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A comprehensive array of market data, economic trends, and financial statistics - designed to enhance your perspective...

A comprehensive array of market data, economic trends, and financial statistics - designed to enhance your perspective...

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  • 1. 2Q | 2012 As of March 31, 2012Guide to the Markets
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
  • 26. Consumer Price Index CPI and Core CPI CPI Weight in 12-month % chg vs. prior year, seasonally adjusted 50-yr. Avg. Feb. 2012 Components CPI Change 15% Headline CPI: 4.2% 2.9% Food & Bev. 15.3% 3.8% Core CPI: 4.1% 2.2% Housing 41.0% 1.8% 12% Apparel 3.6% 4.2% Transportation 16.9% 5.8%Economy 9% Medical Care 7.1% 3.4% Recreation 6.0% 1.0% 6% Educ. & Comm. 6.8% 1.9% Other 3.4% 1.5% 3% Headline CPI 100.0% 2.9% Less: 0% Energy 9.7% 7.0% Food 13.7% 3.9% -3% 65 70 75 80 85 90 95 00 05 10 Core CPI 76.6% 2.2% Source: BLS, FactSet, J.P. Morgan Asset Management. CPI values shown are % change vs. 1 year ago and reflect February 2012 CPI data. CPI component weights are as of December 2011 and 12-month change reflects non-seasonally adjusted data through February 2012. Core CPI is defined as CPI excluding food and energy prices. Data reflect most recently available as of 3/31/12.26
  • 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 Occurred 6 times since 1972 25% 25% 23% 20% 20% 18% Above median 15% 13% 15% 10% 7% 8% 5% 10%Economy 5% 2% 5% 0% 0% -5% -5% -10% -10% -15% -15% -15% Bonds Equities Cash Commodities Bonds Equities Cash Commodities Median Inflation: Low and Rising Inflation Low and Falling Inflation 3.3% Occurred 7 times since 1972 Occurred 13 times since 1972 Below median 25% 25% 20% 20% 17% 20% 15% 15% 12% 10% 8% 6% 10% 6% 4% 5% 3% 5% 0% 0% -5% -5% -10% -10% -15% -15% Bonds Equities Cash Commodities Bonds Equities Cash Commodities Source: BLS, Barclays Capital, Robert Shiller, Federal Reserve, Strategas/Ibbotson, Standard and Poor’s, FactSet, J.P. Morgan Asset Management. High or low inflation distinction is relative to median CPI-U inflation for the period 19712to 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.27 Data reflect most recently available as of 3/31/12.
  • 28. Oil and the Economy WTI Crude Oil & Retail Gasoline Prices Economic Drag From Oil Prices $4.50 $160 U.S. Petroleum Imports as a % of GDP 1Q12*: 3.2% Gas 12/31/2000 3/31/2012 Oil 4% Oil $26.72 $103.02 3Q08: 3.8% Gas $1.41 $3.92 $4.00 $140 3% $3.50 $120 2%Economy $3.00 $100 1% $2.50 $80 0% 70 75 80 85 90 95 00 05 10 Energy Spending by Income Level $2.00 $60 % of after-tax income Lowest 20% 2nd Middle 20% 4th Top 20% $1.50 $40 Natural Gas 2.4% 1.4% 0.9% 0.7% 0.5% Electricity 9.5% 4.6% 3.1% 2.2% 1.2% $1.00 $20 Fuel Oil & Other Fuels 0.9% 0.4% 0.3% 0.2% 0.2% Gasoline & Motor Oil 10.1% 5.9% 4.8% 3.7% 2.2% $0.50 $0 Total Energy 22.9% 12.3% 9.1% 6.8% 4.0% 94 96 98 00 02 04 06 08 10 12 Source: U.S. Department of Energy, FactSet, J.P. Morgan Asset Management. Price of Source: (Top) BEA, FactSet, J.P. Morgan Asset Management. (Bottom) BLS, J.P. gas based on U.S. retail national average of all formulations and WTI for crude. Morgan Asset Management. Data reflect most recently available as of 3/31/12. *1Q12 drag from oil prices is a J.P. Morgan Asset Management estimate.28
  • 29. Global Oil Supply Middle East Energy Production & Chokepoints U.S. Commercial & Strategic Oil Stocks Feb. 2012: Percent of global liquid fuel production, 2010 Days of net imports 224 days 250 Kuwait Syria 2.9% 200 0.5% Oct. 2005: Suez Canal 129 days 2.1% 150 Iraq Iran 2.8% 4.9% 100Economy U.S. Commercial Oil Stocks Libya Egypt 50 2.1% 0.8% Saudi Arabia U.S. Strategic Petroleum Reserve 11.7% 0 94 96 98 00 02 04 06 08 10 12 Strait of Hormuz Sudan 18.0% OPEC Surplus Production Capacity 0.6% Millions of barrels per day UAE 6 3.3% EIA 5 forecast 4 Bab el-Mandeb 3.7% 3 Average: 2.7mm bbl/day Major Producers Major Consum ers 2 Percent of global total, 2010 Percent of global total, 2010 1 Saudi Arabia 12% China 5% United States 22% India 4% Russia 12% Iran 5% China 11% Russia 3% 0 United States 11% Canada 4% Japan 5% Saudi Arabia 3% 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: EIA, J.P. Morgan Asset Management. Forecast from the March EIA Short Term Energy Outlook. Data are as of 3/31/12.29
  • 30. Consumer Confidence and the Stock Market Consumer Sentiment Index – University of Michigan 130 Average 12-month S&P 500 index return… Sentiment Cycle Peak/Trough and subsequent After a peak: +1.1% After a trough: +23.3% Total period: +6.6% 12-month S&P 500 Index return 120 Jan. 2000 -2.0% 110 Jan. 2004Economy +4.4% Aug. 1972 Mar. 1984 100 Jan. 2007 -6.2% +13.5% May 1977 -4.2% +1.2% 90 Average: 85.3 80 Mar. 2003 70 +32.8% Oct. 2005 +14.2% 60 Oct. 1990 +29.1% Feb. 1975 Nov. 2008 Aug. 2011 +22.2% 50 +22.3% ? May 1980 +19.2% 40 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 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. Data reflect most recently available as of 3/31/12.30
  • 31. 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 Forward P/E Consumer Sentiment 120 24x 110 22x 100 20x 90 18x 80Economy 16x 14x 70 12x 60 10x 50 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Sentiment & Real Yields Est. impact of a 10pt. rise in sentiment: +54 basis points* Real yield based on nominal 10-yr. yield minus year over year core CPI 6% Real 10-year Yield Consumer Sentiment 120 5% 110 4% 100 3% 90 2% 80 1% 70 0% 60 -1% 50 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 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 10- year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month. *Estimated impact based on31 coefficients from regression analysis. Data are as of 3/31/12.
  • 32. Fixed Income Sector Returns 10-yrs 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1Q12 02 - 11 EMD Corp. TIPS High Yield EMD EMD High Yield TIPS Treas. High Yield High Yield TIPS EMD EMD 13.7% 10.3% 16.7% 29.0% 11.9% 12.3% 11.8% 11.6% 13.7% 58.2% 15.1% 13.6% 5.5% 185.6% Barclays Asset Treas. EMD EMD High Yield EMD Treas. MBS EMD EMD Muni High Yield High Yield Agg Alloc. 13.5% 8.4% 12.2% 26.9% 11.1% 3.6% 10.0% 9.0% 8.3% 34.2% 12.8% 10.7% 5.3% 133.6% Barclays Barclays TIPS MBS Treas. TIPS TIPS Muni MBS Corp. Corp. Treas. Corp. TIPS Agg Agg 13.2% 8.2% 11.8% 10.6% 6.3% 3.5% 5.2% 7.0% 5.2% 18.7% 9.0% 9.8% 2.1% 107.5% Barclays Asset Asset Asset Asset Asset Asset Asset Asset Muni TIPS TIPS MBS Muni Agg Alloc. Alloc. Alloc. Alloc. Alloc. Alloc. Alloc. Alloc. 11.7% 7.9% 10.3% 10.0% 6.0% 2.8% 5.1% 6.9% -1.4% 15.8% 7.6% 8.9% 1.8% 96.0%Fixed Income Barclays Asset Asset Barclays Asset Corp. Corp. Corp. Treas. Muni TIPS Muni Corp. Corp. Agg Alloc. Alloc. Agg Alloc. 11.6% 6.8% 10.1% 8.2% 5.4% 2.8% 4.8% 6.2% -2.4% 12.9% 6.5% 8.2% 1.6% 85.2% Asset Barclays Barclays Barclays MBS Treas. Muni MBS High Yield EMD Muni TIPS TIPS TIPS Alloc. Agg Agg Agg 11.2% 6.7% 10.0% 5.3% 4.7% 2.7% 4.3% 5.2% -2.5% 11.4% 6.3% 7.8% 0.9% 75.4% Asset Barclays Barclays High Yield Muni Muni MBS Corp. Corp. Corp. Treas. EMD MBS Treas. Alloc. Agg Agg 10.2% 5.3% 9.6% 4.1% 4.5% 2.6% 4.3% 4.6% -4.9% 5.9% 5.9% 7.0% 0.6% 74.3% Barclays Barclays Barclays Corp. Muni MBS MBS Treas. Muni EMD MBS MBS MBS MBS Agg Agg Agg 9.1% 5.1% 8.7% 3.1% 4.3% 2.4% 3.1% 3.4% -14.7% 5.9% 5.4% 6.2% 0.3% 73.9% High Yield EMD High Yield Treas. Treas. Corp. TIPS High Yield High Yield Treas. Muni High Yield Treas. Muni -5.9% 1.5% -1.4% 2.2% 3.5% 1.7% 0.4% 1.9% -26.2% -3.6% 2.4% 5.0% -1.3% 68.8% 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 3/31/12.
  • 33. Interest Rates and Inflation Nominal and Real 10-year Treasury Yields 20% Sep. 30, 1981: 15.84% 15% Average 3/31/12 Nominal Yields 6.50% 2.23% Real Yields 2.61% 0.06% 10% Nominal 10-year Treasury YieldFixed Income Mar. 31, 2012: 2.23% 5% 0% Mar. 31, 2012: 0.06% -5% Real 10-year Treasury Yield -10% 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 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 March 2012, where real yields are calculated by subtracting out February 2012 year-over-year core inflation. Data are as of 3/31/12.33
  • 34. Fixed Income Yields and Returns Source: U.S. Treasury, Barclays Yield Return Capital, FactSet, J.P. Morgan Asset Management. Fixed income sectors shown above are U.S. Treasuries # of issues Mkt. Value Avg. Maturity 12/31/2010 3/31/2012 2011 1Q12 provided by Barclays Capital and are 2-Year 2 years 0.61% 0.33% 1.53% -0.08% represented by – Broad Market: US Barclays Capital Index; MBS: Fixed 5-Year # of issues: 142 5 2.01 1.04 9.36 -0.48 Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond 10-Year Total value: $4.687 tn 10 3.30 2.23 17.18 -2.25 Index; Emerging Debt: Emerging 30-Year 30 4.34 3.35 35.60 -7.71 Markets Index; High Yield: Corporate High Yield Index. TIPS: Treasury Sector Inflation Protection Securities (TIPS). Treasury securities data for # of issues Broad Market 7,887 $16,113 bn 7.1 years 2.97% 2.22% 7.84% 0.30% and market value based on U.S. Treasury benchmarks from Barclays MBS 945 5,044 5.3 3.67 2.74 6.23 0.57 Capital. Yield and return information based on Bellwethers for TreasuryFixed Income Corporates 4,061 3,280 10.4 4.02 3.40 8.15 2.08 securities. Municipals 46,081 1,308 13.5 3.80 2.62 10.70 1.75 Change in bond price is calculated Emerging Debt 480 704 11.1 5.76 5.35 6.97 5.51 using both duration and convexity High Yield 1,893 1,030 6.8 7.51 7.23 4.98 5.34 according to the following formula: New Price = (Price + (Price * -Duration * TIPS 33 753 9.1 2.78 1.93 13.56 0.86 Change in Interest Rates))+(0.5 * Price * Convexity * (Change in Interest Rates)^2) Price Impact of a 1% Rise/Fall in Interest Rates +1% 19.0% 20% *Calculation assumes 2-year Treasury -1% interest rate falls 0.80% to 0.00% as 15% 8.9% interest rates can only fall to 0.00%. 10% 6.2% 6.6% 6.8% 7.6% 4.9% 4.2% 5.0% 3.3% 5% 0.7% Chart is for illustrative purposes only. 0% Past performance is not indicative of comparable future results. -5% -2.0% -4.9% -3.3% -4.2% Data are as of 3/31/12. -5.0% -6.2% -10% -6.6% -6.8% -7.6% -8.9% -15% -20% -19.0% -25% 2-Year 5-Year 10-Year 30-Year Sector MBS High Yield Broad Mkt TIPS EMD Corp. Munis34
  • 35. The Fed and the Money Supply Federal Funds Rate FOMC Projected Pace of Policy Firming 10% Target Federal Funds Rate at Year-End 9% 5.0% FOMC member Fed Funds Rate 8% projection as of January 25, 2012 Mar. 31, 2012: 4.0% 7% 6% 0-0.25% 3.0% 5% 4% 2.0% 3% 2% 1.0% 1% 0% 0.0%Fixed Income 86 88 90 92 94 96 98 00 02 04 06 08 10 12 2012 2013 2014 Longer run Excess Reserves, Monetary Base and Multiplier Money Supply Growth $ trillions Year-over-year growth in M2 $3.0 Monetary Base & Reserves M2 Money Multiplier 10x 14% 9x 12% $2.5 Feb. 2012: 9.9% 8x 10% $2.0 7x Monetary Base 8% $1.5 6x Excess Reserves 6% 5x $1.0 4% 4x $0.5 2% 3x $0.0 2x 0% 02 03 04 05 06 07 08 09 10 11 85 90 95 00 05 10 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 banks reserves. Money multiplier defined as M2 divided by the monetary base. Data are as of 3/31/12.35
  • 36. Credit Conditions Lending Standards Consumer & Industrial Loan Demand Net percent of banks reporting tighter lending standards Net percent of banks reporting stronger demand 100% 60% Consumer Loans 84% 80% Commercial and Industrial Loans 40% 20% (Medium & Large Firms) 67% 60% 20% 40% 0% 20% 5% -20% 0% -40% 15% Small Firms -20% -60% Large & Medium Firms -3% -40% -80%Fixed Income 98 00 02 04 06 08 10 12 92 94 96 98 00 02 04 06 08 10 12 Delinquency Rates U.S. Corporate Issuance All banks, seasonally adjusted $ trillions 12% $3.5 Residential Mortgages $3.0 10% Consumer Loans $2.5 Total Equity Commercial and Industrial Loans 9.9% Total Debt 8% $2.0 6% $1.5 $1.0 4% 3.1% $0.5 2% 1.6% $0.0 92 94 96 98 00 02 04 06 08 10 12 1990 1993 1996 1999 2002 2005 2008 2011 Source: (Top left) Federal Reserve, FactSet, 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) SIFMA, J.P. Morgan Asset Management. All data reflect most recently available releases. 2Q11 – 1Q12 estimates of lending standards on consumer loans are J.P. Morgan Asset Management estimates. 2011 corporate issuance is through February 2012. Data are as of 3/31/12.36
  • 37. High Yield Bonds High Yield Spreads and Defaults 20% Average Latest HY Spreads 6.0% 6.3% HY Defaults 4.3% 1.9% 15% Spreads Default Rates 10% 5% 0% 88 90 92 94 96 98 00 02 04 06 08 10 12Fixed Income Historical High Yield Recovery Rates Annual High Yield Bond Issuance High yield bonds, cents on the dollar Billions USD 70¢ $350 60¢ $300 50¢ $250 Average: 38.5¢ 40¢ $200 30¢ $150 20¢ $100 10¢ $50 0¢ $0 88 90 92 94 96 98 00 02 04 06 08 10 86 88 90 92 94 96 98 00 02 04 06 08 10 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): 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 yields less comparable maturity Treasury yields. Past performance is not indicative of comparable future results. 2011 issuance and recovery rates are as of March 30, 2012.37 Data are as of 3/31/12.
  • 38. Municipal Finance Muni/Treasury Ratio State & Local Government Debt Service Ratio of Barclays 10-year Municipal Bond yield to 10-year Treasury Percent of current expenditures 8% 240% 7% 220% 4Q11: 5.6% 6% 200% 5% 180% 4%Fixed Income 160% 90 92 94 96 98 00 02 04 06 08 10 Municipal Bond Issuance* 140% Billions USD, revenue and GO issues $500 120% $400 $300 100% $200 80% Mar. 31, 2012: 111% $100 60% $0 98 00 02 04 06 08 10 12 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 February 2012. Data are as of 3/31/12.38
  • 39. Emerging Market Debt EM & DM Gross Debt to GDP Emerging Markets Bond Index Global Spreads 120% Sovereign and quasi-sovereign issues, USD-denominated bonds 10% Developed 100% Emerging 8% 80% 6% 60% Average: 3.8% 4% 40% 20% 2% Mar. 31, 2012: 3.4% 0% 0% 00 01 02 03 04 05 06 07 08 09 10 11 12 02 03 04 05 06 07 08 09 10 11Fixed Income Corporate Emerging Markets Bond Spreads Local Emerging Market Bond Yields Corporate issues, USD-denominated bonds Sovereign issues, local currency-denominated bonds 12% 9% 10% 8% 8% Mar. 31, 2012: Mar. 31, 2012: 3.8% Average: 6.8% 6.4% 6% 7% 4% Average: 3.2% 6% 2% 0% 5% 01 02 03 04 05 06 07 08 09 10 11 01 02 03 04 05 06 07 08 09 10 11 Source: J.P. Morgan, IMF, MorganMarkets, FactSet, 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. Debt to GDP ratios use IMF definition and data for developed and emerging countries; 2012 ratios are IMF estimates. Past performance is not indicative of comparable future results.39 Data are as of 3/31/12.
  • 40. Global Equity Markets: Returns and Composition World Market Returns – 1Q12, Percent 25% Local currency returns 20% 21.1 USD returns 20.1 19.1 18.6 18.0 15% 15.2 14.1 13.9 12.6 12.6 12.6 12.3 10% 11.3 11.3 11.4 10.3 11.0 10.0 10.8 9.9 9.9 10.1 9.4 9.5 7.6 5% 4.7 0% USA EAFE Europe ex- Pacific ex- Emerging United France Germany Japan China India Brazil Russia (S&P 500) U.K. Japan Markets Kingdom Weights in MSCI All Country World Index Share of Global GDP % global market capitalization Based on purchasing power parity Europe ex-U.K.: United 16% States: Canada:International 19% 2% United U.K.: 8% Emerging Japan: States: Markets: 6% Emerging 49% 46% Markets: Other 13% Developed: Europe Japan: ex-U.K.: 6% 8% United 15% Canada: Pacific: Kingdom: 4% 5% 3% Source: Standard & Poor’s, MSCI, IMF, FactSet, J.P. Morgan Asset Management. 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 2011. Definition of emerging markets is based on MSCI and IMF data sources, respectively.40 Data as of 3/31/12.
  • 41. Global Economic Growth Emerging Market Country Real GDP Growth Historical JPMSI Forecast Year-over-year % chg. – forecasts from JPMSI 10% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 8% 6% 4% 2% 0% -2% Emerging Markets China India Mexico Russia Korea South Africa Brazil Developed Market Country Real GDP Growth Year-over-year % chg. – forecasts from JPMSI Historical JPMSI Forecast 10% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 8%International 6% 4% 2% 0% -2% Developed U.S. Canada Japan Germany U.K. France Italy Countries 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 reflect most recently available as of 3/31/12.41
  • 42. Global Monetary Policy Central Bank Assets – Percent of Nominal GDP Real Policy Rates – Monthly 35% 4% 30% 3% 25% 2% Bank of Japan 20% 1% 15% European Central Bank 0% 10% -1% Emerging Markets -2% 5% U.S. Federal Reserve Developed Markets -3% 0% 02 03 04 05 06 07 08 09 10 11 12 99 00 01 02 03 04 05 06 07 08 09 10 11 Country Level Monetary Policy and Inflation 14.0% Target Policy Rate Inflation Rate Real Policy Rate 10.5% 7.0% 3.5%International 0.0% -3.5% -7.0% China South Africa Indonesia Russia Thailand Poland India Colombia Hong Kong Canada Australia Turkey Mexico Korea Taiwan Euro area U.K. U.S. Japan Brazil Developed Markets Emerging Markets 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 4Q11. Real policy rates are short-term target interest rates set by central banks minus year-over-year inflation.42 Data are as of 3/31/12.
  • 43. The Importance of Exports Exports as a % of GDP – 2010 Goods exports only Brazil 0.9% 2.1% 1.9% 4.7% 9.7% U.S. Eurozone BRIC Other Total India 1.5% 2.4% 2.0% 7.8% 13.7% Russia 0.8% 10.1% 1.9% 12.5% 25.3% China 4.8% 4.8% 1.6% 15.7% 26.9% U.S. 1.4% 1.2% 6.1% 8.8% Japan 2.2% 1.6% 3.9% 6.4% 14.1% U.K. 1.9% 9.3% 1.1% 4.3% 16.6% France 1.0% 12.0% 1.4% 5.5% 19.9%International Italy 1.2% 11.6% 1.7% 6.9% 21.4% Canada 18.4% 2.3% 1.3% 2.6% 24.5% Germany 2.0% 20.9% 3.7% 10.1% 36.7% 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: IMF, J.P. Morgan Asset Management. Numbers represent exports of goods only, and would be higher if services were included. Data reflect most recently available as of 3/31/12.43
  • 44. The Impact of Global Consumers Share of Global Nominal Consumption Foreign Sales, % of Total Sales 40% 35% 35% 30% Mega Cap (Russell 200) 30% 25% Large Cap (Russell 1000) 25% 20% 20% U.S. Consumption % of Global 15%International EM Consumption % of Global Small Cap (Russell 2000) 15% 10% 1990 1994 1998 2002 2006 2010 90 92 94 96 98 00 02 04 06 08 10 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 sales as a percentage of total sales is calculated as an unweighted average of individual index constituent companies’ reported sales figures and does not capture all index members due to differences in reporting practices. Data are as of 3/31/12.44
  • 45. European Crisis: Fiscal Challenges GDP Growth, Debt to GDP and Borrowing Costs Example of Fiscal Redistribution in the U.S. Bubble size = 10-year 8% government bond yield EM = 10% 6% = 5% Real GDP Growth (2010 – 2012) 4% Germany U.S. 2% France E.U. Italy The E.U. Lacks a Similar Fiscal Mechanism Spain Ireland 0% Portugal -2% GreeceInternational -4% -6% 20% 40% 60% 80% 100% 120% 140% 160% Net Debt-to-GDP Ratio (2011 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 September 2011 World Economic Outlook. Bond yields as of 3/31/12. Data are as of 3/31/12.45
  • 46. European Crisis: Financial System Risks European Bank Exposure – $ Billions European Sovereign Funding Costs $400 10-year benchmark bond yields, daily Derivative claims 18% 1st LTRO $300 Sovereign debt claims and bank claims 16% $200 Country Yield (3/31/12) Portugal 11.20% $100 14% Ireland 6.79% Spain 5.35% Italy 5.12% $0 Greek Portugese Irish Spanish Italian U.S. banks 12% exposure to Exposure of all European banks to each country’s all GIIPS public sector, banking sector and derivative claims European Central Bank Balance Sheet 10% Trillions of Euros €3.0 Feb. 2012: €2.7tn 8%International €2.5 6% €2.0 4% €1.5 2% Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Source: FactSet, BIS, ECB, J.P. Morgan Asset Management. Bank exposure based on 4Q11 data. LTRO refers to the ECB’s December Long-Term Refinancing Operation. Data are as of 3/31/12.46
  • 47. Chinese Growth and Economic Policy China & U.S. Contribution to Global GDP Growth Chinese Inflation and the Money Supply Share of year-over-year change in nominal global GDP Year-over-year % change 40% 10% 30% China Most Recent 35% United States 8% CPI (LHS) 3.2% 30% M2 (RHS) 13.0% 25% 6% 25% 20% 4% 20% 15% 2% 10% 15% 0% 5% 0% * -2% 10% 81 84 87 90 93 96 99 02 05 08 11 14 00 02 04 06 08 10 12 Components of Chinese Nominal GDP Chinese Currency 100% Net Exports: 3% Net Exports: 2% Chinese Renminbi per USD, inverted 6.0 Government: 13% Government 13% Mar. 12: 6.30 80% Investment 6.5International Spending Investment 60% 35% Spending 7.0 May 10 – Mar. ‘12: 51% Jun. 05 – Jul. 08: +5.9% 40% 7.5 +17.5% Consumption 20% 49% Consumption 8.0 34% 0% 8.5 1990 2010 02 03 04 05 06 07 08 09 10 11 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) FactSet, J.P. Morgan Asset Management. *In 2009, global growth was negligible, while Chinese growth was robust, which resulted in China contributing over 1200% to global growth. Calculations based on PPP exchange rates and 2012 – 2016 growth forecasts are from the IMF. Data reflect most recently available as of 3/31/12.47
  • 48. Global Equity Valuations – Developed and Emerging Markets Developed Market Countries Example +6 Std Dev Std Dev from Global Average +5 Std Dev Expensive +4 Std Dev relative to +3 Std Dev world +2 Std Dev +1 Std Dev Expensive relative to own Current Average history -1 Std Dev Average -2 Std Dev Cheap relative to -3 Std Dev own history Cheap -4 Std Dev relative to -5 Std Dev world World EAFE France Germany U.K. Australia Japan Canada Switzerland United (ACWI) States Emerging Market Countries +6 Std Dev Note: Each valuation index shows an equally weighted Std Dev from Global Average +5 Std Dev +4 Std Dev composite of four metrics: +3 Std Dev price to forward earnings +2 Std Dev (Fwd. P/E), price to current +1 Std Dev book (P/B), price to last 12International Average months’ cash flow (P/CF) and -1 Std Dev -2 Std Dev price to last 12 months’ -3 Std Dev dividends normalized using -4 Std Dev means and average -5 Std Dev variability over the last 10 World EM Russia China Brazil Taiwan South Korea Mexico India years. (ACWI) Index Africa Source: MSCI, FactSet, J.P. Morgan Asset Management. 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.48 Data are as of 3/31/12.
  • 49. International Economic and Demographic Data Economics Demographics GDP USD GDP Per GDP Unempl. Inflation Population Percent Median Migration (CPI) Population (B$s) Capita Growth Rate Growth Age >65 Age per 1000 Developed U.S. $15,094 $48,147 3.0% 8.3% 2.9% 314 mm 0.9% 13.1% 36.9 yrs +3.6 Canada 1,759 51,147 1.8 7.4 2.6 34 0.8 15.9 41.0 +5.7 U.K. 2,481 39,604 -0.8 8.3 3.4 63 0.6 16.5 40.0 +2.6 Germany 3,629 44,556 -0.7 5.8 2.4 81 -0.2 20.6 44.9 +.7 France 2,808 44,401 0.9 10.0 2.3 66 0.5 16.8 39.9 +1.1 Japan 5,855 45,774 -0.7 4.6 0.1 127 -0.1 22.9 44.8 - Italy 2,246 37,046 -2.9 9.2 3.3 61 0.4 20.3 43.5 +4.7 Emerging Russia 1,885 13,236 7.0 6.5 3.7 138 -0.5 13.0 38.7 +0.3 Mexico 1,185 10,803 1.7 5.2 3.9 115 1.1 6.6 27.1 -3.1 Brazil 2,518 12,917 1.3 5.7 5.8 206 1.1 6.7 29.3 -0.1International China 6,988 5,184 9.2 4.1 3.2 1,343 0.5 8.9 35.5 -0.3 India 1,843 1,527 3.8 9.8 5.2 1,205 1.3 5.5 26.2 -0.1 Source: FactSet, Eurostat, CIA, J.P. Morgan Securities, J.P. Morgan Asset Management. GDP levels represent 2011 data and are from the September 2011 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 4Q11. India unemployment is from CIA estimates and is as of 2011, and Italy unemployment is as of 1/31/12. CPI Inflation is shown as % change versus a year ago and all data are for February 2012, except for India and Japan, which are as of January 2012. Unemployment rate for developed countries refers to February 2012 and comes from FactSet Economics, Eurostat and Statistics Canada. Demographic data provided by CIA World Factbook at CIA.gov. Data are as of 3/31/12.49
  • 50. 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: 110 -6.5% -6% 105 100 95 -4% 4Q11: -3.2% 90 Mar. 2009: 85 84.0 -2% 80International 75 0% 70 Mar. 2008: 70.3 Mar. 2012: 72.9 65 92 94 96 98 00 02 04 06 08 10 12 94 96 98 00 02 04 06 08 10 12 Source: BEA, FactSet, J.P. Morgan Asset Management. Source: Federal Reserve, FactSet, J.P. Morgan Asset Management. Data are as of 3/31/12 and are reported quarterly. Data are as of 3/31/12.50
  • 51. Asset Class Returns 10-yrs 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 . 1Q 12 02 - 11 DJ UBS M SCI M SCI M SCI Barclays M SCI M SCI M SCI REITs REITs REITs REITs REITs REITs Cmdty EM E EM E EM E Agg EM E EM E EM E 26.4% 13.9% 23.9% 56.3% 31.6% 34.5% 35.1% 39.8% 5.2% 79.0% 28.0% 8.3% 14.1% 277.2% DJ UBS M arket Barclays Russell M SCI DJ UBS M SCI M SCI M arket M SCI Russell Barclays S&P REITs Cmdty Neutral Agg 2000 EM E Cmdty EM E EAFE Neutral EAFE 2000 Agg 500 24.2% 9.3% 10.3% 47.3% 26.0% 17.6% 32.6% 11.6% 1.1%* 32.5% 26.9% 7.8% 12.6% 164.2% M arket Barclays M arket M SCI M SCI M SCI M SCI DJ UBS Asset M SCI M arket Russell Barclays REITs Neutral Agg Neutral EAFE EAFE EAFE EAFE Cmdty Alloc. EM E Neutral 2000 Agg 15.0% 8.4% 7.4% 39.2% 20.7% 14.0% 26.9% 11.1% -23.8% 28.0% 19.2% 4.5% 12.4% 75.4% Barclays Russell Russell Russell M arket Russell Russell DJ UBS S&P M SCI Asset REITs REITs REITs Agg 2000 2000 2000 Neutral 2000 2000 Cmdty 500 EAFE Alloc. 11.6% 2.5% 3.8% 37.1% 18.3% 12.2% 18.4% 9.3% -33.8% 27.2% 16.7% 2.1% 11.0% 73.5% Asset M SCI Asset S&P Asset Asset S&P Asset DJ UBS S&P S&P Asset Russell REITs Alloc. EM E Alloc. 500 Alloc. Alloc. 500 Alloc. Cmdty 500 500 Alloc. 2000 0.6% -2.4% -5.4% 28.7% 12.5% 8.0% 15.8% 7.3% -36.6% 26.5% 15.1% -0.2% 10.5% 72.8% Russell Asset M SCI Asset S&P M arket Asset Barclays S&P Asset Asset Russell Asset M arket 2000 Alloc. EM E Alloc. 500 Neutral Alloc. Agg 500 Alloc. Alloc. 2000 Alloc. Neutral -3.0% -3.4% -6.0% 25.2% 10.9% 6.1% 14.9% 7.0% -37.0% 22.5% 12.7% -4.2% 7.5% 72.7% S&P S&P M SCI DJ UBS DJ UBS S&P M arket S&P DJ UBS M SCI M SCI M arket M SCI REITs 500 500 EAFE Cmdty Cmdty 500 Neutral 500 Cmdty EAFE EAFE Neutral EAFE -9.1% -11.9% -15.7% 22.7% 7.6% 4.9% 11.2% 5.5% -37.7% 18.7% 8.2% -11.7% 1.5% 64.8% M SCI M SCI Russell M arket M arket Russell Barclays Russell M SCI Barclays Barclays DJ UBS DJ UBS DJ UBS EAFE EAFE 2000 Neutral Neutral 2000 Agg 2000 EAFE Agg Agg Cmdty Cmdty CmdtyAsset Class -14.0% -21.2% -20.5% 7.1% 6.5% 4.6% 4.3% -1.6% -43.1% 5.9% 6.5% -13.4% 0.9% 58.0% M SCI DJ UBS S&P Barclays Barclays Barclays DJ UBS M SCI M arket M arket M SCI Barclays S&P REITs EM E Cmdty 500 Agg Agg Agg Cmdty EM E Neutral Neutral EM E Agg 500 -30.6% -22.3% -22.1% 4.1% 4.3% 2.4% -2.7% -15.7% -53.2% 4.1% -2.5% -18.2% 0.3% 33.4% Source: Russell, MSCI, Dow Jones, Standard and Poor’s, Credit Suisse, Barclays Capital, NAREIT, FactSet, J.P. Morgan Asset Management. The “Asset 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, 30% in the Barclays Capital Aggregate, 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 3/31/12, except for the CS/Tremont Equity Market Neutral Index, which reflects data through 2/29/12. “10-yrs” returns represent cumulative total return and are not annualized. 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.51 Data are as of 3/31/12.
  • 52. Correlations: 10-Years Eq Large Small Core Corp. Hedge Market Cap Cap EAFE EME Bonds HY EMD Cmdty. REITs Funds Neutral* Large Cap 1.00 0.95 0.91 0.85 -0.31 0.79 0.68 0.45 0.76 0.77 0.50 Small Cap 1.00 0.88 0.81 -0.35 0.73 0.61 0.40 0.82 0.74 0.48 EAFE 1.00 0.92 -0.22 0.74 0.64 0.52 0.73 0.85 0.66 EME 1.00 -0.18 0.80 0.75 0.59 0.65 0.88 0.54 Core Bonds 1.00 -0.11 0.15 -0.25 -0.04 -0.22 -0.02 Corp. HY 1.00 0.86 0.52 0.69 0.77 0.40 EMD 1.00 0.41 0.60 0.64 0.35 Commodities 1.00 0.39 0.70 0.49 REITs 1.00 0.59 0.50 Hedge Funds 1.00 0.57Asset Class Eq Market Neutral* 1.00 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 Capital Aggregate; Corp HY: Barclays Capital Corporate High Yield; EMD: Barclays Capital Emerging Market; Cmdty.: DJ UBS Commodity Index; 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 12/31/01 to 12/31/11. This chart is for illustrative purposes only.52
  • 53. Mutual Fund Flows Fund Flows Billions, USD AUM YTD 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Domestic Equity 4,254 (5) (135) (95) (28) (148) (65) (0) 18 101 120 (26) 55 261 World Equity 1,535 4 5 58 28 (80) 139 149 106 71 24 (3) (22) 53 Taxable Bond 2,525 49 136 230 311 22 97 45 26 5 40 125 76 (36) Tax-exempt Bond 522 13 (12) 11 69 8 11 15 5 (15) (7) 17 11 (14) Hybrid 903 16 30 24 10 (26) 42 18 37 49 38 9 9 (36) Money Market 2,653 (39) (124) (525) (539) 637 654 245 62 (157) (263) (46) 375 159 U.S. Equity Fund Flows and Market Performance Difference Between Flows Into Stock and Bond Funds Billions USD, U.S. equity funds, quarterly Billions, USD, U.S. and international funds, monthly $120 Equity Flows S&P 500 1600 $40 Bond flows exceeded equity flows $100 1400 by $35 billion in February 2012 $80 $20 $60 1200 $40 $0 1000 $20 800 -$20 $0Asset Class -$20 600 -$40 -$40 400 -$60 -$60 -$80 200 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 90 92 94 96 98 00 02 04 06 08 10 12 Source: Investment Company Institute, J.P. Morgan Asset Management. Data include flows through February 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.53 Data are as of 3/31/12.
  • 54. Dividend Income: Domestic and Global S&P 500 Total Return: Dividends vs. Capital Appreciation Average annualized returns Capital appreciation 20% Dividends 15% 13.9% 13.6% 10% 12.6% 15.3% 3.0% 1.6% 5.5% 5% 4.4% 5.4% 6.0% 5.1% 1.8% 4.7% 3.3% 4.2% 4.4% 4.1% 2.5% 0% -2.7% -5.3% -5% -10% 1926 - 1929 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 1926 to 2011 REIT Dividend Yields Equity Dividend Yields Major world markets by capitalization Major world markets by capitalization 10-year government 6% 10-year government 7% 6.4% 6.2% bond yield bond yield 4.8% 6% 5.4% 5% 5.3% 4.4% 5.1% 5% 3.7% 4.3% 4.2% 4% 3.5% 4% 3.5% 2.7% 2.8% 3% 2.3%Asset Class 3% 2% 2% 2.0% 1% 1% 0% 0% U.S. Singapore Australia France Canada Japan Global U.K. U.S. Australia France U.K. Switzerland ACWI Canada Japan 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 3/31/12.54
  • 55. Global Commodities Commodity Prices Oil Demand: Emerging Markets Share Weekly index prices rebased to 100 Emerging markets as % of total global oil consumption 40% 600 Precious metals 38% 36% 500 34% Industrial metals 32% 400 30% 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Energy 300 Commodity Prices and Inflation Year over year % chg. 8% DJ-UBS Commodity Index (Y/Y % chg.) 80% 6% 60% 200 4% 40% Grains 2% 20%Asset Class 100 0% 0% -2% -20% Livestock -4% Headline CPI (Y/Y % chg.) -40% 0 -6% -60% 02 03 04 05 06 07 08 09 10 11 94 96 98 00 02 04 06 08 10 12 Source: Dow Jones/UBS, FactSet, J.P. Morgan Asset Management. Source: (Top) USDA, BP Statistical Review of World Energy, J.P. Morgan Asset Management. (Bottom) BLS, Commodity prices represented by the appropriate DJ/UBS Commodity sub-index. DJ/UBS, FactSet, J.P. Morgan Asset Management Data reflect most recently available as of 3/31/12.55 Data are as of 3/31/12.
  • 56. Gold Gold Prices World Gold Production $ / oz Year Troy Ounces Total Value $2,000 2000 83.3 mm $23 bn $1,800 Gold 2001 83.6 mm $23 bn Gold, Inflation adjusted Mar. 2012: $1,600 $1,662.50 2002 82.0 mm $25 bn $1,400 2003 81.7 mm $30 bn $1,200 2004 77.8 mm $32 bn $1,000 Jan. 1980: $850.00 2005 79.4 mm $35 bn $800 2006 76.2 mm $46 bn $600 2007 75.9 mm $53 bn Jan. 1980: $433.72 Mar. 2012: $400 $318.46 2008 73.6 mm $64 bnAsset Class $200 2009 78.8 mm $86 bn $0 2010 80.4 mm $113 bn 75 80 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 start of the chart. Data reflect most recently available as of 3/31/12.56
  • 57. Historical Returns by Holding Period Range of Stock, Bond and Blended Total Returns Annual total returns, 1950 – 2011 60% Annual Avg. Growth of $100,000 Total Return over 20 years 50% Stocks 10.8% $771,337 51% Bonds 6.3% $337,713 40% 43% 50/50 Portfolio 8.9% $552,853 30% 32% 28% 20% 23% 21% 19% 16% 17% 18% 10% 14% 12% 6% 5% 0% -2% -2% 1% 2% -1% 1% 1% -8% -10% -15% Stocks -20% BondsAsset Class 50/50 Portfolio -30% -37% -40% 1-yr. 5-yr. rolling 10-yr. rolling 20-yr. rolling Sources: Barclays Capital, FactSet, Robert Shiller, Strategas/Ibbotson, Federal Reserve, J.P. Morgan Asset Management. Data are as of 3/31/12.57
  • 58. Diversification and the Average Investor (Top) Indexes and weights of the Maximizing the Power of Diversification (1994 – 2011) traditional portfolio are as follows: Traditional Portfolio More Diversified Portfolio U.S. stocks: 55% S&P 500, U.S. bonds: 30% Barclays Capital Equity Mkt. Neutral Aggregate. International stocks: 15% MSCI EAFE. Portfolio with 25% Commodities in alternatives is as follows: U.S. 8% stocks: 22.2% S&P 500, 8.8% REIT Russell 2000; International Stocks: S&P 500 26% 8% 4.4% MSCI EM, 13.2% MSCI EAFE; 30% 8% S&P 500 U.S. Bonds: 26.5% Barclays Capital 55% MSCI EAFE Aggregate; Alternatives: 8.3% Russell 2000 CS/Tremont Equity Market Neutral, 4% 8.3% DJ/UBS Commodities, 8.3% Barclays Agg. 22% NAREIT Equity REIT Index. Return 15% 13% MSCI EAFE and standard deviation calculated 9% using Morningstar Direct. MSCI EM Charts are shown for illustrative purposes only. Past returns are no Barclays Agg. guarantee of future results. Diversification does not guarantee Return: 6.75% Return: 7.09% investment returns and does not Standard Deviation: 10.94% Standard Deviation: 9.97% eliminate risk of loss. Data are as of 12/31/11. 20-year Annualized Returns by Asset Class (1992 – 2011) (Bottom) Indexes used are as follows: REITS: NAREIT Equity REIT 12% Index, EAFE: MSCI EAFE, Oil: WTI 10.9% Index, Bonds: Barclays Capital U.S. Aggregate Index, Homes: median 10% sale price of existing single-family 8.6% homes, Gold: USD/troy oz, Inflation: 7.8% 7.6% CPI. Average asset allocation 8% investor return is based on an 6.5% analysis by Dalbar Inc., which utilizesAsset Class the net of aggregate mutual fund 6% sales, redemptions and exchanges each month as a measure of investor 4.0% behavior. Returns are annualized 4% (and total return where applicable) 2.5% 2.5% and represent the 20-year period 2.1% 2% ending 12/31/11 to match Dalbar’s most recent analysis. 0% REITs Oil S&P 500 Gold Bonds EAFE Inflation Homes Average Investor58
  • 59. Annual Returns and Intra-year Declines 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% 31 26 26 27 26 27 26 23 20 20 20% 17 15 15 14 12 13 9 -10 -7 7 -2 4 -10 -13 -23 3 4 5% 1 2 -38 0 -3 -10% -6 -6 -5 -7 -8 -8 -8 -8 -8 -7 -8 -9 -9 -10 -12 -11 -12 -14 -14 -17 -17 -17 -16 -20 -19 -19 -25% -26 -28 -32 -34 -40%Asset Class -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 and 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. Data are as of 3/31/12.59
  • 60. Alternative Investment Returns Hedge Funds (as of 12/31/11) 1 year 3 year 5 year 10 year CSFB/Tremont HF Index -2.5% 8.6% 3.2% 6.4% Multi-Strategy 1.8% 11.5% 3.1% 6.6% Distressed -4.2% 8.5% 1.9% 7.4% Convertible Arbitrage 1.1% 18.2% 3.5% 4.7% Equity Market Neutral* 4.5% 2.5% 3.6% 5.6% Risk Arbitrage** 0.8% 5.2% 4.2% 4.2% Fixed Income Arbitrage** 4.7% 14.5% 2.1% 4.0% Global Macro 6.4% 10.4% 8.6% 10.6% Real Estate (as of 12/31/11) 1 year 3 year 5 year 10 year NCREIF Property Index 14.3% 2.4% 3.1% 8.1% Apartment 15.5% 4.0% 3.1% 8.0% Industrial 14.6% 1.0% 2.2% 7.3% Office 13.8% 0.9% 2.8% 7.1% Retail 13.8% 4.5% 4.4% 10.7% Private Equity (as of 9/30/11) 1 year 3 year 5 year 10 year U.S. Venture Capital Index 20.9% 4.9% 6.7% 2.6% U.S. Private Equity Index 13.8% 7.3% 8.1% 11.6%Asset Class Source: Cambridge Associates LLC, NCREIF, CS/Tremont, J.P. Morgan Asset Management. Cambridge PE and VC data provided at no charge. Other indexes shown are unmanaged and are for illustrative purposes only. Past performance is no guarantee of future results. Returns for all periods are as of 12/31/11 with the exception of Private Equity and Venture Capital returns, which are as of 9/30/11. All returns are annualized for periods greater than 1 year. Investing in alternative assets involves higher risks than traditional investments and is suitable only for the long term. They may not be tax efficient and have higher fees than traditional investments. They may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. *Market Neutral returns include estimates found in disclosures. **Arbitrage is the simultaneous purchase and sale of an asset in order to profit from a difference in the price. Data are as of 3/31/12.60
  • 61. Cash Accounts Annual Income Generated by $100,000 Investment in a 6-month CD Weight in $10,000 Money Supply $ Billions Money Component Supply $8,000 2006: $5,240 $6,000 M2-M1 7,565 76.2% $4,000 2011: $419 Retail MMMFs 661 6.7% $2,000 $0 Savings deposits 6,167 62.1% 1986 1990 1994 1998 2002 2006 2010 Cash Accounts Total Household Financial Assets Cash as a % of Small time deposits 738 7.4% 28% 6-month CD rate vs. Core CPI Mar. ’09 S&P 500 low 24% Oct. ’02 S&P 500 low Institutional MMMFs 1,721 17.3% 20% Cash in IRA & Keogh 639 6.4% accounts 16%Asset Class 12% Total 9,924 100.0% 98 00 02 04 06 08 10 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 issued in amounts of less than $100,000. All IRA and Keogh account 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 3/31/12.61
  • 62. Corporate DB Plans and Endowments Asset Allocation: Corporate DB Plans vs. Endowments Defined Benefit Plans – Funded Status: S&P 500 companies Endowments overfunded underfunded Corporate Defined Benefit Plans 8% 32.0% 22% Equities 45.3% Fixed Income 13.0% 78% 92% 35.5% 21.9% Hedge Funds 2.7% 1999 2010 10.7% Pension Return Assumptions: S&P 500 companies Private Equity 40% 1999: Average 9.2% 4.7% 33% 2010: Average 7.4% 29% 6.1% 30% 27% 27% Real Estate 3.1% % of companies 20% 20% 16% 16% 12.2% OtherAsset Class 4.1% 9% 10% 8% 7% 5% 4.0% 2% 1% 0% 0% 0% Cash 4.7% 0% % of total < 7% 7 to 7.5 to 8 to 8.5 to 9 to 9.5 to > 10% 7.5% 8% 8.5% 9% 9.5% 10% 0% 10% 20% 30% 40% 50% 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 12/31/10.62
  • 63. J.P. Morgan Asset Management – Index DefinitionsAll indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not The MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted indexinclude fees or expenses. 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 S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renownedindex 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 The MSCI Small Cap IndicesSM target 40% of the eligible Small Cap universe within each industry group, withinof U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. each country. MSCI defines the Small Cap universe as all listed securities that have a market capitalization in the range of USD200-1,500 million.The S&P 400 Mid Cap Index is representative of 400 stocks in the mid-range sector of the domestic stockmarket, representing all major industries. The MSCI Value and Growth IndicesSM cover the full range of developed, emerging and All Country MSCI EquityThe Russell 3000 Index® measures the performance of the 3,000 largest U.S. companies based on total market indexes. As of the close of May 30, 2003, MSCI implemented an enhanced methodology for the MSCI Globalcapitalization. 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 forward-The Russell 1000 Index ® measures the performance of the 1,000 largest companies in the Russell 3000. looking 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 marketThe Russell 1000 Growth Index ® measures the performance of those Russell 1000 companies with higher capitalization of the underlying country index. Country Value/Growth indices are then aggregated into regionalprice-to-book ratios and higher forecasted growth values. Value/Growth indices. Prior to May 30, 2003, the indices used Price/Book Value (P/BV) ratios to divide theThe Russell 1000 Value Index ® measures the performance of those Russell 1000 companies with lower price- standard MSCI country indices into value and growth indices. All securities were classified as either "value"to-book ratios and lower forecasted growth values. securities (low P/BV securities) or "growth" securities (high P/BV securities), relative to each MSCI country index.The Russell Midcap Index ® measures the performance of the 800 smallest companies in the Russell 1000 The following MSCI Total Return IndicesSM are calculated with gross dividends:Index. This series approximates the maximum possible dividend reinvestment. The amount reinvested is the dividendThe Russell Midcap Growth Index ® measures the performance of those Russell Midcap companies with higher distributed to individuals resident in the country of the company, but does not include tax credits.price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000Growth index. 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 theThe Russell Midcap Value Index ® measures the performance of those Russell Midcap companies with lower following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece,price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.index.The Russell 2000 Index ® measures the performance of the 2,000 smallest companies in the Russell 3000 The MSCI Pacific IndexSM is a free float-adjusted market capitalization index that is designed to measure equityIndex. 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.The Russell 2000 Growth Index ® measures the performance of those Russell 2000 companies with higherprice-to-book ratios and higher forecasted growth values. Credit Suisse/Tremont Hedge Fund Index is compiled by Credit Suisse Tremont Index, LLC. It is an asset-The Russell 2000 Value Index ® measures the performance of those Russell 2000 companies with lower price- weighted hedge fund index and includes only funds, as opposed to separate accounts. The Index uses the Creditto-book ratios and lower forecasted growth values. 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 ofThe MSCI® EAFE (Europe, Australia, Far East) Net Index is recognized as the pre-eminent benchmark in the Credit Suisse Tremont Index, LLC.United States to measure international equity performance. It comprises 21 MSCI country indexes, representingthe developed markets outside of North America. 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 forThe MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exemptmeasure equity market performance in the global emerging markets. As of June 2007, the MSCI Emerging institutional investors - the great majority being pension funds. As such, all properties are held in a fiduciaryMarkets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, environment.Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco,Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. 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.63
  • 64. J.P. Morgan Asset Management – Index DefinitionsAll indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not The Barclays Capital Taxable Municipal Bond Index is a rules-based, market-value weighted index engineeredinclude fees or expenses. 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: Moodys, S&P,The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities and Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. Ifrepresents nineteen separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and only one of the three agencies rates a security, the rating must be investment-grade. They must have anzinc. 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 coverted toThe S&P GSCI Index is a composite index of commodity sector returns representing an unleveraged, long-only fixed rate), bonds with floating rates, and derivatives, are excluded from the benchmark.investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are Municipal Bond Index: To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher)calculated on a fully collateralized basis with full reinvestment. Individual components qualify for inclusion in the by at least two of the following ratings agencies: Moodys, S&P, Fitch. If only two of the three agencies rate theindex on the basis of liquidity and are weighted by their respective world production quantities. 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 asThe Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31,denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bondsgovernment and corporate securities, mortgage pass-through securities, and asset-backed securities. These major with floating rates, and derivatives are excluded from the benchmark.sectors are subdivided into more specific indexes that are calculated and reported on a regular basis.This U.S. Treasury Index is a component of the U.S. Government index. The Barclays Capital Emerging Markets Index includes USD-denominated debt from emerging markets in the following regions: Americas, Europe, Middle East, Africa, and Asia. As with other fixed income benchmarksWest Texas Intermediate (WTI) is the underlying commodity for the New York Mercantile Exchanges oil futures provided by Barclays Capital, the index is rules-based, which allows for an unbiased view of the marketplace andcontracts. easy replicability. The Barclays Capital MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae, FannieThe Barclays Capital High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind Mae, and Freddie Mac. Aggregate components must have a weighted average maturity of at least one year, must(PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, have $250 million par amount outstanding, and must be fixed rate mortgages.Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countriesare included. Original issue zeroes, step-up coupon structures, and 144-As are also included. The Barclays Capital Corporate Bond Index is the Corporate component of the U.S. Credit index. The Barclays Capital TIPS Index consists of Inflation-Protection securities issued by the U.S. Treasury.The Barclays Capital 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. TreasuryBills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and The J.P. Morgan EMBI Global Index includes U.S. dollar denominated Brady bonds, Eurobonds, traded loanshave $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. and local market debt instruments issued by sovereign and quasi-sovereign entities.dollars and must be fixed rate and non convertible. 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 Barclays Capital General Obligation Bond Index is a component of the Barclays Capital Municipal BondIndex. To be included in the index, bonds must be general obligation bonds rated investment-grade (Baa3/BBB- or The CS/Tremont Equity Market Neutral Index takes both long and short positions in stocks with the aim ofhigher) by at least two of the following ratings agencies: Moodys, S&P, Fitch. If only two of the three agencies rate minimizing exposure to the systematic risk of the market (i.e., a beta of zero).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 The CS/Tremont Multi-Strategy Index consists of funds that allocate capital based on perceived opportunitiesas part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December among several hedge fund strategies. Strategies adopted in a multi-strategy fund may include, but are not limited31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, to, convertible bond arbitrage, equity long/short, statistical arbitrage and merger arbitrage.bonds with floating rates, and derivatives, are excluded from the benchmark. *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 NeutralThe Barclays Capital Revenue Bond Index is a component of the Barclays Capital Municipal Bond Index. Tobe included in the index, bonds must be revenue bonds rated investment-grade (Baa3/BBB- or higher) by at least returns were estimated to be +0.85% (with 69% of all CS/Tremont constituents having reported return data).two of the following ratings agencies: Moodys, S&P, Fitch. If only two of the three agencies rate the security, the Presumed to be excluded from the November return are three funds, which were later marked to $0 bylower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must CS/Tremont in connection with the Bernard Madoff scandal. J.P. Morgan Funds believes this distortion is not anbe investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a accurate representation of returns in the category. CS/Tremont later published a finalized November return of -transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and 40.56% for the month, reflecting this mark-down. CS/Tremont assumes no responsibility for these estimates.must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds withfloating 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 middlerating of Moody’s, S&P and Fitch.64
  • 65. J.P. Morgan Asset Management – Definitions, Risks & Disclosures Derivatives may be riskier than other types of investments because they may be more sensitive to changes inPast performance is no guarantee of comparable future results. 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,Diversification does not guarantee investment returns and does not eliminate the risk of loss. and the cost of such strategies may reduce investment returns.Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise. Price to forward earnings is a measure of the price-to-earnings ratio (P/E) using forecasted earnings. Price toThe price of equity securities may rise, or fall because of changes in the broad market or changes in a company’s book value compares a stocks market value to its book value. Price to cash flow is a measure of thefinancial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting markets expectations of a firms future financial health. Price to dividends is the ratio of the price of a shareindividual companies, sectors or industries, or the securities market as a whole, such as changes in economic or on a stock exchange to the dividends per share paid in the previous year, used as a measure of a companyspolitical conditions. Equity securities are subject to “stock market risk” meaning that stock prices in general may potential as an investment.decline over short or extended periods of time. There is no guarantee that the use of long and short positions will succeed in limiting an investors exposureSmall-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies to domestic stock market movements, capitalization, sector swings or other risk factors. Investing using longsince smaller companies generally have a higher risk of failure. Historically, smaller companies stock has and short selling strategies may have higher portfolio turnover rates. Short selling involves certain risks,experienced a greater degree of market volatility than the average stock. including additional costs associated with covering short positions and a possibility of unlimited loss on certain short sale positions.Mid-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies.Historically, mid-cap companies stock has experienced a greater degree of market volatility than the average Opinions and estimates offered constitute our judgment and are subject to change without notice, as arestock. 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 notReal estate investments may be subject to a higher degree of market risk because of concentration in a specific intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategiesindustry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited described may not be suitable for all investors. This material has been prepared for informational purposesto, declines in the value of real estate, risks related to general and economic conditions, changes in the value of only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. Referencesthe underlying property owned by the trust and defaults by borrower. 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 orInternational investing involves a greater degree of risk and increased volatility. Changes in currency exchange interpreted as a recommendation.rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, someoverseas markets may not be as politically and economically stable as the United States and other nations. The views expressed are those of J.P. Morgan Asset Management. They are subject to change at any time.Investments in emerging markets can be more volatile. As mentioned above, the normal risks of investing in These views do not necessarily reflect the opinions of any other firm.foreign countries are heightened when investing in emerging markets. In addition, the small size of securitiesmarkets and the low trading volume may lead to a lack of liquidity, which leads to increased volatility. Also, Contact JPMorgan Distribution Services, Inc. at 1-800-480-4111 for a fund prospectus. Youemerging markets may not provide adequate legal protection for private or foreign investment or private property. can also visit us at www.jpmorganfunds.com. Investors should carefully consider the investment objectives and risks as well as charges and expenses of the mutual fund beforeInvestments in commodities may have greater volatility than investments in traditional securities, particularly if investing. The prospectus contains this and other information about the mutual fund. Readthe instruments involve leverage. The value of commodity-linked derivative instruments may be affected bychanges in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a the prospectus carefully before investing.particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorganinternational economic, political and regulatory developments. Use of leveraged commodity-linked derivatives Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc.,creates an opportunity for increased return but, at the same time, creates the possibility for greater loss. Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. JPMorgan Distribution Services, Inc., member FINRA/SIPC. Can’t find a slide? © JPMorgan Chase & Co., April 2012. Please visit www.jpmorganfunds.com/bench Unless otherwise stated, all data are as of March 31, 2012 or most recently available. to access slides from previous editions that are now “on the bench”. Prepared by: Andrew D. Goldberg, Joseph S. Tanious, Andrés Garcia-Amaya, David M. Lebovitz, Brandon D. Odenath and David Kelly. NOT FDIC INSURED ı NO BANK GUARANTEE ı MAY LOSE VALUE JP-LITTLEBOOK65