2Q | 2012                 As of March 31, 2012Guide to the Markets
Table of Contents     EQUITIES                                                                 4     ECONOMY              ...
Page Reference     Equities                                                       Fixed Income    4.    Returns by Style  ...
Returns by Style           Charts reflect index levels (price change only). All returns and annotations reflect total retu...
Returns by Sector                                                                                                         ...
U.S. Equity Indexes            Russell Indexes                                      Growth (585)                          ...
S&P 500 Index at Inflection Points            S&P 500 Index                                        Characteristic         ...
Equity Scenarios: Bull, Bear and In-between             S&P 500 Index: Return Needed to Reach 2007 Peak                   ...
Investment Style Valuations            Russell 1000 Growth P/E divided by Russell 1000 Value P/E                          ...
Stock Valuation Measures: S&P 500 Index            S&P 500 Index: Valuation Measures                                      ...
Earnings Estimates and Multiples            S&P 500 Index: Forward P/E Ratio                                              ...
Earnings Drivers and Shareholder Distributions            Year-Over-Year EPS Growth                                       ...
Broad Market Lagged Price to Earnings Ratio            Lagged P/E Ratio – All U.S. Corporations            Ratio of Market...
P/E Ratios and Equity Returns             P/E and Total Return Over 1-yr. Periods                                         ...
Equity Correlations and Volatility            Large Cap Stocks                                                            ...
Economic Growth and the Composition of GDP           Real GDP                                                             ...
Cyclical Sectors           Light Vehicle Sales                                                                            ...
Consumer Finances           Consumer Balance Sheet                                                                        ...
Federal Finances           The 2012 Federal Budget                                                                       F...
Federal Revenues, Outlays and Tax Rates           Federal Revenues                                                        ...
Political Perception and Economic Reality           Presidential and Congressional Approval Ratings                       ...
The Aftermath of the Housing Bubble           Median Existing Home Prices                                                 ...
Employment           Civilian Unemployment Rate                                                          Employment – Tota...
Employment by Sector and Education            20 Years – Net Job Creation                                                 ...
Corporate Profits          S&P 500 Earnings Per Share                                       Most recent:     Adjusted Afte...
JPMorganGuide2Q2012
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JPMorganGuide2Q2012

  1. 1. 2Q | 2012 As of March 31, 2012Guide to the Markets
  2. 2. Table of Contents EQUITIES 4 ECONOMY 16 FIXED INCOME 32 INTERNATIONAL 40 ASSET CLASS 51 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 Equities Fixed Income 4. Returns by Style 32. Fixed Income Sector Returns 5. Returns by Sector 33. Interest Rates and Inflation 6. U.S. Equity Indexes 34. Fixed Income Yields and Returns 7. S&P 500 Index at Inflection Points 35. The Fed and the Money Supply 8. Equity Scenarios: Bull, Bear and In-between 36. Credit Conditions 9. Investment Style Valuations 37. High Yield Bonds 10. Stock Valuation Measures: S&P 500 Index 38. Municipal Finance 11. Earnings Estimates and Multiples 39. Emerging Market Debt 12. Earnings Drivers and Shareholder Distributions 13. Broad Market Lagged Price to Earnings Ratio International 14. P/E Ratios and Equity Returns 40. Global Equity Markets: Returns and Composition 15. Equity Correlations and Volatility 41. Global Economic Growth 42. Global Monetary Policy Economy 43. The Importance of Exports 16. Economic Growth and the Composition of GDP 44. The Impact of Global Consumers 17. Cyclical Sectors 45. European Crisis: Fiscal Challenges 18. Consumer Finances 46. European Crisis: Financial System Risks 19. Federal Finances 47. Chinese Growth and Economic Policy 20. Federal Revenues, Outlays and Tax Rates 48. Global Equity Valuations – Developed and Emerging Markets 21. Political Perception and Economic Reality 49. International Economic and Demographic Data 22. The Aftermath of the Housing Bubble 50. Current Account Deficit and U.S. Dollar 23. Employment 24. Employment by Sector and Education Asset Class 25. Corporate Profits 51. Asset Class Returns 26. Consumer Price Index 52. Correlations: 10-Years 27. Returns in Different Inflation Environments – 40 years 53. Mutual Fund Flows 28. Oil and the Economy 54. Dividend Income: Domestic and Global 29. Global Oil Supply 55. Global Commodities 30. Consumer Confidence and the Stock Market 56. Gold 31. Confidence and the Capital Markets 57. Historical Returns by Holding Period 58. Diversification and the Average Investor 59. Annual Returns and Intra-year Declines 60. Alternative Investment Returns 61. Cash Accounts 62. Corporate DB Plans and Endowments3
  4. 4. Returns by Style Charts reflect index levels (price change only). All returns and annotations reflect total return, including dividends. 1Q 2012 2011 S&P 500 Index Value Blend Growth Value Blend Growth 1,450Equities Large Large 1,400 11.1% 12.6% 14.7% 0.4% 2.1% 2.6% 1,350 1,300 1Q12: +12.6% Mid Mid 1,250 2011: +2.1% 11.4% 12.9% 14.5% -1.4% -1.5% -1.7% 1,200 1,150 Small Small 1,100 11.6% 12.4% 13.3% -5.5% -4.2% -2.9% Dec-10 Apr-11 Jul-11 Sep-11 Dec-11 Mar-12 Since Market Peak (October 2007) Since Market Low (March 2009) S&P 500 Index Since 10/9/07 Peak: Value Blend Growth Value Blend Growth 1,600 -0.7% Large Large 1,400 -10.6% -0.7% 12.1% 122.9% 122.0% 128.7% 1,200 Mid Mid 1,000 3.4% 7.3% 10.4% 164.0% 159.0% 155.2% Since 3/9/09 Low: +122.0% 800 Small Small -0.1% 4.6% 8.9% 146.9% 152.1% 156.9% 600 Dec-06 Jan-08 Feb-09 Feb-10 Mar-11 Mar-12 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 – 12/31/11, illustrating market returns since the most recent S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09 – 12/31/11, 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 3/31/12.4
  5. 5. Returns by Sector x es de r. y e l ap sc In ls og ar ls ls ria ia Di m C St 0 ol es ia 50 gy nc co th st n s. s. er iti ch er du al na P le n n at il S& En Co Co He Te Te Ut In Fi MEquities S&P Weight 14.9% 20.5% 11.4% 10.6% 11.2% 10.9% 10.8% 2.8% 3.4% 3.5% 100.0% Weight Russell Growth Weight 4.3% 30.4% 10.5% 12.5% 10.0% 14.4% 11.9% 0.8% 0.1% 5.2% 100.0% Russell Value Weight 26.8% 9.1% 12.3% 9.2% 11.6% 9.3% 7.7% 4.4% 6.9% 2.6% 100.0% 1Q 2012 22.0 21.5 9.1 11.3 3.9 16.0 5.5 2.1 -1.6 11.2 12.6 2011 -17.1 2.4 12.7 -0.6 4.7 6.1 14.0 6.3 20.0 -9.8 2.1 Return Since Market Peak -51.3 22.5 14.1 -4.8 0.7 28.7 38.3 -8.0 2.4 -3.9 -0.7 (October 2007) Since Market Low 166.0 156.6 84.0 161.6 84.3 197.8 93.9 75.8 79.2 129.0 122.0 (March 2009) Beta to S&P 500 1.35 1.27 0.65 1.15 0.91 1.11 0.53 0.92 0.58 1.25 1.00 β Forward P/E Ratio 11.4x 13.4x 12.4x 13.2x 10.6x 15.4x 15.2x 16.8x 14.3x 12.8x 13.0x 15-yr avg. 12.9x 24.0x 18.9x 17.1x 14.9x 18.6x 18.8x 17.4x 13.5x 16.1x 16.9x P/E Trailing P/E Ratio 14.5x 15.9x 17.0x 15.7x 11.1x 15.3x 17.8x 44.7x 14.7x 15.2x 15.4x 20-yr avg. 16.0x 27.0x 24.3x 20.4x 18.3x 19.8x 21.1x 18.7x 14.3x 19.8x 19.7x Dividend Yield 1.8% 1.0% 2.3% 2.4% 1.9% 1.6% 3.0% 5.5% 4.3% 2.1% 2.1% Div 20-yr avg. 2.2% 0.6% 1.4% 1.8% 1.9% 1.0% 2.1% 3.8% 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 – 3/31/12. Since Market Low represents period 3/9/09 – 3/31/12. 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 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 3/31/12.5
  6. 6. U.S. Equity Indexes Russell Indexes Growth (585) 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 (654) 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 500 111.6 bn 12,730 bn 20.5% 3.0% 91.3% 8.2% 0.4% 2.1% 13.0x Russell 1000 99.6 14,452 18.3 0.8 82.3 14.2 3.5 2.0 13.5 Large Dow Jones 147.3 3,984 57.0 43.0 100.0 0.0 0.0 2.4 12.6 Russell 1000 Value 79.0 7,112 24.3 0.7 81.6 14.2 4.3 2.5 12.2 Russell 1000 Growth 119.5 7,340 29.2 0.9 83.0 14.2 2.8 1.5 15.1 S&P Mid Cap 400 4.0 1,189 6.6 10.7 1.5 56.5 42.0 1.4 15.6 Mid Russell Mid Cap 8.8 4,201 4.5 2.7 39.4 48.6 12.0 1.7 15.1 All Sm Russell 2000 1.4 1,220 2.5 0.4 0.0 1.2 98.8 1.4 19.0 Russell 3000 91.9 15,672 16.8 0.0 75.9 13.2 10.9 2.0 13.8 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 November 2011, Lipper defines large as market cap over $11.7 billion, small as less than $4.1 billion and mid as all values in between. The number of holdings as of 3/31/12 are – Russell 1000: 977; Russell Mid Cap: 779; Russell 2000: 1,941; Russell 3000: 2,918.6 Data are as of 3/31/12.
  7. 7. S&P 500 Index at Inflection Points S&P 500 Index Characteristic Mar-2000 Oct-2007 Mar-2012 Oct. 9, 2007 Mar. 24, 2000 Index level 1,527 1,565 1,408 P/E (fwd) = 15.2x 1,600 P/E (fwd) = 25.6x P/E ratio (fwd) 25.6x 15.2x 13.0x 1,565 1,527 Dividend yield 1.1% 1.8% 2.1%Equities 10-yr. Treasury 6.2% 4.7% 2.2% Mar. 31, 2012 P/E (fwd) = 13.0x 1,408 1,400 +101% 1,200 +106% -57% -49% 1,000 +108% 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 12 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 3/31/12.7
  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 Mar. 31, 2012. Index has risen 108.0% since low of 677. Bear Yrs to Market Market Length of Length Market Bull Run Reach Old Peak Low Decline of Run 1 Yrs 13.1% 13.1% Return PeakEquities 5/29/46 5/19/47 -28.6% 12 257.6% 122 3.1 yrs 2 Yrs 7.4% 15.4% 7/15/57 10/22/57 -20.7% 3 86.4% 50 0.9 yrs 3 Yrs 5.6% 17.7% 12/12/61 6/26/62 -28.0% 6 79.8% 44 1.2 yrs 4 Yrs 4.7% 20.0% 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 4.1% 22.4% 3/31/12 Level 1,408 11/29/68 5/26/70 -36.1% 18 74.2% 31 1.8 yrs Decline Peak to Trough 888 6 Yrs 3.8% 24.9% 1/5/73 10/3/74 -48.4% 21 125.6% 74 5.8 yrs Recovery So Far 731 Distance Left to Peak 157 11/28/80 8/12/82 -27.1% 20 228.8% 60 0.2 yrs 7 Yrs 3.5% 27.4% 8/25/87 12/4/87 -33.5% 3 582.1% 148 1.6 yrs 8 Yrs 3.3% 29.9% X% Implied avg. annualized total return 3/24/00 10/9/02 -49.1% 31 101.5% 60 4.6 yrs 9 Yrs 3.2% 32.5% X% Implied cumulative total return 10/9/07 3/9/09 -56.8% 17 108.0% 37* 10 Yrs 3.1% 35.2% 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 3/31/12. Data are as of 3/31/12.
  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 11.9 13.2 14.7 Large 3.0x Most recent:Equities R1000 Growth 14.7 14.0 16.7 21.0 2.5x R1000 Value 11.9 Growth / Value 1.2x* 13.4 15.0 16.9 Mid 2.0x 14.0 16.3 21.9 13.7 15.4 17.2 Small 1.5x 20-yr. average: 1.5x 14.2 17.1 21.3 1.0x 94 96 98 00 02 04 06 08 10 12 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 21.1% 1.3x cheaper than their historical average. Value Blend Growth 1.2x 20-yr. average: 1.0x Large 1.1x 85.1% 78.9% 69.9% 1.0x Most recent: Mid 95.3% 91.7% 77.3% 0.9x R2000 15.4 R1000 13.2 0.8x Small Small / Large 1.2x* 96.4% 89.9% 80.8% 0.7x 94 96 98 00 02 04 06 08 10 12 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 3/31/12.9
  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 13.0x 13.2x 13.0x 13.1x 14.5x 16.9xEquities P/B Price to Book 2.3 2.3 2.1 2.3 2.5 3.1 P/CF Price to Cash Flow 8.9 8.8 8.4 8.7 9.9 11.1 P/S Price to Sales 1.3 1.3 1.1 1.2 1.3 1.5 PEG Price/Earnings to Growth 1.6 0.9 1.0 1.2 1.2 1.2 Div. Yield Dividend Yield 2.1% 2.0% 2.2% 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% 200% S&P 500 Earnings Yield: 9% (Inverse of fwd. P/E) 7.7% 8% 150% 7% 1Q12*: 96.0% 100% More Attractive 6% 40-yr. avg. = 75.3% 5% 50% Moody’s Baa Yield: 5.2% 4% 0% 3% 1970 1975 1980 1985 1990 1995 2000 2005 2010 94 96 98 00 02 04 06 08 10 12 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. *1Q12 is an estimate provided by J.P. Morgan Asset Management as of 3/31/12. (Bottom right) Standard & Poor’s, Moody’s, FactSet, J.P. Morgan Asset Management. Data are as of 3/31/12.10
  11. 11. Earnings Estimates and Multiples 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 1Q12: $108.51 24xEquities $100 20x $80 Average: 16.2x $60 16x $40 12x $20 Mar. 2012: 13.0x 8x $0 94 96 98 00 02 04 06 08 10 12 02 03 04 05 06 07 08 09 10 11 Forward P/E Ratios by Sector Averages and ranges based on monthly data from April 2002 to March 2012 Example 35x 30x 25x 10-yr. Average 20x range Current 15x 10x 5x Con. Disc Con. Energy Financials Health Industrials Tech Materials Telecom Utilties Staples Care 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. (Bottom) Standard & Poor’s, FactSet, 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 3/31/12.
  12. 12. Earnings Drivers and Shareholder Distributions Year-Over-Year EPS Growth Nominal GDP and S&P 500 Sales Growth S&P 500, quarterly, broken into revenue growth and margin expansion Year-over-year growth, 2000 – 2011 60% 20% 84.9% 15% Sales per shareEquities 10% 50% 5% Margin Share of EPS Growth Nominal GDP 0% Revenue Share of EPS Growth -5% -10% 40% -15% Correlation Coefficient: 0.82 -20% 00 02 04 06 08 10 30% 44.0% Cash Returned to Shareholders Rolling 4-quarter averages, S&P 500, billions USD $30 $160 Dividends per share 29.8% $140 20% $27 20.0% $120 7.3% $24 6.5% $100 8.1% 10% $21 $80 0.2% $60 11.6% 10.8% 7.8% 8.3% 7.9% $18 6.8% 7.3% 6.8% $40 Share buybacks 0% $15 $20 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: Standard & Poor’s, Compustat, BEA, FactSet, J.P. Morgan Asset Management. Data are as of 3/31/12.12
  13. 13. 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 12.6x 25x Avg. During Expansions 13.9x March 31, 2012 12.5x 20x 15x Average: 13.7x 10x Mar. 31, 2012: 12.5x 5x 0x 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 Source: BEA, Federal Reserve Board, Wilshire Associates, J.P. Morgan Asset Management. Data are as of 3/31/12.13
  14. 14. P/E Ratios and Equity Returns P/E and Total Return Over 1-yr. Periods P/E and Total Return Over 10-yr. Annualized Periods Quarterly, 1Q 1952 to 1Q 2011 Quarterly, 1Q 1952 to 1Q 2002 60% 60% Current P/E: 12.5 Current P/E: 12.5Equities 40% 40% 20% 20% 0% 0% 5x 10x 15x 20x 25x 30x 5x 10x 15x 20x 25x 30x -20% -20% -40% -40% Source: BEA, FRB, J.P. Morgan Asset Management. Prices are based on the market value of all US 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 (LHS) and 0.50 for 10-yr. returns (RHS). Data are as of 3/31/12.14
  15. 15. Equity Correlations and Volatility Large Cap Stocks Sovereign Debt Correlations Among Stocks 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: 26.7% Mar. 2012: 33.2% 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% 0.40% 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 69 75 81 87 93 99 06 12 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 – Mar. 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.15 Charts shown for illustrative purposes only. Data are as of 3/31/12.
  16. 16. Economic Growth and the Composition of GDP Real GDP Components of GDP % chg at annual rate 4Q11 nominal GDP, billions, USD 10% 20-yr avg. 4Q11 2.3% Housing $16,000 Real GDP: 2.6% 3.0% 8% 10.8% Investment ex-housing $14,000 6% 19.7% $685 bn of $12,000 Gov’t SpendingEconomy 4% output lost $10,000 2% $8,000 0% -2% $6,000 71.0% $788 bn of output Consumption -4% recovered $4,000 -6% $2,000 -8% $0 -10% - 3.8% Net Exports 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 4Q11 GDP. Data reflect most recently available as of 3/31/12.16
  17. 17. Cyclical Sectors Light Vehicle Sales Manufacturing and Trade Inventories Millions, seasonally adjusted annual rate Days of sales, seasonally adjusted 24 47 46 Jan. 2012: 38.6 22 45 20 44 18 43 Feb. 2012: 16 15.0 42 Average: 15.1 41Economy 14 40 12 39 10 38 8 37 94 96 98 00 02 04 06 08 10 12 94 96 98 00 02 04 06 08 10 12 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 Feb. 2012: 59.6 65 1,600 60 Average: 57.7 1,200 Average: 1,446 55 800 50 400 45 Feb. 2012: 698 0 40 75 80 85 90 95 00 05 10 98 00 02 04 06 08 10 12 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 reflect most recently available as of 3/31/12.17
  18. 18. Consumer Finances Consumer Balance Sheet Personal Savings Rate Trillions of dollars outstanding, not seasonally adjusted Annual, % of disposable income 12% $80 10% 2Q-’07 Peak: $80.7tn Total Assets: $72.2 tn YTD 2012: 1Q-’09 Low: $64.5tn 8% $70 4.0% 6% Homes: 25%Economy $60 4% 2% Other tangible: 7% $50 0% 60 65 70 75 80 85 90 95 00 05 10 Deposits: 11% Household Debt Service Ratio $40 Debt payments as % of disposable personal income, seasonally adjusted 15% Pension funds: 18% 3Q07: $30 14.0% Revolving (e.g.: credit cards): 6% 14% Non-revolving: 12% Other Liabilities: 10% 13% $20 Other financial Total Liabilities: $13.8 tn 12% 1Q80: assets: 38% 11.2% $10 11% 1Q12*: Mortgages: 71% 10.8% 10% $0 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 February 2012. *1Q12 Household Debt Service Ratio is J.P. Morgan Asset Management estimate. All other data are as of 4Q11. Data reflect most recently available as of 3/31/12.18
  19. 19. Federal Finances The 2012 Federal Budget Federal Budget Surplus/Deficit CBO Baseline forecast, trillions USD % of GDP, 1990 – 2022* Forecast $4.0 4% 2011 actual: -8.7% 2% Total Spending: $3.6tn 0% $3.5 Other -2% $504bn (14%) -4% Borrowing: $3.0 Net Int.: $224bn (6%) $1,171bn (32%) -6%Economy CBO Baseline Alt. Scenario Non-defense -8% 2012 -7.6% -7.7% Discretionary: Baseline $2.5 -10% 2013 -3.8% -6.3% $630bn (17%) Alternative -12% 1990 1994 1998 2002 2006 2010 2014 2018 2022 $2.0 Defense: Federal Debt (Accumulated Deficits) $673bn (19%) Net debt % of GDP, 1990 – 2022* Forecast 100% $1.5 Revenues: 80% 2022*: 93.2% Social Security: 2011 actual: 67.7% $2,456bn (68%) $769bn (21%) $1.0 60% 2022: 61.3% 40% $0.5 Medicare & Medicaid: CBO Baseline Alt. Scenario $827bn (23%) 20% Baseline 2012 73.2% 73.3% Alternative 2013 75.8% 78.4% $0.0 0% Total Government Spending Sources of Financing 1990 1994 1998 2002 2006 2010 2014 2018 2022 Source: U.S. Treasury, BEA, CBO, J.P. Morgan Asset Management. 2011 numbers are actuals. 2012 Federal Budget is based on the CBO’s March 2012 Baseline Scenario. *The CBO’s Alternative Scenario as shown in the deficit and debt charts assumes that expiring tax provisions (other than the payroll tax cut) are extended, the AMT is indexed for inflation after 2011, Medicare’s payment rates for physicians’ services are held constant at their current level and the automatic spending cuts required by the Budget Control Act, which are set to take effect in January 2013, do not occur (but discretionary appropriation caps stay in place). 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 3/31/12.
  20. 20. Federal Revenues, Outlays and Tax Rates Federal Revenues Federal Outlays 1960 – 2012, % of GDP 1960 – 2012, % of GDP 26% 26% 2012*: 23.4% 22% 22% Average: 20.5%Economy 18% 18% Average: 17.9% 2012*: 15.7% 14% 14% 1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010 Average Maximum Tax Rate on Dividends and Capital Gains Tax Rate 40-yr. avg. Current 100% Dividends 44.6% 15.0% Capital Gains 24.7% 15.0% 80% Ordinary Income 47.9% 35.0% 60% 40% 20% 0% 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s Current Source: (Top Charts) CBO, White House, J.P. Morgan Asset Management. (Bottom) The Tax Foundation, J.P. Morgan Asset Management. Tax rates based on maximum U.S. individual income tax. *2012 revenues and outlays are estimates based on the CBO’s Alternative Scenario, which was re-estimated on March 13, 2012. This scenario assumes that all expiring tax provisions (excluding the payroll tax cut) are extended, the AMT is indexed for inflation after 2011, Medicare payments are held constant at current levels and the automatic enforcement procedures specified by the Budget Control Act of 2011 do not take effect.20 Data are as of 3/31/12.
  21. 21. Political Perception and Economic Reality Presidential and Congressional Approval Ratings S&P 500 Return by Political Control 88% 1940 to 2011 78% 16% Presidential Approval 15.3% 68% 12% 58% 48% 8% 7.7% 38%Economy 4% 5.0% 28% 3.3% 18% 0% Congressional Approval Dem. President Rep. President 8% 1974 1987 1995 1997 2000 2002 2003 2005 2006 2008 2010 2011 Dem. Congress Split Congress Rep. Congress Split Congress Political Polarization Real GDP Growth by Political Control % of Representatives voting with the majority of their party* 1940 to 2011 100% 7% Senate 6% 6.3% 95% House 5% 90% 4% 85% 3% 3.1% 2% 2.7% 80% 1% 1.4% 75% 0% Dem. President Rep. President 70% 1901 1921 1941 1961 1981 2001 Dem. Congress Split Congress Rep. Congress Split Congress 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.21 Data are most recent as of 3/31/12.
  22. 22. 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 Monthly current: $950 Mortgage 200 -26.9% 1Q12*: $800 Payment 180 $706 160 $650 140 Feb. 2012: $166KEconomy $500 120 1Q12*: $518 $350 Monthly Rent 100 80 $200 92 94 96 98 00 02 04 06 08 10 12 88 90 92 94 96 98 00 02 04 06 08 10 12 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 8 35% 5 Feb. 2012: 7 30% 4 2.7 6 25% 3 Feb. 2012: 5 20% 10.5% 2 4 15% Feb. 2012: 4.9 1 3 94 96 98 00 02 04 06 08 10 12 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. *1Q12 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 3/31/12.22
  23. 23. 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% 0 Feb. 2012: 8.3% 8% 3.9mm -200 jobs gained 7% -400 6% -600 5% 50-yr. avg.: 6.1% 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 3/31/12.23
  24. 24. Employment by Sector and Education 20 Years – Net Job Creation Unemployment Rate by Education Level Net change in millions of payroll jobs, sa 18% Fin. & Bus. Services 6.9 16% Other Separations: 3.9mm Health Care 6.9 14% Feb. 2012:Economy Leisure & Hospitality 4.2 12.9% 12% Feb. 2012: 8.3% Education 4.0 10% Less than HS degree Trade & Retailing 3.3 8% Other Services 1.2 Feb. 2012: 6% HS No College 7.3% Mining & Construction 1.1 4% Some College Feb. 2012: Government 0.9 4.2% 2% Manufacturing -4.9 College or greater 0% -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 92 94 96 98 00 02 04 06 08 10 12 Source: BLS, FactSet, J.P. Morgan Asset Management. Source: BLS, FactSet, J.P. Morgan Asset Management. Data reflect most recently available as of 3/31/12.24
  25. 25. Corporate Profits S&P 500 Earnings Per Share Most recent: Adjusted After-Tax Corporate Profits (% of GDP) Operating basis, quarterly Includes inventory and capital consumption adjustments 2Q07: $24.06 $23.73 $26 11% 4Q11: 10.3% $23 10% $20 9%Economy $17 8% $14 7% $11 50-yr. avg.: 6.2% 6% $8 5% $5 4% $2 -$1 3% 01 03 05 07 09 11 65 70 75 80 85 90 95 00 05 10 Source: Standard & Poor’s, J.P. Morgan Asset Management. Source: BEA, FactSet, J.P. Morgan Asset Management. EPS levels are based on operating earnings per share. Most recently available is a 4Q11 99% complete estimate. Data reflect most recently available as of 3/31/12.25
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