calendar years and taken at quarter end dates throughout the year. Actual reported are annual operating earnings reported by Standard and Poor’s. (Bottom) Standard & Poor’s, FactSet, University of Michigan, J.P. Morgan Asset Management. Forward Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next twelve months.11 Data are as of 9/30/11.
  12. 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 35xEquities 30x P/E Ratios Avg. During Recessions 12.7x Avg. During Expansions 13.9x 25x September 30, 2011 10.6x 20x Avg. During 15x Expansions: 13.9x 10x Avg. During Sep. 30, 2011: 10.6x Recessions: 12.7x 5x 0x 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 Source: BEA, Federal Reserve Board, Wilshire Associates, J.P. Morgan Asset Management. Data are as of 9/30/11.12
  13. 13. Deploying Corporate Cash Corporate Cash as a % of Current Assets Corporate Growth S&P 500 companies – cash and cash equivalents, quarterly Quarterly deal volume and nonfarm nonfinancial capex, billions USD $1,300 1,600 28% Capital expenditures M&A activity $1,200 1,400 26%Equities 1,200 24% $1,100 1,000 22% $1,000 800 20% $900 600 18% $800 400 16% $700 200 14% $600 0 00 01 02 03 04 05 06 07 08 09 10 00 01 02 03 04 05 06 07 08 09 10 11 Dividend Payout Ratio Cash Returned to Shareholders S&P 500 companies, LTM Rolling 4-quarter averages, S&P 500, billions USD 60% $30 $160 Dividends per share $140 $27 50% $120 $24 $100 40% $21 $80 $60 30% $18 Share buybacks $40 20% $15 $20 02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10 11 Source: Standard & Poor’s, FRB, Bloomberg, FactSet, J.P. Morgan Securities, J.P. Morgan Asset Management. (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 9/30/11.13
  14. 14. Equity Correlations and Volatility Large Cap Stocks Correlations Among Stocks Sep. 2011: 65.9% Sovereign Debt Crisis 70% Great Depression / Lehman 60% World War II Bankruptcy 1987 CrashEquities 50% Cuban Missile Crisis OPEC Oil 40% Crisis Tech Bust & 9/11 30% 20% 10% Average: 26.4% 0% 26 32 38 44 50 56 62 68 74 80 86 92 98 04 10 Daily Volatility of DJIA Volatility Level ’08 Peak Latest 3.5% DJIA 3.30% 1.37% Chart shown 3.0% in 3-month moving average 2.5% 2.0% 1.5% 1.0% Average: 0.72% 0.5% 0.0% 26 32 38 44 50 56 62 68 74 81 87 93 99 05 11 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. 29, 2011. (Bottom) Dow Jones, J.P. Morgan Asset Management. Data are represented as three-month moving averages of the daily absolute percentage change in the Dow Jones Industrial Average.14 Charts shown for illustrative purposes only. Data are as of 9/30/11.
  15. 15. Economic Expansions and Recessions Length of Economic Expansions and Recessions The Great Depression and Post-War Recessions 125 Length and severity of recession 5 yrs Average Length (months): Expansions: 44 months Great Depression: 100 26.7% decline in real GDP Recessions: 15 months 4 yrsEconomy Length of Recession in Years -26.7% 75 3 yrs Most Recent Recession: 5.1% decline in real GDP 50 2 yrs -5.1% -3.2% -2.9% 25 * 1 yrs -1.6% -0.6% -1.7% -0.3% -2.6% -1.4% -3.7% -2.2% 0 0 yrs 1900 1912 1921 1933 1949 1961 1980 2001 1910 1930 1950 1970 1990 2010 Source: NBER, J.P. Morgan Asset Management. Source: NBER, BEA, J.P. Morgan Asset Management. *Chart assumes current expansion started in July 2009 and continued through September Bubble size reflects the severity of the recession, which is calculated as the decline in real 2011. GDP from the peak quarter to the trough quarter except in the case of the Great Depression, where it is calculated from the peak year (1929) to the trough year (1933), Data for length of economic expansions and recessions obtained from the National due to a lack of available quarterly data. Bureau of Economic Research (NBER). These data can be found at www.nber.org/cycles/ and reflects information through September 2011. For illustrative purposes only. Data reflect most recently available as of 9/30/11.15
  16. 16. Economic Growth and the Composition of GDP Real GDP Components of GDP % chg at annual rate 2Q11 nominal GDP, billions, USD 10% 20-yr avg. 2Q11 $16,000 2.2% Housing Real GDP: 2.5% 1.3% 8% $14,000 10.4% Investment ex-housing 6% 20.2% $12,000 $685 bn of Gov’t SpendingEconomy 4% output lost $10,000 2% $8,000 0% $6,000 71.1% -2% $631 bn of output Consumption -4% recovered $4,000 -6% $2,000 -8% $0 - 4.0% Net Exports -10% 02 04 06 08 10 -$2,000 Source: BEA, FactSet, J.P. Morgan Asset Management. GDP values shown in legend are % change vs. prior quarter annualized and reflect revised 2Q11 GDP. Data reflect most recently available as of 9/30/11.16
  17. 17. Cyclical Sectors Light Vehicle Sales Manufacturing and Trade Inventories Millions, seasonally adjusted annual rate Days of sales, seasonally adjusted 24 48 22 46 Jul. 2011: 38.6 20 44 18 16 42Economy 14 Average: 14.6 40 12 38 10 Aug. 2011: 12.1 8 36 85 90 95 00 05 10 92 94 96 98 00 02 04 06 08 10 Housing Starts Real Capital Goods Orders Thousands, seasonally adjusted annual rate Non-defense capital goods orders ex. aircraft, $ bn, seasonally adjusted 2,400 75 70 2,000 Aug. 2011: 60.4 65 1,600 60 Average: 57.5 1,200 Average: 1,457 55 800 50 400 45 Aug. 2011: 571 0 40 75 80 85 90 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. Data reflect most recently available as of 9/30/11.17
  18. 18. Consumer Finances Consumer Balance Sheet Personal Savings Rate Trillions of dollars outstanding, not seasonally adjusted Annual, % of disposable income $80 12% Total Assets: $72.6 tn 10% YTD 2011: 4.9% $70 8% 6% Homes: 25% $60Economy 4% 2% Other tangible: 7% $50 0% 60 65 70 75 80 85 90 95 00 05 10 Deposits: 11% $40 Household Debt Service Ratio Debt payments as % of disposable personal income, seasonally adjusted Pension funds: 19% 15% 3Q07: $30 14.0% Revolving (e.g.: credit cards): 6% 14% Non-revolving: 12% Other Liabilities: 11% 13% $20 Other financial Total Liabilities: $13.9 tn assets: 38% 12% 1Q80: 11.2% $10 11% Mortgages: 72% 3Q11*: 11.0% 10% $0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 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 2011. *3Q11 Household Debt Service Ratio is J.P. Morgan Asset Management estimate. All other data are as of 2Q11.18 Data reflect most recently available as of 9/30/11.
  19. 19. Federal Finances The 2011 Federal Budget Federal Budget Surplus/Deficit Trillions, USD % of GDP, 1960 – 2021* $4.0 4% 2011 estimate: -8.5% 2% Total Spending: $3.6tn 0% $3.5 Other -2% $467bn (13%) -4% $3.0 Net Int.: $221bn (6%) Borrowing -6%Economy $1,284 bn (36%) Non-defense -8% $2.5 Discretionary: -10% $650bn (18%) 2012 estimate: -6.2% -12% 1960 1970 1980 1990 2000 2010 2020 $2.0 Defense: Federal Debt (Accumulated Deficits) $703bn (20%) % of GDP, 1960 – 2021* 100% $1.5 2021 estimate: 82.0% Social Security: 75% $726bn (20%) Revenues 2011 estimate: 67.6% $1.0 $2,314 bn (64%) 50% $0.5 Medicare & Medicaid: 25% $830bn (23%) $0.0 0% Total Government Spending Sources of Financing 1960 1970 1980 1990 2000 2010 2020 Source: U.S. Treasury, BEA, CBO, OMB, J.P. Morgan Asset Management. 2011 numbers are based on CBO August Baseline Scenario. *Estimates for 2011 – 2021 are based on August alternative scenario budget projections from the CBO’s “Budget and Economic Outlook: An Update” which was released on August 24, 2011. The alternative scenario assumes an extension of all Bush tax cuts, annual adjustments to AMT and Medicare payment schedules and spending on operations in Afghanistan and Iraq rising from 2011 levels in line with inflation throughout the forecast period. Note: Years shown are fiscal years (Oct. 1 through Sep. 30). Top right chart displays federal surplus/deficit (revenues – outlays).19 Data reflect most recently available as of 9/30/11.
  20. 20. Political Polarization Presidential Approval Rating Over Term Cycles 100% Eisenhower Johnson Ford Reagan Clinton Obama 75% Sep. 2011: 41% 50%Economy 25% Truman Kennedy Nixon Carter Bush Bush 0% 45 49 53 57 61 65 69 73 77 81 85 89 93 97 01 05 09 Congressional Approval Ratings Political Polarization 100% % of Representatives voting with the majority of their party* 100% 95% Senate 75% House 90% 50% 85% 80% 25% 75% Aug. 2011: 13% 0% 70% 1974 1993 1997 2001 2003 2006 2008 2010 1901 1921 1941 1961 1981 2001 Source: (Top) Gallup Inc., J.P. Morgan Asset Management. (Bottom left) Gallup Inc., J.P. Morgan Asset Management. (Bottom right) Keith T. Poole, J.P. Morgan Asset Management. *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.20 Data are most recent as of 9/30/11.
  21. 21. The Aftermath of the Housing Bubble Median Existing Home Prices Monthly Rent vs. Monthly Mortgage Payment $ thousands, seasonally adjusted Vacant properties 240 $1,100 Nov. 2005: $227K Peak to 220 current: Monthly $950 -28.4% Mortgage 3Q11*: 200 $800 Payment $694 180 160 $650 Aug. 2011: $163KEconomy 140 $500 3Q11*: $540 120 Monthly Rent $350 100 $200 80 95 00 05 10 88 90 92 94 96 98 00 02 04 06 08 10 Home Sales and Inventories Affordability: Mortgage Payment on Average New Home Millions, annual rate, seasonally adjusted % of average household personal income 6 Home Sales 9 40% Inventories Aug. 2011: 3.6 8 35% 5 7 30% 4 6 25% 3 Aug. 2011: 5 20% 10.8% 2 4 15% Aug. 2011: 5.3 1 3 10% 92 94 96 98 00 02 04 06 08 10 75 80 85 90 95 00 05 10 Sources: (Top left) National Association of Realtors, 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. *3Q11 estimates provided by J.P. Morgan Asset Management. (Bottom left) Census Bureau, National Association of Realtors, J.P. Morgan Asset Management. Home sales include both new and existing home sales. Existing home sales include single-family, townhouses, condominiums, and co-ops. Bottom right) Census Bureau, FRB, BEA, J.P. Morgan Asset Management. Calculation assumes a 20% down payment, a 30-year fixed-rate mortgage, excludes property tax and homeowners’ insurance and is expressed as a % of pre-tax income. Data reflect most recently available as of 9/30/11.21
  22. 22. Employment Civilian Unemployment Rate Employment – Total Private Payroll Seasonally adjusted Total job gain/loss (thousands) 12% 600 11% 400 10% 200Economy 8.8mm jobs lost 9% Aug. 2011: 9.1% 0 8% 2.4mm -200 jobs gained 7% -400 6% -600 5% 50-yr. avg.: 6.0% 4% -800 3% -1,000 70 80 90 00 10 02 03 04 05 06 07 08 09 10 11 Source: BLS, FactSet, J.P. Morgan Asset Management. Source: BLS, FactSet, J.P. Morgan Asset Management. Data reflect most recently available as of 9/30/11.22
  23. 23. Job Growth, Productivity and Labor Force 20 Years – Net Job Creation Labor Productivity: Output per Hour Net change in millions of payroll jobs, sa Non-farm business productivity, % change year-over-year 8% Health Care 7.0 6% 4% Fin. & Bus. Services 6.5 2% 20-yr. average: 2.3%Economy Leisure & Hospitality 4.0 0% 2Q11: Education 0.7% 3.9 -2% 92 94 96 98 00 02 04 06 08 10 Trade & Retailing 2.9 Labor Force Participation Rate % of population aged 16+ working or looking for work 68% Other Services 1.2 67% Government 1.0 66% 20-yr. average: 66.3% Mining & Construction 0.9 65% Manufacturing -5.3 64% Aug. 2011: 64.0% -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 63% 92 94 96 98 00 02 04 06 08 10 Source: BLS, FactSet, J.P. Morgan Asset Management. Source: BLS, FactSet, J.P. Morgan Asset Management. Data reflect most recently available as of 9/30/11.23
  24. 24. Small Business NFIB Small Business Optimism Index Small and Large Firm Profits - Billions $ 110 $1.2 $2.0 Small firms 105 $1.8 $1.1 $1.6 100 $1.4 Aug. 2011: 88.1 95 $1.0 $1.2Economy 90 $1.0 $0.9 85 $0.8 Large firms Mar. 2009: 81.0 80 $0.8 $0.6 02 03 04 05 06 07 08 09 10 11 02 03 04 05 06 07 08 09 10 11 Small Business: Availability of Credit Net Change in Employment – Thousands Net percent (“easier” – “harder”) compared to 3mo ago, 3mo moving average Small firm defined as having less than 1000 employees 1000 -4% 500 -6% -8% 0 -10% -500 Small firms -12% -1000 Large firms Aug. 2011: -14% -10.7% -1500 -16% -2000 07 08 09 10 11 93 95 97 99 01 03 05 07 09 Source: (Top left) NFIB, FactSet, J.P. Morgan Asset Management. (Top right) BEA, FactSet, J.P. Morgan Asset Management. (Bottom left) NFIB, FactSet, J.P. Morgan Asset Management. (Bottom right) Census Bureau, FactSet, J.P. Morgan Asset Management. (Top right) Large firm profits defined as adjusted pre-tax corporate profits. Small firm profits defined as adjusted proprietors’ income. Employment data are from the BLS Business Employment Dynamics Survey, which is released quarterly, and as of March 2011.24 Data reflect most recently available as of 9/30/11.

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