2Q | 2011 Guide to the Markets As of March 31, 2011.

2Q | 2011

Guide to the Markets

As of March 31, 2011

2

Table of Contents

EQUITIES

ECONOMY

FIXED INCOME

INTERNATIONAL

ASSET CLASS

2

13

27

36

46

U.S. Market Strategy TeamDr. David P. Kelly, CFA [email protected]

Andrew D. Goldberg [email protected]

Joseph S. Tanious, CFA [email protected]

Brandon D. Odenath [email protected]

David M. Lebovitz [email protected]

www.jpmorganfunds.com/mi

Past performance is no guarantee of comparable future results.

3

Returns by Style

Jan-10 Jun-10 Oct-10 Apr-111,000

1,100

1,200

1,300

1,400

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 – 3/31/11, illustrating market returns since the most recent S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09 –3/31/11, illustrating market returns since the S&P 500 Index low on 3/9/09. Returns are cumulative returns, not annualized. For all ti me periods, total return is based on Russell-style indexes with the exception of the large blend category, which is reflected by th e S&P 500 Index. Past performance is not indicative of future returns.

Data are as of 3/31/11.

Eq

uit

ies

Jan-07 May -08 Oct-09 Apr-11600

800

1,000

1,200

1,400

1,600

S&P 500 Index

S&P 500 Index

2010: +15.1%1Q11: +5.9%

Since 10/9/07 Peak: -8.5%

1Q 2011

Since Market Low (March 2009)

2010

Since Market Peak (October 2007)

Charts reflect index levels (price change only). All returns and annotations reflect total return, including dividends.

Since 3/9/09 Low: +104.5%

Value Blend Growth Value Blend GrowthL

arg

e

-14.7% -8.5% 1.0%

La

rge

112.7% 104.5% 106.0%M

id 1.1% 3.9% 5.7% Mid 158.2% 150.7% 144.4%

Sm

all

0.9% 4.8% 8.1%

Sm

all

149.6% 152.6% 155.2%

Value Blend Growth Value Blend Growth

La

rge

6.5% 5.9% 6.0%

La

rge

15.5% 15.1% 16.7%

Mid 7.4% 7.6% 7.9% Mid 24.8% 25.5% 26.4%

Sm

all

6.6% 7.9% 9.2%

Sm

all

24.5% 26.9% 29.1%

2

4

Returns by Sector

Source: Standard & Poor’s, Russell Investment Group, FactSet, J.P. Morgan Asset Management.

All calculations are cumulative total return, including dividends for the stated period. Since Market Peak represents period 10/9/07 – 3/31/2011, illustrating market returns since the S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09 – 3/31/11, illustrating market returns since the S&P 500 Index low on 3/9/09. Returns are cumulative, not annualized.

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. Trailing P/E ratios are bottom-up values defined as month-end price divided by the last twelve months of available reported earnings. There is an inherent lag in the reporting of these data by companies to S&P. Historical data canchange as new information becomes available. All P/E ratios exclude negatives. 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. For all time periods, total return is based on S&P sectors and provided by FactSet. Russell weights are based on each sector’s respective representation in the Russell 1000 Growth Index and the Russell 1000 Value Index.

Past performance is not indicative of future returns. Technology is a rapidly changing field and stocks of these companies, especially of smaller or unseasoned companies, may be more volatile than the stock market in general.


Eq

uit

ies

Finan

cials

Technolo

gy

Health

Car

e

Indus

trial

s

Energy

Cons. Dis

cr.

Cons. Sta

ples

Telec

om

Utiliti

es

Mat

erials

S&P 500

Index

S&P Weight 15.8% 18.1% 11.0% 11.3% 13.3% 10.4% 10.2% 3.0% 3.2% 3.7% 100.0%Russell Growth Weight 4.7% 30.2% 9.9% 13.6% 11.9% 14.3% 9.3% 0.8% 0.1% 5.1% 100.0%

Russell Value Weight 26.9% 5.3% 12.4% 9.4% 13.8% 8.0% 9.4% 5.1% 6.6% 3.2% 100.0%

1Q 2011 3.0 3.5 5.6 8.8 16.8 4.7 2.5 4.9 2.8 4.5 5.9

2010 12.1 10.2 2.9 26.7 20.5 27.7 14.1 19.0 5.5 22.2 15.1

Since Market Peak (October 2007)

-50.4 1.9 -2.0 -6.4 8.1 9.5 17.8 -11.0 -10.8 0.1 -8.5

Since Market Low (March 2009)

170.8 113.5 58.0 157.1 97.9 153.4 65.2 70.0 56.1 138.5 104.5

Forward P/E Ratio 11.6x 12.9x 11.5x 15.1x 13.0x 14.8x 14.2x 17.0x 12.9x 13.7x 13.1x

15-yr avg. 13.0x 24.1x 19.4x 17.3x 15.4x 18.8x 19.2x 17.4x 13.4x 16.4x 17.1x

Trailing P/E Ratio 13.7x 16.0x 16.2x 18.5x 15.9x 17.5x 15.5x 14.5x 13.3x 19.2x 15.9x

20-yr avg. 16.0x 27.4x 24.6x 20.5x 18.5x 19.9x 21.5x 18.5x 14.1x 19.7x 19.8x

Dividend Yield 1.1% 0.9% 2.2% 2.0% 1.6% 1.4% 3.0% 5.3% 4.4% 1.8% 1.8%

20-yr avg. 2.2% 0.6% 1.4% 1.8% 2.0% 1.1% 2.0% 3.7% 4.6% 2.2% 1.7%

P/E

We

igh

tR

etu

rnD

iv

3

5

U.S. Equity Indexes

Index Wtd Avg Total Top 10 Bottom 100 Large Mid Small Div Yld Fwd P/ E

S&P 500 93.1 bn 12,068 bn 18.7% 3.3% 90.3% 9.3% 0.4% 1.9% 13.1xRussell 1000 82.5 13,757 16.6 0.9 80.7 15.5 3.8 1.8 13.9Dow J ones 135.3 3,794 56.6 43.4 100.0 0.0 0.0 2.3 12.7

Russell 1000 Value 73.6 6,826 24.0 1.0 79.6 15.6 4.8 2.1 13.0Russell 1000 Growth 91.3 6,930 25.0 0.6 81.8 15.4 2.9 1.4 14.9

S&P Mid Cap 400 4.0 1,211 7.1 10.8 2.4 55.3 42.3 1.2 17.4Russell Mid Cap 8.5 4,211 4.4 3.1 37.1 50.4 12.5 1.4 16.5

Sm Russell 2000 1.4 1,266 3.2 0.4 0.0 4.2 95.8 1.1 21.1

All Russell 3000 75.7 15,022 15.2 0.0 73.9 14.5 11.6 1.7 14.3

ValuationWeight

Larg

eM

id

Market Cap Size (Lipper*)

Russell 1000

Russell Indexes

Russell 1000

Russell 2000

Russell Top 200

Russell

S&P Indexes

Russell 3000

S&P 1500

S&P 500

S&P Mid Cap 400

S&P Small Cap 600

Industrials

Value (665)

Growth (624)

Russell 1000

Industrials (30)

Dow Jones

Eq

uit

ies

Market Cap is a bottom-up weighted average based on share information from Compustat and price information from FactSet's pricing database as provided by Standard & Poor's 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 forillustrative purposes only and are hypothetical distributions based on Lipper mutual fund categories. As of February 2011, Lipper defines large asmarket cap over $11.6 billion, small as less than $4.1 billion and mid as all values in between. The number of holdings as of 3/31/11 are –Russell 1000: 973; Russell Mid Cap: 778; Russell 2000: 1,948; Russell 3000: 2,921. Data are as of 3/31/11.

Mid Cap (800)

4

6

S&P 500 Index at Inflection Points

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11600

800

1,000

1,200

1,400

1,600Index level 1,527 1,565 1,326P/E Ratio (fwd) 25.6x 15.2x 13.1xDividend yield 1.1% 1.8% 1.8% 10-yr. Treasury 6.2% 4.7% 3.5%

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 p rovided 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.


S&P 500 Index

-49%

Eq

uit

ies

Oct. 9, 2002 P/E (fwd) = 14.1x

777

Mar. 24, 2000 P/E (fwd) = 25.6x

1,527

Dec. 31, 1996 P/E (fwd) = 16.0x

741

Mar. 31, 2011 P/E (fwd) = 13.1x

1,326

+101%

Oct. 9, 2007 P/E (fwd) = 15.2x

1,565

-57%

Mar. 9, 2009 P/E (fwd) = 10.3x

677

+96%

Characteristic Mar-2000 Oct-2007 Mar-2011

5

7

Equity Scenarios: Bull, Bear and In-between

20.1%

10.7%

7.7%

6.2%

5.4%

4.8%

4.4%

4.1%

3.9%

3.7%

1 Yrs

2 Yrs

3 Yrs

4 Yrs

5 Yrs

6 Yrs

7 Yrs

8 Yrs

9 Yrs

10 Yrs

10/9/07 Peak 1,565

Distance Left to Peak 239

Eq

uit

ies

S&P 500 Index: Return Needed to Reach 2007 Peak

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. *Current bull run from 3/9/09 through 3/31/11. Data are as of 3/31/11.

Implied avg. annualized total return

Implied cumulative total returnX%

Analysis as of Mar. 31, 2011. Index has risen 95.8% since low of 677.

X%

20.1%

22.4%

24.9%

27.4%

29.9%

32.5%

35.2%

37.9%

40.6%

43.4%

Recovery So Far 649

Decline Peak to Trough 888

3/31/11 Level 1,326

3/9/09 Trough 677

Bear Market Cycles vs. Subsequent Bull Runs

Market Peak

Market Low

Bear Market Return

Length of Decline

Bull RunLength of Run

Yrs to Reach Old

Peak

5/29/46 5/19/47 -28.6% 12 257.6% 122 3.1 yrs

7/15/57 10/22/57 -20.7% 3 86.4% 50 0.9 yrs

12/12/61 6/26/62 -28.0% 6 79.8% 44 1.2 yrs

2/9/66 10/7/66 -22.2% 8 48.0% 26 0.6 yrs

11/29/68 5/26/70 -36.1% 18 74.2% 31 1.8 yrs

1/5/73 10/3/74 -48.4% 21 125.6% 74 5.8 yrs

11/28/80 8/12/82 -27.1% 20 228.8% 60 0.2 yrs

8/25/87 12/4/87 -33.5% 3 582.1% 148 1.6 yrs

3/24/00 10/9/02 -49.1% 31 101.5% 60 4.6 yrs

10/9/07 3/9/09 -56.8% 17 95.8%* 25* -

Average: -35.0% 14 mo's 176.0% 68 mo's 2.2 yrs

6

8

Investment Style Valuations

Value Blend Growth

La

rge

91.5% 82.3% 70.4%

Mid 102.8% 96.1% 78.6%

Sm

all

107.8% 99.6% 87.7%

'92 '94 '96 '98 '00 '02 '04 '06 '08 '100.7x

0.8x

0.9x

1.0x

1.1x

1.2x

1.3x

'92 '94 '96 '98 '00 '02 '04 '06 '08 '101.0x

1.5x

2.0x

2.5x

3.0x

3.5x

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 is most recent as of 3/31/11. Data reflect P/Es as provided by Russell based on IBES estimates of next twelve months’ earnings.Data are as of 3/31/11.

Russell 1000 Growth P/E divided by Russell 1000 Value P/E

Eq

uit

ies

Russell 2000 P/E divided by Russell 1000 P/E

20-yr. average: 1.47x

Most recent:

R1000 Growth 14.9

R1000 Value 12.9

Growth / Value 1.15x*

Most recent:

R2000 17.0

R1000 13.9

Small / Large 1.22x*

20-yr. average: 1.03x

Current P/E as % of 20-year avg. P/E

E.g.: Large Cap Blend stocks are 17.7% cheaper than their historical average.

Current P/E vs. 20-year avg. P/E

12.9 13.9 14.9

14.1 16.9 21.2

14.4 15.7 17.3

14.0 16.3 22.0

15.3 17.0 18.7

14.2 17.0 21.3Sm

all

Value Blend Growth

La

rge

Mid

7

9

Stock Valuation Measures: S&P 500 Index

S&P 500 Index: Valuation Measures Historical AveragesValuation Measure Description

Latest1-year

ago3-year avg.

5-year avg.

10-year avg.

15-year avg.

P/E Price to Earnings 13.1x 14.1x 13.0x 13.6x 15.4x 17.1x

P/B Price to Book 2.3 2.2 2.1 2.4 2.7 3.1

P/CF Price to Cash Flow 8.8 8.9 8.3 9.1 10.5 11.2

P/S Price to Sales 1.3 1.2 1.1 1.2 1.3 1.5

Div. Yield Dividend Yield 2.0% 1.9% 2.3% 2.2% 2.0% 1.9%

'94 '96 '98 '00 '02 '04 '06 '08 '103%

4%

5%

6%

7%

8%

9%

10%

'75 '80 '85 '90 '95 '00 '05 '100.0x

0.5x

1.0x

1.5x

2.0x

Eq

uit

ies

Q-Ratio: Stock Price Relative to Company Assets

Mo

re A

ttractive

Le

ss Attra

ctive

Price to net asset value, all U.S. non-financial corporationsS&P 500 Earnings Yield vs. Baa Bond Yield

S&P 500 Earnings Yield: (Inverse of fwd. P/E) 7.6%

Moody’s Baa Yield: 6.1%

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 i s 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 es timates 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. 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. *1Q11 is an estimate provided by J.P. Morgan Asset Management as of 3/31/11.(Bottom right) Standard & Poor’s, Moody’s, FactSet, J.P. Morgan Asset Management.


1Q11*:1.1x

40-yr. avg. = 0.8x

8

10

Earnings Estimates and Valuation Drivers

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10$0

$20

$40

$60

$80

$100

$120

'94 '96 '98 '00 '02 '04 '06 '08 '108x

12x

16x

20x

24x

28x

S&P 500 Index: Forward P/E Ratio S&P 500 Operating Earnings Estimates

Average: 16.5x

1Q11: $100.93

Mar. 2011: 13.1x

'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

12x

16x

20x

24x

60

80

100

120

Eq

uit

ies

Source: (Top left) Standard & Poor’s, Compustat, FactSet, J.P. Morgan Asset Management. (Top right) Standard & Poor’s, Compustat, Fac tSet, J.P. Morgan Asset Management. Earnings estimates are for calendar years and taken at quarter end dates throughout the year. Actual reported are annual operating earnings reported by Standard and Poor’s. (Bottom) Standard & Poor’s, FactSet, University of Michigan, J.P. Morgan Asset Management.Forward Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next twelve months.


Forward P/EConsumer Sentiment

Multiple Expansion and ContractionForward P/E based on consensus EPS estimates Correlation Coefficient: 0.72

Consensus estimates of the next twelve months’ rolling earnings

9

11

Deploying Corporate Cash

0

200

400

600

800

1,000

1,200

1,400

1,600

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Corporate Cash as a % of Current Assets

Cash Returned to ShareholdersDividend Payout Ratio

S&P 500 companies – cash and cash equivalents, quarterly

Rolling 4-quarter averages, S&P 500, billions USD

Source: Standard & Poor’s, FRB, Bloomberg, FactSet, J.P. Morgan Securities, J.P. Morgan Asset Management.

(Top left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Top right) M&A activity is quarterly number of deals of any value and capital expenditures are for nonfarm nonfinancial corporate business. (Bottom left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Bottom right) Standard & Poor’s, Compustat, FactSet, J.P. Morgan Asset Management. Data are most recent as of 3/31/11.

Eq

uit

ies

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '1014%

16%

18%

20%

22%

24%

26%

28%

Corporate Growth

Capital expenditures M&A activity

Quarterly deal volume and nonfarm nonfinancial capex, billions USD

S&P 500 companies, LTM

Dividends per share

Share buybacks

'01 '02 '03 '04 '05 '06 '07 '08 '09 '1020%

30%

40%

50%

60%

$20

$40

$60

$80

$100

$120

$140

$160

$15

$18

$21

$24

$27

$30

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

10

12

Sources of Profitability

Chart 2: Asset Turnover Ratio

Source: Standard & Poor’s, Compustat, FactSet, J.P. Morgan Asset Management.

Return on equity for S&P 500 companies calculated as the product of aggregate net income/sales, aggregate sales/assets and ag gregate assets/equity for these 500 companies. Most recent data are from 3Q10 reflecting the last fully completed reporting period.

Dotted lines represent the average, as well as +/- one standard deviation from the average, for the time period shown.


Sales/assetsNet income/salesChart 1: Net Profit Margin

Return on EquityChart 1 * Chart 2 * Chart 3 = Net income/equity

Chart 3: Financial LeverageAssets/equity

Eq

uit

ies

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '100%

4%

8%

12%

16%

20%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '1030%

33%

36%

39%

42%

45%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10480%

520%

560%

600%

640%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '100%

2%

4%

6%

8%

10%

11

13

Equity Correlations and Volatility

0%

10%

20%

30%

40%

50%

60%

70%

'26 '32 '38 '44 '50 '56 '62 '68 '74 '80 '86 '92 '98 '04 '10

Eq

uit

ies

'26 '32 '38 '44 '50 '56 '62 '68 '74 '80 '86 '92 '98 '04 '100.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Daily Volatility of DJIA

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. 9, 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.Charts shown for illustrative purposes only. Data are as of 3/31/11.

Chart shownin 3-month

moving average

Average: 0.72%

Volatility Level ’08 Peak Latest

DJIA 3.30% 0.54%

Large Cap StocksCorrelations Among Stocks Sovereign Debt

Crisis

Lehman Bankruptcy

Tech Bust & 9/11

1987 Crash

Great Depression /World War II

OPEC Oil Crisis

Cuban Missile Crisis

Average: 26.4%

Mar. 2011: 23.6%

12

14

Economic Expansions and Recessions 13

0

25

50

75

100

125

1900 1912 1921 1933 1949 1961 1980 2001

The Great Depression and Post-War Recessions Length and severity of recession

Great Depression: 26.7% decline in real GDP

Most Recent Recession: 4.1% decline in real GDP

Ec

on

om

y

Source: NBER, BEA, J.P. Morgan Asset Management.

Bubble size reflects the severity of the recession, which is calculated as the decline in real GDP from the peak quarter to the trough quarter except in the case of the Great Depression, where it is calculated from the peak year (1929) to the trough year (1933), due to a lack of available quarterly data. Data are as of 3/31/11.

Source: NBER, J.P. Morgan Asset Management.

*Chart assumes current expansion started in July 2009 and continued through March 2011.

Data for length of economic expansions and recessions obtained from the National Bureau of Economic Research (NBER). These data can be found at www.nber.org/cycles/ and reflects information through March 2011.

For illustrative purposes only.

Length of Economic Expansions and Recessions

Average Length (months):

Expansions: 44 monthsRecessions: 15 months

*

-3.2%

-0.6%

-2.2%

-2.9%

-1.6%-2.6%

-3.7%

-1.7%-1.4%

-0.3%

-4.1%

-26.7%

0 yrs

1 yrs

2 yrs

3 yrs

4 yrs

5 yrs

1910 1930 1950 1970 1990 2010

Le

ng

th o

f R

ec

es

sio

n in

Ye

ars

15

Economic Growth and the Composition of GDP

-$2,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

'02 '04 '06 '08 '10-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Source: BEA, FactSet, J.P. Morgan Asset Management.

Data reflect most recently available as of 3/31/11. GDP values shown in legend are % change vs. prior quarter annualized and reflect revised 4Q10 GDP.

Real GDP % chg at annual rate

Ec

on

om

y

20-yr avg. 4Q10

Real GDP: 2.5% 3.1%

Components of GDP

10.0% Investment ex-housing

70.7% Consumption

20.4% Gov’t Spending

Billions, USD

2.3% Housing

- 3.3% Net Exports

$554 bn of output lost

$571 bn of output

recovered

14

16

Cyclical Sectors

'98 '00 '02 '04 '06 '08 '1040

45

50

55

60

65

70

75

'70 '75 '80 '85 '90 '95 '00 '05 '10-200

-150

-100

-50

0

50

100

150

'75 '80 '85 '90 '95 '00 '05 '100

400

800

1,200

1,600

2,000

2,400

'85 '90 '95 '00 '05 '108

10

12

14

16

18

20

22

24

Ec

on

om

y

Change in Private Inventories

Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Top right) BEA, FactSet, J.P. Morgan Asset Management. (Bottom left) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom right) Census Bureau, FactSet, J.P. Morgan Asset Management.

Data reflect most recently available as of 3/31/11.

Billions of 2005 dollars, seasonally adjusted annual rateMillions, seasonally adjusted annual rateLight Vehicle Sales

Real Capital Goods OrdersNon-defense capital goods orders ex. aircraft, $ bn, seasonally adjusted

Feb. 2011: 479

Housing StartsThousands, seasonally adjusted annual rate

Average: 14.6 Average: 25.4

Average: 57.6

Feb. 2011: 56.1

4Q10: 16.2

Mar. 2011: 13.1

Average: 1,469

15

17

Consumer Finances

10%

11%

12%

13%

14%

15%

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

$0

$10

$20

$30

$40

$50

$60

$70

$80

Personal Savings Rate

'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '100%

2%

4%

6%

8%

10%

12%

Annual, % of disposable incomeConsumer Balance SheetTrillions of dollars outstanding, not seasonally adjusted

Source: (Left) FRB, J.P. Morgan Asset Management. Data includes households and nonprofit organizations. (Right) BEA, FRB, J.P. Morgan Asset Management.

Household Debt Service RatioDebt payments as % of disposable personal income, seasonally adjusted

Total Assets: $71 tn

Total Liabilities: $14 tn

Homes: 26%

Deposits: 11%

Pension funds: 18%

Other financial assets: 38%

Other tangible: 7%

Mortgages: 72%

Revolving (e.g.: credit cards): 6%Non-revolving: 12%

Other Liabilities: 10%

Ec

on

om

y

YTD 2011:6.0%

1Q80: 11.2%

1Q11*: 11.5%

3Q07:14.0%

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 are as of February 2011. *1Q11 Household Debt Service Ratio is J.P. Morgan Asset Management estimate.

All other data are as of 4Q10.

16

18

Entitlements: Social Security

Medicare Medicaid

40%

Net Interest6%

Defense (Discretionary)

20%

Non-Defense (Discretionary)

15%

Other19%

Federal Budget Surplus/Deficit

Ec

on

om

y

% of GDP, 1940 – 2012*Federal Government Revenues & Outlays U.S. Proposed Federal Budget Outlays – 2011

Outlays

Revenues

Source: U.S. Treasury, BEA, CBO, OMB, J.P. Morgan Asset Management.

2010 numbers reflect actual CBO data for FY 2010. *Other numbers are based on 2011 and 2012 budget projections from the CBO.

Note: Years shown are fiscal years (Oct. 1 through Sep. 30). Bottom left chart displays federal surplus (revenues – outlays). Data reflect most recently available as of 3/31/11.

Source: CBO, J.P. Morgan Asset Management.

2010 numbers reflect actual CBO data for FY 2010.

Federal Debt (Accumulated Deficits)% of GDP, 1940 – 2012* % of GDP, 1940 – 2012*

5%

15%

25%

35%

45%

1940 1950 1960 1970 1980 1990 2000 2010

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

1940 1950 1960 1970 1980 1990 2000 2010

0%

25%

50%

75%

100%

125%

1940 1950 1960 1970 1980 1990 2000 2010

2012 estimate: 74%

2012 estimate: 7%

17Federal Finances

19

The Aftermath of the Housing Bubble

10%

15%

20%

25%

30%

35%

40%

'75 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10'95 '00 '05 '103

4

5

6

7

8

9

'95 '00 '05 '1080

100

120

140

160

180

200

220

240 Home Price Changes: 1-year: -5% 3-years: -20%5-years: -27%10-years: 12%

'90 '95 '00 '05 '102,000

2,500

3,000

3,500

4,000

4,500

5,000$ thousands, seasonally adjusted

Combined New & Existing Homes for SaleThousands, seasonally adjusted

Ec

on

om

y

Sources: (Top left) National Association of Realtors, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, Natio nal Association of Realtors, J.P. Morgan Asset Management. (Bottom left) Census Bureau, National Association of Realtors, J.P. Morgan Asset Management. (Bottom right) Census Bureau, FRB, BEA, J.P. Morgan Asset Management. Home price based on median sales price of existing homes and are cumulative, not annualized. Existing home sales include single-family,townhomes, condominiums and co-ops. Note: Calculation for bottom right chart assumes a 20% down payment, a 30-year fixed rate mortgage,excludes property tax and homeowners’ insurance and is expressed as a percent of pre-tax income.Data reflect most recently available as of 3/31/11.

Affordability: Mortgage Payment on Average New Home% of average household personal income

Median Existing Home Prices

10-years

5-years

3-years

1-year

Feb. 2011: 11.7%

Combined New & Existing Home Sales Millions, annual rate, seasonally adjusted

Feb. 2011: 3,821

Oct. 2007: 4,875

Feb. 2011: 5.1

Average: 5.8

Average: 2,940

18

20

Employment

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10-1,000

-800

-600

-400

-200

0

200

400

600

'70 '80 '90 '00 '103%

4%

5%

6%

7%

8%

9%

10%

11%

12%

Source: BLS, J.P. Morgan Asset Management.


Civilian Unemployment Rate Employment – Total Private Payroll

Ec

on

om

y

50-yr. avg.: 6.0%



Seasonally adjusted Total job gain/loss (thousands)

Mar. 2011: 8.8%

8.8mm jobs lost

1.8mm jobs gained

19

21

Job Growth, Productivity and Labor Force

'92 '94 '96 '98 '00 '02 '04 '06 '08 '1064%

65%

66%

67%

68%

'92 '94 '96 '98 '00 '02 '04 '06 '08 '10-2%

0%

2%

4%

6%

8%



Labor Productivity: Output per HourNon-farm business productivity, % change year-over-year

20 Years – Net Job CreationNet change in millions of payroll jobs, sa

Ec

on

om

y

4Q10:1.9%



Labor Force Participation Rate% of population aged 16+ working or looking for work

20-yr. average: 66.3%


Mar. 2011: 64.2%-5.5

0.6

1.2

1.1

2.6

3.9

4.0

6.4

7.0

-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0

Manufacturing

Mining & Construction

Other Services

Government

Trade & Retailing

Leisure & Hospitality

Education

Fin. & Bus. Services

Health Care

20

22

Small Business

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10$0.6

$0.8

$1.0

$1.2

$1.4

$1.6

$1.8

$0.8

$0.9

$1.0

$1.1

$1.2

'06 '07 '08 '09 '10-16%

-14%

-12%

-10%

-8%

-6%

-4%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '1080

85

90

95

100

105

110

Ec

on

om

y

Small and Large Firm Profits - Bil $

Source: (Top left) NFIB, FactSet, J.P. Morgan Asset Management. (Top right) BEA, FactSet, J.P. Morgan Asset Management. (Bottom left) NFIB, FactSet, J.P. Morgan Asset Management. (Bottom right) Census Bureau, FactSet, J.P. Morgan Asset Management.

(Top right) Large firm profits defined as adjusted pre-tax corporate profits. Small firm profits defined as adjusted proprietors ’ income.

Employment data is from the BLS Business Employment Dynamics survey, which is released quarterly.


NFIB Small Business Optimism Index

Net Change in Employment – ThousandsSmall Business: Availability of Credit

Feb. 2011: 94.5

Large Firms

Small Firms

Mar. 2009: 81.0

Small firms

Large firms

Feb. 2011:-10.7%

Net percent (“easier” – “harder”) compared to 3mo ago, 3mo moving average Small firm defined as having less than 1000 employees

-2000

-1500

-1000

-500

0

500

1000

'93 '95 '97 '99 '01 '03 '05 '07 '09

21

23

Corporate Profits

-$1

$2

$5

$8

$11

$14

$17

$20

$23

$26

'10'08'06'04'02'00

Source: BEA, FactSet, J.P. Morgan Asset Management.


Adjusted After-Tax Corporate Profits (% of GDP)Includes inventory and capital consumption adjustments

Ec

on

om

y

S&P 500 Earnings Per ShareOperating basis, quarterly

Source: Standard & Poor’s, J.P. Morgan Asset Management.

EPS levels are based on operating earnings per share. Data reflect most recently available as of 3/31/11.

Most recently available is a 4Q10 99% complete estimate.

Most recent: $21.92

'65 '70 '75 '80 '85 '90 '95 '00 '05 '103%

4%

5%

6%

7%

8%

9%

50-yr. avg.: 6.0%

2Q07: $24.064Q10:8.4%

22

24

Consumer Price Index

'65 '70 '75 '80 '85 '90 '95 '00 '05 '10-3%

0%

3%

6%

9%

12%

15%


Data reflect most recently available as of 3/31/11. CPI values shown are % change vs. 1 year ago and reflect February 2011 CPI data. CPI component weights are as of Feb. 2011 and 12-month change reflects data through February 2011. Core CPI is defined as CPI excluding food and energy prices.

Ec

on

om

y

CPI and Core CPI50-yr. Avg. Feb. 2011

Headline CPI: 4.1% 2.2%

Core CPI: 4.1% 1.1%

% chg vs. prior year, seasonally adjustedCPI Components

Weight in CPI

12-month Change

Food & Bev. 14.8% 2.2%

Housing 41.5% 0.7%

Apparel 3.6% -0.4%

Transportation 17.3% 7.3%

Medical Care 6.6% 2.9%

Recreation 6.3% -0.1%

Educ. & Comm. 6.4% 1.2%

Other 3.5% 2.0%

Headline CPI 100.0% 2.2%

Less:

Energy 9.1% 11.2%

Food 13.7% 2.3%

Core CPI 77.2% 1.1%

23

25

Returns in Different Inflation Environments – 40 years

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 1971 to 2010. Rising or falling inflation distinction is relative to previous year CPI-U inflation rate. Bond returns are based on the Barclays U.S. Aggregate index since its inception in 1976 and a composite bond index prior to that. Equity returns based on S&P 500 price return and annual dividend yield. Cash returns are based on the Barclays 1-3 Month T-Bill index since its inception in 1992 and 3-month T-Bill rates prior to that. Commodities returns based on GSCI.

For illustrative purposes only. Past performance is not indicative of comparable future returns. Data reflect most recently available as of 3/31/11.

High and Rising Inflation

Ec

on

om

y

Occurred 13 times since 1971High and Falling InflationOccurred 7 times since 1971

Low and Rising InflationOccurred 7 times since 1971

Low and Falling InflationOccurred 13 times since 1971

Abo

ve m

edia

n

Below

median

Median Inflation:

3.4%

Falling inflation scenariosRising inflation scenarios

6%1%

7%10%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Bonds Equities Cash Commodities

17%

22%

8%

-12%-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


6%

20%

3%

22%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


8%12%

4%6%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


24

26

Oil and the Economy

0

1

2

3

4

5

6

7

8

'94 '96 '98 '00 '02 '04 '06 '08 '10-4%

-2%

0%

2%

4%

6%

8%

10%

'70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10

'94 '96 '98 '00 '02 '04 '06 '08 '10$0

$20

$40

$60

$80

$100

$120

$140

$160

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

'70 '75 '80 '85 '90 '95 '00 '05 '100%

1%

2%

3%

4%

Source: U.S. Department of Energy, FactSet, J.P. Morgan Asset Management.

2011 and 2012 world oil consumption based on estimates from U.S. Department of Energy.*Gasoline price based on weekly series; data are as of 4/1/11.


WTI Crude Oil & Retail Gasoline Prices

Ec

on

om

y

OilGas

Source: (Top) BEA, J.P. Morgan Asset Management. (Bottom) OPEC, J.P. Morgan Asset Management.


12/31/2000 3/31/2011 Oil $26.72 $106.72Gas $1.41 $3.60*

Economic Drag of Oil PricesU.S. Petroleum Imports as a % of GDP

4Q10: 2.4%

OPEC Spare Capacity – Crude Oil

3Q08: 3.8%

Millions of barrels per dayWorld Oil ConsumptionPercentage change, barrels

Average: 3.0 mm bbl/day

25

27

Consumer Confidence

'72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '1040

50

60

70

80

90

100

110

120

130

Source: University of Michigan, FactSet, J.P. Morgan Asset Management.

*Based on regression analysis of monthly data from Jan. 1998 to Feb. 2011.


Consumer Sentiment Index – University of Michigan

Average: 85.8

Ec

on

om

y

Feb. 1975+25.1%

May 1980+13.6%

Oct. 1990+36.5%

Mar. 2003+31.4%

Nov. 2008+21.6%

Sentiment Cycle Low and subsequent 12-month S&P 500 Index return

-1.6 points+6.4+2.7-4.5

10% y-o-y rise in gasoline prices10% y-o-y rise in home prices10% y-o-y rise in the S&P 5001% y-o-y rise in the unemployment rate

Impact on Consumer Sentiment from a…*

Current: 67.5

26

28

Fixed Income Sector Returns

10-yrs2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q11 01 - '10

EMD Corp. TIPS High Yield EMD EMD High Yield TIPS Treas. High Yield High Yield High Yield EMD

13.7% 10.3% 16.7% 29.0% 11.9% 12.3% 11.8% 11.6% 13.7% 58.2% 15.1% 3.9% 171.1%

Treas.Barclays

AggEMD EMD High Yield

Asset Alloc.

EMD Treas. MBS EMD EMD TIPS High Yield

13.5% 8.4% 12.2% 26.9% 11.1% 3.6% 10.0% 9.0% 8.3% 34.2% 12.8% 2.1% 134.2%

TIPS MBS Treas. TIPS TIPS Muni MBSBarclays

AggBarclays

AggCorp. Corp. EMD TIPS

13.2% 8.2% 11.8% 10.6% 6.3% 3.5% 5.2% 7.0% 5.2% 18.7% 9.0% 1.6% 97.2%

Muni TIPSBarclays

AggAsset Alloc.

Asset Alloc.

TIPSAsset Alloc.

MBSAsset Alloc.

Asset Alloc.

Asset Alloc.

Asset Alloc.

Asset Alloc.

11.7% 7.9% 10.3% 10.0% 6.0% 2.8% 5.1% 6.9% -1.4% 15.8% 7.6% 1.0% 92.2%

Barclays Agg

Asset Alloc.

Corp. Corp. Corp. Treas. MuniAsset Alloc.

TIPS MuniBarclays

AggCorp. Corp.

11.6% 6.8% 10.1% 8.2% 5.4% 2.8% 4.8% 6.2% -2.4% 12.9% 6.5% 0.9% 89.0%

MBS Treas.Asset Alloc.

Muni MBS High YieldBarclays

AggEMD Muni TIPS TIPS MBS MBS

11.2% 6.7% 10.0% 5.3% 4.7% 2.7% 4.3% 5.2% -2.5% 11.4% 6.3% 0.6% 77.2%

Asset Alloc.

High Yield MuniBarclays

AggMuni MBS Corp. Corp. Corp.

Barclays Agg

Treas. MuniBarclays

Agg10.2% 5.3% 9.6% 4.1% 4.5% 2.6% 4.3% 4.6% -4.9% 5.9% 5.9% 0.5% 76.3%

Corp. Muni MBS MBSBarclays

AggBarclays

AggTreas. Muni EMD MBS MBS

Barclays Agg

Treas.

9.1% 5.1% 8.7% 3.1% 4.3% 2.4% 3.1% 3.4% -14.7% 5.9% 5.4% 0.4% 69.4%

High Yield EMD High Yield Treas. Treas. Corp. TIPS High Yield High Yield Treas. Muni Treas. Muni

-5.9% 1.5% -1.4% 2.2% 3.5% 1.7% 0.4% 1.9% -26.2% -3.6% 2.4% -0.2% 60.3%

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 Real 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.


Fix

ed

Inc

om

e

27

29

Fixed Income Yields and Returns

U.S. Treasuries # of issues Mkt. Value Avg. Maturity 12/31/2010 3/31/2011 2010 1Q 2011 +1% -1%

2-Year 2 years 0.61% 0.80% 2.35% -0.02% -1.98% 1.58%*

5-Year 5 2.01 2.24 7.02 0.02 -4.70 4.70

10-Year 10 3.30 3.47 8.01 -0.37 -8.22 8.23

30-Year 30 4.34 4.51 8.72 -1.73 -16.04 16.08

Sector

Broad Market 8,001 $15,093 bn 7.3 years 2.97% 3.08% 6.54% 0.42% -5.12% 5.12%

MBS 1,110 4,979 6.6 3.67 3.75 5.37 0.58 -4.57 4.55

Corporates 3,749 2,927 10.1 4.02 4.07 9.00 0.86 -6.51 6.51

Municipals 45,878 1,202 13.2 3.80 3.86 2.38 0.51 -8.46 8.46

Emerging Debt 400 575 11.2 5.76 5.84 12.84 1.57 -6.39 6.39

High Yield 1,864 975 6.9 7.51 7.02 15.12 3.88 -4.28 4.28

TIPS 31 611 9.0 2.78 2.90 6.31 2.08 -5.27 5.27

Yield ReturnImpact on Price from 1%

Change in Rates

Fix

ed

Inc

om

e

Source: U.S. Treasury, Barclays Capital, FactSet, J.P. Morgan Asset Management.

Fixed income sectors shown above are provided by Barclay’ Capital and are represented by – Broad Market: US Barclays Capital Index; MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index. TIPS: Treasury Inflation Protection (TIPS). Treasury securities data for # of issues and market value based on U.S. Treasury benchmarks from Barclays Capital. Yield and return information based on Bellwethers for Treasury securities.

Change in bond price is calculated using both duration and convexity according to the following formula:New Price = (Price + (Price * -Duration * Change in Interest Rates))+(0.5 * Price * Convexity * (Change in Interest Rates)̂ 2)

*Calculation assumes 2-Year Treasury interest rate falls 0.80% to 0.00% as interest rates can only fall to 0.00%.

Chart is for illustrative purposes only.


# of issues: 137

Total value: $3.895 tn

28

30

The Federal Reserve

'05 '06 '07 '08 '09 '10$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '100%

2%

4%

6%

8%

10%

12%

'82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '100%

2%

4%

6%

8%

10%

12%

14%

Source: Federal Reserve, FactSet, J.P. Morgan Asset Management.


Fix

ed

Inc

om

e

Fed Funds Target Rate and 10-Year Treasury Yields

Source: Federal Reserve, FactSet, J.P. Morgan Asset Management.


Money Supply GrowthYear-over-year growth in M2

Federal Reserve Balance SheetU.S. Federal Reserve, total reserve bank credit, $ trillions

Long-term

Short-term

Fed Funds Target: 0.0% to 0.25%

10-year Treasuries: 3.47%

Feb. 2011: 4.1%

29

31

Credit Conditions

675

680

685

690

695

1999 2001 2003 2005 2007 2009 '98 '00 '02 '04 '06 '08 '10

0%

1%

2%

3%

4%

5%

'92 '94 '96 '98 '00 '02 '04 '06 '08 '10

2%

4%

6%

8%

10%

12%

Consumer Loans

Residential Mortgages

'98 '00 '02 '04 '06 '08 '10-40%

-20%

0%

20%

40%

60%

80%

100%

Source: (Top left) Federal Reserve, FactSet, J.P. Morgan Asset Management. (Top right) Federal Reserve, FactSet, J.P. Morgan Asset Management. (Bottom left): FRBNY Consumer Credit Panel, J.P. Morgan Asset Management. (Bottom right) U.S. Treasury, British Bankers Association, FactSet, U.S. Treasury,J.P. Morgan Asset Management.

All data reflect most recently available releases.


Lending Standards: Consumer Loans Net percent of banks reporting tighter lending standards

Equifax Risk Score Average credit score

Delinquency RatesAll banks, seasonally adjusted

Commercial and Industrial Loans

Consumer Loans

Fix

ed

Inc

om

e

-11%

-6%

67%

84%

LIBOR Spread over Treasuries (“TED Spread”) 3-month LIBOR – 3-month Treasury (rate on interbank loans)

Commercial and Industrial Loans 9.9%

3.0%

3.7%

4Q10:692

0.21%

Average: 0.6%

30

32

Treasury Yields and Inflation

As of Mar. 31, 2011:

10-year Treasuries 3.47%Core CPI 1.09%Real 10-year yield 2.38%

As of Mar. 31, 2011:

10-year Treasuries 3.47%10-year TIPS 0.99%Implied Expected Inflation 2.48%

'80 '85 '90 '95 '00 '05 '100%

2%

4%

6%

8%

10%

12%

14%

16%

'92 '94 '96 '98 '00 '02 '04 '06 '08 '100%

1%

2%

3%

4%

5%

6%

Source: FRB, BLS, J.P. Morgan Asset Management. Chart is the 10-year Treasury yield less Core CPI (inflation excluding food and energy, year-over-year).


Real 10-Year Treasury Yields

Fix

ed

Inc

om

e

Nominal 10-Year Yields: Treasuries & TIPS


10-year Treasuries: 3.47%

10-year TIPS: 0.99%

Source: St. Louis Fed, Federal Reserve, J.P. Morgan Asset Management.

Treasury Inflation-Protected Securities were first introduced in 1997.


Mar. 31, 2011:2.38%

10-Year Treasury Yields minus Core CPISep. 30, 1981:

15.84%

31

33

Foreign Ownership of U.S. Treasuries

12%14%

22%19%

35%

41%

46%

51%52%52%

57%

61%

57%

0%

10%

20%

30%

40%

50%

60%

'78 '84 '89 '94 '00 '02 '03 '04 '05 '06 '07 '08 '09

Source: J.P. Morgan Asset Management, U.S. Treasury Department TIC.

Data reflects most recently available information as of 3/31/11, published by the U.S. Treasury in May 2010 for the period ending 6/30/09. Based on long-term marketable securities less bills outstanding.

Percentage of U.S. Treasuries Owned by Foreigners

Fix

ed

Inc

om

e

Foreign Holders of U.S. Treasuriesin billions USD

Source: J.P. Morgan Asset Management, U.S. Treasury Department TIC.

Caribbean Banking Centers include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama. Oil countries include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya and Nigeria. Data on this page are updated annually each June to reflect revisions by Treasury.

Data are as of January 2011.

All other$1,409

32%

Japan $88620%

China$1,155

26%

Brazil$1984%

Oil countries $216 5%

Russia $1393%

Hong Kong$1283%

Caribbean$1674%

Taiwan$1574%

32

34

High Yield Bonds

0%

5%

10%

15%

20%

'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

Average Latest HY Spreads 5.9% 5.2%HY Defaults 4.4% 0.8%

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 chart): J.P Morgan High Yield & Leveraged Loan Strategy, Moody’s, J.P. Morgan Asset Management.

Spreads indicated are benchmark rates over comparable Treasury yields.


Fix

ed

Inc

om

e

Historical High Yield Recovery RatesHigh yield bonds, cents on the dollar

High Yield Spreads and Defaults

Spreads

Default Rates

Average: 38.4¢39¢

32¢26¢

36¢

46¢43¢

46¢ 43¢ 42¢

49¢

21¢

32¢

23¢ 23¢26¢

39¢

49¢44¢

60¢ 61¢

28¢

35¢41¢

0¢

10¢

20¢

30¢

40¢

50¢

60¢

70¢

'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

33

35

Municipal Finance

Jan '08 Jul '08 Jan '09 Jul '09 Jan '10 Jul '10 Jan '112%

4%

6%

8%

10%

12%

Fix

ed

Inc

om

e

State & Local Government Surplus/DeficitReceipts minus expenditures as a % of GDP

State & Local Government Employment

Municipal Bond Tax-Equivalent SpreadSpread over 10-year U.S. Treasury, %

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '100%

1%

2%

3%

4%

5%

TEY = Yield / (1 – tax rate)

Mar. 31, 2011: 2.4%

Average: 1.8%

Source: (Left charts) Barclays Capital, FactSet, J.P. Morgan Asset Management. Spreads indicated are benchmark rates over comparable maturity Treasury yields. (Right charts) BEA, FactSet, J.P. Morgan Asset Management. High yield represented by the Barclays Capital High Yield Municipal Index, taxable bonds by the Barclays Capital Taxable Municipal Bond Index, revenue bonds by the Barclays Capital Revenue Bond Index and general obligation bonds by the Barclays Capital General Obligat ion Index. Tax-equivalent yield calculation assumes a 35% marginal tax rate. Past performance is not indicative of comparable future results .


Municipal Bond Yields by Sector

High Yield

General Obligation

Taxable

'92 '94 '96 '98 '00 '02 '04 '06 '08 '10-2%

-1%

0%

1%

2%

3%

4%

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10-0.8%

-0.4%

0.0%

0.4%

0.8%

Revenue

% change, saar

34

36

Emerging Market Debt

5%

6%

7%

8%

9%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '100%

2%

4%

6%

8%

10%

12%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

'01 '02 '03 '04 '05 '06 '07 '08 '09 '100%

2%

4%

6%

8%

10%

12%

Spreads measure the credit risk premium over comparable maturity U.S. Treasury bonds. The J.P. Morgan EMBI Global (EMBIG) Index is a USD-denominated external debt index tracking bonds issued by sovereigns and quasi-sovereigns in developing nations. The J.P. Morgan Corporate Emerging Bond Index (CEMBI) is a USD-denominated external debt index tracking bonds issued by corporations. The J.P. Morgan GBI-EM index is a local currency-denominated index tracking bonds issued by emerging market governments. Past performance is not indicative of comparable future results.


Fix

ed

Inc

om

e

Emerging Markets Bond Index Global SpreadsIndex ComponentsSovereign and quasi-sovereign issues, USD-denominated bonds

Mar. 31, 2011: 2.7%

Mar. 31, 2011: 3.0%

Local Emerging Market Bond YieldsSovereign issues, local currency-denominated bonds

Corporate Emerging Markets Bond SpreadsCorporate issues, USD-denominated bonds

Mar. 31, 2011:6.6%

Average: 4.3%

Average: 3.1%

Average: 6.9%

Source: J.P. Morgan, MorganMarkets, FactSet, J.P. Morgan Asset Management.

19.6% 17.6%32.2%

43.1%31.5%

18.9%

24.4%43.8% 36.3%

12.9% 7.1% 12.7%

0%

20%

40%

60%

80%

100%

Local Currency Sovereigns

USD Sovereigns USD Corporates

Mid-East/Africa

Latin America

Europe

Asia

35

37

International Returns: Local Currency vs. U.S. Dollars

Source: J.P. Morgan Asset Management, FactSet, MSCI Inc., Standard & Poor’s.

All return values are MSCI Gross Index (official) data. Returns are as of 3/31/11. MSCI ACWI weights as of 3/31/11.

International investing involves a greater degree of risk and volatility. Changes in currency exchange rate and political andeconomic climate can raise or lower returns. Past performance is not indicative of future results. Europe and Pacific regionsexclude Emerging Markets, which are shown separately. Europe excludes U.K. and Pacific excludes Japan.


Inte

rna

tio

nal

Weights in MSCI All Country World Index

United States:

43%

U.K.: 8%

France: 4% Germany: 3% Switzer.: 3% Spain: 1% Other: 6%

Korea: 2% Brazil: 2% Russia: 1% India: 1% China: 2% Other: 6%

Europe: 17%

Pacific: 5%

Emerging: 14%

Country / Region

Regions / Broad Indexes

USA (S&P 500) - 5.9 - 15.1

EAFE 1.1 3.4 5.3 8.2

Europe ex-U.K. 2.7 7.9 5.1 2.4

Pacific ex-Japan 2.0 2.8 6.1 17.1

Emerging Markets 0.7 2.1 14.4 19.2

MSCI: Selected Countries

United Kingdom 1.4 3.8 12.2 8.8

France 4.5 10.6 3.5 -3.2

Germany 1.7 7.6 16.9 9.3

Japan -2.8 -4.9 0.7 15.6

China 2.9 2.9 5.1 4.8

India -5.4 -5.1 16.2 20.9

Brazil 0.6 2.6 1.7 6.8

Russia 9.5 16.3 20.3 19.4

1Q11 2010

Local USD Local USD

36

38

The Economic Growth Differential

World GDP Growth vs. U.S. GDP Growth

Source: J.P. Morgan Global Economics Research, IMF, J.P. Morgan Asset Management.Data are as of December 2010 and are provided by the International Monetary Fund. 2011 and 2012 data are shown in brown and are estimates provided by the IMF. Emerging and Developed Economy GDP growth rates represent quarterly annualized growth estimated by J.P. Morgan Global Economics Research and are as of 4Q10.Data are as of 3/31/11.

Inte

rna

tio

nal

U.S. GDP Growth

World GDP Growth

Difference

Emerging and Developed GDP Growth Emerging Economies

Developed Economies

-9%

-2%

5%

12%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-3%

0%

3%

6%

9%

1970 1975 1980 1985 1990 1995 2000 2005 2010

37

39

Global Economic Growth

Source: IMF, J.P. Morgan Asset Management.2010 data are estimates as provided by the IMF.Data are as of 3/31/11.

Inte

rna

tio

nal

’81-’85

Developed Market Countries Real GDP Growth

Emerging Market Countries Real GDP Growth

’86-’90 ’91-’95 ’96-’00 ’01-’05 ’06-’10 2010

Annualized Averages

’81-’85 ’86-’90 ’91-’95 ’96-’00 ’01-’05 ’06-’10 2010

Annualized Averages

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Japan Germany Australia Canada United States United Kingdom France Italy Spain

-2%

0%

2%

4%

6%

8%

10%

12%

14%

China India Turkey Brazil Korea Indonesia Mexico Russia Poland South Africa

38

40

Global Monetary Policy

-6%

-3%

0%

3%

6%

9%

12%

U.K

.

Ho

ng

Ko

ng

Can

ada

Eur

o a

rea

U.S

.

Jap

an

Aus

tral

ia

Rus

sia

Ind

ia

Arg

entin

a

Tur

key

Ko

rea

Th

aila

nd

Mex

ico

Ind

one

sia

Tai

wan

Po

lan

d

Ch

ina

So

uth

Afr

ica

Bra

zil

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

'02 '03 '04 '05 '06 '07 '08 '09 '10

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) Key policy rates are the short-term target interest rates set by central banks. Inflation rates shownrepresent year-over-year quarterly rates for 4Q10. Real policy rates are short-term target interest rates set by central banks minus year-over-year inflation.Data are as of 3/31/11.

Inte

rna

tio

nal

Developed Markets

Real GDP Growth Rates – Quarterly Year-over-Year

Country Level Monetary Policy and Inflation

Emerging Markets

Inflation Rate Real Policy Rate

Real Policy Rates – Quarterly

Developed Markets

Emerging Markets

Target Policy Rate

Developed Markets Emerging Markets

-2%

-1%

0%

1%

2%

3%

4%

'02 '03 '04 '05 '06 '07 '08 '09 '10

39

41

Global Equity Valuations – Developed Markets

World (ACWI)

EAFE France Germany Japan U.K. SwitzerlandAustralia

Canada United States

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) normalized using means and average v ariability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). See disclosures page at the end for metric definitions.Data are as of 3/31/11.

Developed Market Countries

Std

De

v fr

om

Glo

ba

l Ave

rag

e

Inte

rna

tio

nal

Expensive relative to own

history

Expensive relative to

world

Cheap relative to own history

Median

Current

Cheap relative to

world

Example

+3 Std Dev

+2 Std Dev

+1 Std Dev

Average

-1 Std Dev

-2 Std Dev

-3 Std Dev

+5 Std Dev

+4 Std Dev

-4 Std Dev

+6 Std Dev

-5 Std Dev

Fwd. P/E P/B P/CF Div. Yld. Fwd. P/E P/B P/CF Div. Yld.

World (ACWI) -0.77 12.1 1.8 7.4 2.5% 14.4 2.2 7.8 2.4%

EAFE Index -1.74 11.2 1.5 6.4 3.3% 14.0 1.9 7.1 2.9%

France -2.31 10.5 1.3 5.4 3.9% 12.8 1.9 6.4 3.0%

Germany -1.99 10.6 1.5 5.5 3.3% 13.2 1.6 5.4 2.8%

Japan -1.71 12.4 1.1 4.7 2.1% 19.3 1.5 7.1 1.4%

U.K. -1.25 10.1 1.8 8.1 3.3% 12.4 2.1 8.6 3.6%

Switzerland -0.80 11.9 2.2 7.8 3.2% 14.1 2.5 9.9 2.4%

Australia -0.33 12.4 2.0 11.1 4.1% 14.3 2.3 10.4 4.0%

Canada 0.26 14.5 2.1 9.1 2.2% 14.4 2.1 8.8 2.1%

United States 0.49 13.2 2.2 8.4 1.8% 15.6 2.7 9.2 1.9%

Current Composite

Index

Current 10-year avg.

40

42

Global Equity Valuations – Emerging Markets

World(ACWI)

EM Index

Brazil Taiwan Russia China Korea South Africa

Mexico India

Inte

rna

tio

nal

Emerging Market Countries

Expensive relative to own

history

Expensive relative to

world

Cheap relative to own history

Median

Current

Cheap relative to

world

Example

Std

De

v fr

om

Glo

ba

l Ave

rag

e

+3 Std Dev

+2 Std Dev

+1 Std Dev

Average

-1 Std Dev

-2 Std Dev

-3 Std Dev

+5 Std Dev

+4 Std Dev

-4 Std Dev

+6 Std Dev

-5 Std Dev

Fwd. P/E P/B P/CF Div. Yld. Fwd. P/E P/B P/CF Div. Yld.

World (ACWI) -0.77 12.1 1.8 7.4 2.5% 14.4 2.2 7.8 2.4%EM Index -0.79 11.1 2.0 7.4 2.4% 11.0 1.9 5.6 2.7%

Brazil -1.51 10.3 1.8 5.9 2.8% 9.7 2.0 5.4 3.6%

Taiwan -1.47 12.8 2.0 5.8 3.9% 14.6 1.9 6.5 3.2%

Russia -1.31 7.2 1.2 6.7 1.7% 8.2 1.4 5.5 2.1%

China -0.38 11.4 2.2 8.7 2.6% 12.7 2.2 8.4 2.6%

Korea -0.32 9.8 1.6 5.2 1.2% 9.2 1.4 4.2 1.9%

South Africa 0.08 11.6 2.3 11.0 3.1% 11.1 2.4 7.5 3.2%

Mexico 1.76 15.6 2.7 9.5 1.5% 12.8 2.5 7.5 2.1%

India 3.84 15.7 3.0 14.8 1.2% 14.5 3.1 11.9 1.6%

Current Composite

Index

Current 10-year avg.

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) normalized using means and average v ariability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). See disclosures page at the end for metric definitions.Data are as of 3/31/11.

41

43

International Economic and Demographic Data

Source: FactSet, CIA, J.P. Morgan Securities, J.P. Morgan Asset Management.

All GDP Growth data are from J.P. Morgan Economics and expressed as % change versus prior quarter annualized with the exception of India, which is from the India Ministry of Statistics & Programme Implementation and represents % change versus a year ago. All GDP Growth data are for 4Q10. India unemployment is from CIA estimates and is as of 2010, and Italy unemployment is as of 9/30/10. CPI Inflation is shown as % change versus a year ago and all data are for 4Q10. Unemployment rate for developed countries refers to February 2010 and comes from FactSet Economics, Eurostat and Statistics Canada. Demographic data provided by CIA World Factbook at CIA.gov.


Inte

rna

tio

nal

Economics Demographics

GDP USD (B$s)

GDP Per Capita

GDP Growth

Unempl. Rate

Inflation (CPI) Population

Population Growth

Percent Age >65

Median Age

Migration per 1000

Developed

U.S. $14,871 $47,400 3.1% 8.9% 1.2% 313 mm 1.0% 13.1% 36.9 yrs +4.2

Canada 1,335 39,600 3.3 7.8 2.3 34 0.8 15.9 41.0 +5.7

U.K. 2,189 35,100 -1.9 8.0 3.4 63 0.6 16.5 40.0 +2.6

Germany 2,960 35,900 1.5 7.1 1.6 81 -0.2 20.6 44.9 +0.5

France 2,160 33,300 1.4 9.2 1.9 65 0.5 16.8 39.9 +1.5

J apan 4,338 34,200 -1.3 4.6 0.1 126 -0.3 22.9 44.8 -

Italy 1,782 30,700 0.5 7.6 2.0 61 0.4 20.3 43.5 +4.9

Emerging

Russia 2,229 15,900 10.8 7.6 8.2 139 -0.5 13.0 38.7 +0.3

Mexico 1,560 13,800 5.1 5.4 4.2 114 1.1 6.6 27.1 -3.2

Brazil 2,194 10,900 3.0 6.4 5.6 203 1.1 6.7 29.3 -0.1

China 9,872 7,400 12.7 4.3 4.7 1,337 0.5 8.9 35.5 -0.3

India 4,046 3,400 10.7 10.8 9.2 1,189 1.3 5.5 26.2 -0.1

42

44

Sovereign Debt Vulnerability

1.3%

3.3%

3.3%

3.5%

3.6%

3.7%

4.8%

5.3%

8.3%

10.0%

12.8%

0% 2% 4% 6% 8% 10% 12% 14%

Japan

Germany

Canada

United States

United Kingdom

France

Italy

Spain

Portugal

Ireland

Greece

10-year Sovereign Debt Interest RatesYields %

Inte

rna

tio

nal

Source: FactSet, IMF’s October 2010 Global Financial Stability Report, IMF’s October 2010 World Economic Outlook, J.P. Morgan Asset Management.

The Structural Deficit represents what the deficit would be if the economy were operating at its potential. Net government debt is equal to gross government debt less government assets.


Structural Govt. Deficit

Net Govt. Debt

Current Acct.

Balance

% Govt. Debt Held Abroad

Weighted Average Maturity

2010

Greece -5.3 117.2 -7.7 72.4 7.8 years

Ireland -6.8 63.0 -1.1 58.7 7.0

Portugal -4.0 82.9 -9.2 72.1 6.7

Spain -5.3 60.9 -4.8 49.0 6.9

Italy -2.8 100.1 -2.7 46.9 7.8

France -3.7 77.9 -1.8 61.0 7.3

United Kingdom -6.2 74.0 -2.0 24.1 13.8

United States -7.1 72.7 -2.6 28.8 5.5

Canada -2.0 33.5 -2.7 17.1 6.3

Germany -2.9 60.4 5.8 50.2 6.2

Japan -7.2 129.5 2.3 5.1 6.4

% of projected 2011 GDP

43

45

Current Account Deficit and U.S. Dollar

'92 '94 '96 '98 '00 '02 '04 '06 '08 '1065

70

75

80

85

90

95

100

105

110

115

'92 '94 '96 '98 '00 '02 '04 '06 '08 '10

-8%

-6%

-4%

-2%

0%

Source: J.P. Morgan Asset Management, BEA.

Data are as of 3/31/11 and are reported quarterly.

Current Account Balance, % of GDP

Inte

rna

tio

nal

Source: FactSet, Federal Reserve, J.P. Morgan Asset Management.


U.S. Dollar Index

Q4 2010: -3.0%

Nominal trade-weighted exchange index: major currencies

Q4 2005: -6.5%

Mar. 2009: 84.0

Mar. 2008: 70.3

Mar. 2011: 70.8

44

46

Currencies

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10€0.6

€0.7

€0.8

€0.9

€1.0

€1.1

€1.2

Yen/Dollar Exchange Rate

Source: Reuters, FactSet, J.P. Morgan Asset Management.


Euro/Dollar Exchange Rate

Canadian Dollar/U.S. Dollar Exchange RateYuan/Dollar Exchange Rate

Inte

rna

tio

nal

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10¥6.4

¥6.6

¥6.8

¥7.0

¥7.2

¥7.4

¥7.6

¥7.8

¥8.0

¥8.2

¥8.4

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10C$0.8

C$0.9

C$1.0

C$1.1

C$1.2

C$1.3

C$1.4

C$1.5

C$1.6

C$1.7

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10¥70

¥80

¥90

¥100

¥110

¥120

¥130

¥140

Mar. 31, 2011:€0.70

Mar. 31, 2011:C$0.97

Mar. 31, 2011:¥ 6.55

Mar. 31, 2011:¥82.88

45

47

Asset Class Returns

10-yrs

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q11 '01 - '10

REITs REITsDJ UBSCmdty

MSCIEME

REITsMSCIEME

REITsMSCIEME

Barclays Agg

MSCIEME

REITsRussell

2000MSCIEME

26.4% 13.9% 23.9% 56.3% 31.6% 34.5% 35.1% 39.8% 5.2% 79.0% 28.0% 7.9% 350.0%

DJ UBSCmdty

Market Neutral

Barclays Agg

Russell 2000

MSCIEME

DJ UBSCmdty

MSCIEME

MSCI EAFE

Market Neutral

MSCI EAFE

Russell 2000

REITs REITs

24.2% 9.3% 10.3% 47.3% 26.0% 17.6% 32.6% 11.6% 1.1%* 32.5% 26.9% 7.5% 178.0%

Market Neutral

Barclays Agg

Market Neutral

MSCI EAFE

MSCI EAFE

MSCI EAFE

MSCI EAFE

DJ UBSCmdty

Asset Alloc.

REITsMSCIEME

S&P500

Russell 2000

15.0% 8.4% 7.4% 39.2% 20.7% 14.0% 26.9% 11.1% -23.8% 28.0% 19.2% 5.9% 84.8%

Barclays Agg

Russell 2000

REITs REITsRussell

2000REITs

Russell 2000

Market Neutral

Russell 2000

Russell 2000

DJ UBSCmdty

DJ UBSCmdty

Asset Alloc.

11.6% 2.5% 3.8% 37.1% 18.3% 12.2% 18.4% 9.3% -33.8% 27.2% 16.7% 4.4% 80.2%

Asset Alloc.

MSCIEME

Asset Alloc.

S&P500

Asset Alloc.

Asset Alloc.

S&P500

Asset Alloc.

DJ UBSCmdty

S&P500

S&P500

Asset Alloc.

Market Neutral

0.6% -2.4% -5.4% 28.7% 12.5% 8.0% 15.8% 7.3% -36.6% 26.5% 15.1% 3.7% 76.9%.

Russell 2000

Asset Alloc.

MSCIEME

Asset Alloc.

S&P500

Market Neutral

Asset Alloc.

Barclays Agg

S&P500

Asset Alloc.

Asset Alloc.

MSCI EAFE

Barclays Agg

-3.0% -3.4% -6.0% 25.2% 10.9% 6.1% 14.9% 7.0% -37.0% 22.5% 12.7% 3.5% 76.3%

S&P500

S&P500

MSCI EAFE

DJ UBSCmdty

DJ UBSCmdty

S&P500

Market Neutral

S&P500

REITsDJ UBSCmdty

MSCI EAFE

Market Neutral

MSCI EAFE

-9.1% -11.9% -15.7% 22.7% 7.6% 4.9% 11.2% 5.5% -37.7% 18.7% 8.2% 2.3% 47.1%

MSCI EAFE

MSCI EAFE

Russell 2000

Market Neutral

Market Neutral

Russell 2000

Barclays Agg

Russell 2000

MSCI EAFE

Barclays Agg

Barclays Agg

MSCIEME

DJ UBSCmdty

-14.0% -21.2% -20.5% 7.1% 6.5% 4.6% 4.3% -1.6% -43.1% 5.9% 6.5% 2.1% 41.7%

MSCIEME

DJ UBSCmdty

S&P500

Barclays Agg

Barclays Agg

Barclays Agg

DJ UBSCmdty

REITsMSCIEME

Market Neutral

Market Neutral

Barclays Agg

S&P500

-30.6% -22.3% -22.1% 4.1% 4.3% 2.4% -2.7% -15.7% -53.2% 4.1% -2.5% 0.4% 15.1%

As

se

tCla

ss

Source: Russell, MSCI Inc., Dow Jones, Standard and Poor’s, Barclays Capital, NAREIT, 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 3/31/11, except for the CS/Tremont Equity Market Neutral Index, which reflects data through

2/28/11. “10-yrs” returns represent cumulative total return and are not annualized. These returns reflect the period from 1/1/01 – 12/31/10. Please see disclosure page at end for index definitions. *Market Neutral returns include estimates found in disclosures.


46

48

Correlations: 10-Years

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 12/31/00 to 12/31/10.

This chart is for illustrative purposes only.

As

se

tCla

ss

Large Cap

Small Cap EAFE EME

Core Bonds

Corp. HY EMD Cmdty. REITs

Hedge Funds

Eq Market

Neutral*

Large Cap 1.00 0.94 0.92 0.87 -0.36 0.72 0.66 0.42 0.71 0.76 0.36

Small Cap 1.00 0.86 0.83 -0.39 0.66 0.57 0.33 0.77 0.69 0.34

EAFE 1.00 0.90 -0.24 0.70 0.62 0.51 0.69 0.82 0.53

EME 1.00 -0.23 0.77 0.71 0.53 0.60 0.82 0.42

Core Bonds 1.00 -0.08 0.12 -0.22 -0.02 -0.19 0.09

Corp. HY 1.00 0.83 0.48 0.64 0.75 0.35

EMD 1.00 0.41 0.58 0.63 0.30

Commodities 1.00 0.36 0.67 0.40

REITs 1.00 0.58 0.44

Hedge Funds 1.00 0.51

Eq Market Neutral* 1.00

47

49

Mutual Fund Flows

200

400

600

800

1000

1200

1400

1600

-$80

-$60

-$40

-$20

$0

$20

$40

$60

$80

$100

$120

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

-$80

-$60

-$40

-$20

$0

$20

$40

Jul '07 Jan '08 Jul '08 Jan '09 Jul '09 Jan '10 Jul '10 Jan '11

Source: Investment Company Institute, J.P. Morgan Asset Management.Data include flows through February 2011 and exclude ETFs. ICI data are subject to periodic revisions. World equity flows are inclusive of emerging market, global equity and regional equity flows. Hybrid flows include asset allocation, balanced fund, flexible portfolio and mixed income flows.Data are as of 3/31/11.

Difference Between Flows Into Stock and Bond FundsU.S. Equity Fund Flows and Market PerformanceBillions, USD, U.S. and international funds, monthlyBillions USD, U.S. equity funds, quarterly

Equity Flows S&P 500 Equity flows exceeded bond flows by $5 billion in Feb. 2011

As

se

tCla

ss

Billions, USD AUM YTD 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999

Domestic Equity 4,408 21 (96) (39) (152) (48) 11 32 112 130 (23) 54 256 176

World Equity 1,552 12 59 31 (83) 138 148 104 66 22 (4) (22) 53 11

Taxable Bond 2,182 23 230 307 19 98 46 26 3 39 124 76 (36) 8

Tax-exempt Bond 457 (17) 11 69 8 11 15 5 (14) (7) 16 12 (14) (12)

Hybrid 782 12 23 23 (18) 24 7 25 42 32 7 9 (31) (14)

Money Market 2,741 (64) (525) (539) 637 654 245 62 (157) (263) (46) 375 159 194

Fund Flows

48

50

Dividend Income: Domestic and Global

Equity Dividend Yields

Source: (Top chart) Standard & Poor’s, Ibbotson, J.P. Morgan Asset Management. (Bottom left) FactSet, NAREIT, J.P. Morgan As set 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.


S&P 500 Total Return: Dividends vs. Capital Appreciation

REIT Dividend YieldsMajor world markets by capitalization Major world markets by capitalization

As

se

tCla

ss

4.7% 5.4% 6.0% 5.1% 3.3% 4.2% 4.4% 2.5%1.8%

4.1%

13.9%

-5.3%

3.0%

13.6%

4.4%1.6%

12.6% 15.3%

-2.7%

5.5%

-10%

-5%

0%

5%

10%

15%

20%

1926 - 1929 1930's 1940's 1950's 1960's 1970's 1980's 1990's 2000's 1926 to 2009

Average annualized returns Capital appreciationDividends

3.5%

6.1%5.8%

5.5%

4.8%4.5%

4.2%

3.7%

0%

1%

2%

3%

4%

5%

6%

7%

U.S. Australia Singapore Canada France Japan Global U.K.

1.8%

4.1%

3.5%

3.1% 3.0%

2.4%2.2%

2.0%

0%

1%

2%

3%

4%

5%

U.S. Australia France U.K. Switzerland ACWI Canada Japan

49

51

Global Commodities

'01 '02 '03 '04 '05 '06 '07 '08 '09 '100

50

100

150

200

250

300

350

400

450

500

0

500

1000

1500

2000

2500

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Source: Dow Jones/UBS, FactSet, J.P. Morgan Asset Management.

Commodity prices represented by the appropriate DJ/UBS Commodity sub-index.


Source: USDA, BP Statistical Review of World Energy, J.P. Morgan Asset Management.


As

se

tCla

ss

Commodity Prices Weekly index prices rebased to 100

Precious metals

Industrial metals

Energy

Livestock

Grains

Oil Demand: Emerging Markets Share Emerging markets as % of total global oil consumption

Grain Demand: Emerging vs. Developed MarketsMillions of metric tons

Emerging Markets

Developed Markets

30%

32%

34%

36%

38%

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

50

52

Year Troy Ounces Total Value

2000 83.3 mm $23 bn

2001 83.6 mm $23 bn

2002 82.0 mm $25 bn

2003 81.7 mm $30 bn

2004 77.8 mm $32 bn

2005 79.4 mm $35 bn

2006 76.2 mm $46 bn

2007 75.9 mm $53 bn

2008 73.6 mm $64 bn

2009 78.8 mm $77 bn

World Gold Production

'75 '80 '85 '90 '95 '00 '05 '10$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

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.


Gold Prices

As

se

tCla

ss

$ / oz

Mar. 2011: $252.66

Mar. 2011: $1,439.00

Jan. 1980: $850.70

Jan. 1980: $326.41

Gold, Inflation adjusted

Gold

51Gold

53

Marginal and Average Tax Rates

0%

20%

40%

60%

80%

100%

1930's 1940's 1950's 1960's 1970's 1980's 1990's 2000's Current

7%

9%

11%

13%

15%

1947 1957 1967 1977 1987 1997 2007

0%

20%

40%

60%

80%

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Average Maximum Tax Rate on Dividends and Capital Gains Tax Rate 40-yr. avg. Current

Dividends 44.6% 15.0% Capital Gains 24.7% 15.0% Ordinary Income 47.9% 35.0%

As

se

tCla

ss

Source: (Top) The Tax Foundation, J.P. Morgan Asset Management. Tax rates based on maximum U.S. individual income tax. (Bottom left) BEA, J.P. Morgan Asset Management. (Bottom right) The Tax Foundation, IRS, J.P. Morgan Asset Management. Personal taxes include taxes on income, personal property and payments for personal licenses (see NIPA tables 3.4 and 3.4u). Data through 2007 is latest available from IRS. Includes all returns with positive AGI. 2007 dollar cut-off/minimum AGI for tax return to fall into top 10%: $113,018; bottom 50%: $32,870. The only tax analyzed here is the federal individual income tax, which is responsible for about 25% of the nation's taxes paid. Data are as of 3/31/11.

Taxes Collected by the Government% of personal income

Lowest since 1950

Share of Federal Income Taxes

Bottom 50% Top 10%% of federal income taxes paid by income segment

2.9%

71.2%

52

54

Historical Returns by Holding Period

-37%

-8%

-15%

-2% -2% 1%-1% 1% 2%

6%

1%5%

51%

43%

32%28%

23% 21% 19%16% 17% 18%

12%14%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1-yr. 5-yr. rolling 10-yr. rolling 20-yr. rolling

Annual total returns, 1950 – 2010Range of Stock, Bond and Blended Total Returns

As

se

tCla

ss

Sources: Barclays Capital, FactSet, Robert Shiller, Strategas/Ibbotson, Federal Reserve, J.P. Morgan Asset Management.


50/50 Portfolio 9.0% $559,744

Bonds 6.2% $336,138

Stocks 10.9% $792,519

Annual Avg. Total Return

50/50 Portfolio

Bonds

Stocks

Growth of $100,000 over 20 years

53

55

Diversification and the Average Investor

20-year Annualized Returns by Asset Class (1991 – 2010)

(Top) Indexes and weights of the traditional portfolio are as follows: U.S. stocks: 55% S&P 500, U.S. bonds: 30% Barclays Capital Aggregate. International stocks: 15% MSCI EAFE/ Portfolio with 25% in alternatives is as follows: U.S. stocks: 22.1% S&P 500, 8.8% Russell 2000; International Stocks: 4.4% MSCI EM, 13.2% MSCI EAFE; U.S. Bonds: 26.5% Barclays Capital Aggregate; Alternatives: 8.3% CS/Tremont Equity Market Neutral, 8.3% DJ/UBS Commodities, 8.3% NAREIT Equity REIT Index. Return and standard deviation calculated using Zephyr.Charts are shown for illustrative purposes only. Past returns are no guarantee of future results. Diversification does not guarantee investment returns and does not eliminate risk of loss. Data are as of 12/31/10. (Bottom) Indexes used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays Capital U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz, Inflation: CPI. Average asset allocation investor return is based on an analysis by Dalbar Inc. which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/10 to match Dalbar’smost recent analysis. A

ss

etC

las

s

Traditional Portfolio More Diversified Portfolio

Return: 6.86%Standard Deviation: 11.12%

Return: 7.92%Standard Deviation: 9.99%

Maximizing the Power of Diversification (1994 – 2010)

55%

15%

30% S&P 500

MSCI EAFE

Barclays Agg.

8%8%

8%

22%

9%13%

4%

26%

Equity Mkt. Neutral

Commodities

REIT

S&P 500

Russell 2000

MSCI EAFE

MSCI EM

Barclays Agg.

10.5%

8.0% 7.7%7.2%

6.1%

4.7%

2.8% 2.6% 2.4%

0%

2%

4%

6%

8%

10%

12%

REITS Oil S&P 500 Gold Bonds EAFE Homes Average Investor

Inflation

54

56

Market Comebacks: Bear Markets and Intra-year Declines

26

-10

15 17

1

26

15

2

12

27

-7

26

4 7-2

34

20

3127

20

-10 -13 -23

26

93

14

4 -37

23

13

-17 -17 -14-7

-12-8 -9

-34

-8 -8

-20

-6 -6 -5-9

-3-8 -11

-19-12

-17

-26-32

-14-8 -7 -8 -10

-47

-28

-16

-55%

-40%

-25%

-10%

5%

20%

35%

50%

'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

Source: Standard and Poor’s, FactSet, J.P. Morgan Asset Management.Returns are based on price index only and do not include dividends. Top: Dates reflect year in which bear market began. Complete list of beginning and end dates of both bear and bull markets can be found on page 6 of the Guide to the Markets. Bear markets are defined as any decline in the S&P 500 Index level of 20% or greater. Bull markets are any period of market ascent that goes uninterrupted by a bear market. Bot tom: Intra-year drops refers to the largest market drops over periods of 6 months or less. For illustrative purposes only.Data are as of 3/31/11.

Bear Market Returns vs. Subsequent Bull Market ReturnsDates reflect start date of bear market (complete list of bear and bull market dates/returns available on page 6)

Intra-year Declines vs. Calendar Year ReturnsDespite average intra-year drops of 14.3%, annual returns positive in 24 of 31 years

Current bull market

-28.6% -20.7% -28.0% -22.2%-36.1% -48.4%

-27.1% -33.5%-49.1% -56.8%

257.6%

86.4% 79.8%48.0%

74.2%

125.6%

228.8%582.1%

101.5% 95.8%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

1946 1957 1961 1966 1968 1973 1980 1987 2000 2007

As

se

tCla

ss

55

57

Alternative Investment Returns

As

se

tCla

ss

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 9/30/10 with the exception of Private Equity returns, which are as of 6/30/10. 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 al so 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.


Hedge Funds (as of 12/31/10) 1 year 3 year 5 year 10 year

CSFB/Tremont HF Index 10.9% 2.1% 6.4% 7.2%Multi-Strategy 9.3% 1.3% 5.6% 6.9%Distressed 10.3% 2.0% 5.8% 9.8%Convertible Arbitrage 11.0% 3.8% 6.1% 6.0%Equity Market Neutral* -0.8% 1.4% 4.8% 6.1%Risk Arbitrage 3.2% 3.8% 5.6% 4.7%Fixed Income Arbitrage 12.5% 0.7% 2.9% 4.3%Global Macro 13.5% 6.5% 10.0% 11.8%

Real Estate (as of 12/31/10) 1 year 3 year 5 year 10 year

NCREIF Property Index 13.1% -4.2% 3.5% 7.4%Apartment 18.2% -3.3% 2.9% 7.4%Industrial 9.4% -5.4% 2.6% 6.8%Office 11.7% -5.7% 3.8% 6.4%Retail 12.6% -1.3% 4.3% 10.0%

Private Equity (as of 9/30/10) 1 year 3 year 5 year 10 year

U.S. Venture Capital Index 8.2% -2.1% 4.3% -4.6%U.S. Private Equity Index 17.7% 1.3% 9.1% 8.1%

56

58

Corporate DB Plans and Endowments

4.7%

4.1%

3.1%

4.7%

2.7%

35.5%

45.3%

4.0%

12.2%

6.1%

10.7%

21.9%

13.0%

32.0%

0% 10% 20% 30% 40% 50%

Cash

Other

Real Estate

Private Equity

Hedge Funds

Fixed Income

Equities

Pension Return Assumptions: S&P 500 companies

return assumption

% o

f co

mp

anie

s

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.

underfunded

Defined Benefit Plans – Funded Status: S&P 500 companies

92%

8%

2010

overfunded

1999

As

se

tCla

ss

78%

22%

% of total

Asset Allocation: Corporate DB Plans vs. Endowments

Corporate Defined Benefit Plans

Endowments

2% 1%

5%

9%

27%29%

20%

7%

16% 16%

33%

27%

8%

0% 0% 0%

0%

10%

20%

30%

40%

< 7% 7 to 7.5%

7.5 to 8%

8 to 8.5%

8.5 to 9%

9 to 9.5%

9.5 to 10%

> 10%

2010: Average 7.4%

1999: Average 9.2%

57

59

The Dow Jones Industrial Average Since 1900

'10 '20 '30 '40 '50 '60 '70 '80 '90 '00 '10

Dow Jones Industrial Index, Price Return (Since 1900)

Log Scale

Source: IDC, FactSet, J.P. Morgan Asset Management.

Data shown in log scale to best illustrate long-term index patterns.

Past performance is not indicative of future returns. Chart is for illustrative purposes only.


As

se

tCla

ss

10,000

3,000

1,000

400

100` 1906 – 1924

1937 – 1949

1966 – 1982

2000 – present

58

60

Page Reference

2. Returns by Style3. Returns by Sector4. U.S. Equity Indexes5. S&P 500 Index at Inflection Points6. Equity Scenarios: Bull, Bear and In-between 7. Investment Style Valuations8. Stock Valuation Measures: S&P 500 Index9. Earnings Estimates and Valuation Drivers10. Deploying Corporate Cash11. Sources of Profitability12. Equity Correlations and Volatility

13. Economic Expansions and Recessions14. Economic Growth and the Composition of GDP15. Cyclical Sectors16. Consumer Finances17. Federal Finances 18. The Aftermath of the Housing Bubble19. Employment20. Job Growth, Productivity and Labor Force21. Small Business22. Corporate Profits23. Consumer Price Index24. Returns in Different Inflation Environments – 40 years25. Oil and the Economy26. Consumer Confidence

27. Fixed Income Sector Returns28. Fixed Income Yields and Returns29. The Federal Reserve

30. Credit Conditions31. Treasury Yields and Inflation32. Foreign Ownership of U.S. Treasuries33. High Yield Bonds34. Municipal Finance35. Emerging Market Debt

36. International Returns: Local Currency vs. U.S. Dollars37. The Economic Growth Differential38. Global Economic Growth39. Global Monetary Policy40. Global Equity Valuations – Developed Markets41. Global Equity Valuations – Emerging Markets42. International Economic and Demographic Data43. Sovereign Debt Vulnerability44. Current Account Deficit and U.S. Dollar 45. Currencies

46. Asset Class Returns47. Correlations: 10-Years48. Mutual Fund Flows49. Dividend Income: Domestic and Global50. Global Commodities51. Gold52. Marginal and Average Tax Rates53. Historical Returns by Holding Period54. Diversification and the Average Investor55. Market Comebacks: Bear Markets and Intra-year Declines56. Alternative Investment Returns57. Corporate DB Plans and Endowments 58. The Dow Jones Industrial Average Since 1900

Equities

Economy

Fixed Income

International

Asset Class

61

J.P. Morgan Asset Management – Index Definitions

All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses.

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world -renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index.

The S&P 400 Mid Cap Index is representative of 400 stocks in the mid-range sector of the domestic stock market, representing all major industries.

The Russell 3000 Index® measures the performance of the 3,000 largest U.S. companies based on total market capitalization.

The Russell 1000 Index ® measures the performance of the 1,000 largest companies in the Russell 3000.

The Russell 1000 Growth Index ® measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 1000 Value Index ® measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

The Russell Midcap Index ® measures the performance of the 800 smallest companies in the Russell 1000 Index.

The Russell Midcap Growth Index ® measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index.

The Russell Midcap Value Index ® measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value index.

The Russell 2000 Index ® measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

The Russell 2000 Growth Index ® measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 2000 Value Index ® measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

The MSCI® EAFE (Europe, Australia, Far East) Net Index is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America.

The MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2007, the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2009 the MSCI ACWI consisted of 45 country indices comprising 23 developed and 22 emerging market country indices.

The MSCI Small Cap IndicesSM target 40% of the eligible Small Cap universe within each industry group, within each country. MSCI defines the Small Cap universe as all listed securities that have a market capitalization in the range of USD200-1,500 million.

The MSCI Value and Growth IndicesSM cover the full range of developed, emerging and All Country MSCI Equity indexes. As of the close of May 30, 2003, MSCI implemented an enhanced methodology for the MSCI Global Value and Growth Indices, adopting a two dimensional framework for style segmentation in which value and growth securities are categorized using different attributes - three for value and five for growth including forward-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 market capitalization of the underlying country index. Country Value/Growth indices are then aggregated into regional Value/Growth indices. Prior to May 30, 2003, the indices used Price/Book Value (P/BV) ratios to divide the standard MSCI country indices into value and growth indices. All securities were classified as either "value" securities (low P/BV securities) or "growth" securities (high P/BV securities), relative to each MSCI country index.

The following MSCI Total Return IndicesSM are calculated with gross dividends:This series approximates the maximum possible dividend reinvestment. The amount reinvested is the dividend distributed to individuals resident in the country of the company, but does not include tax credits.

The MSCI Europe IndexSM is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of June 2007, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

The MSCI Pacific IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Pacific region. As of June 2007, the MSCI Pacific Index consisted of the following 5 Developed Market countries: Australia, Hong Kong, Japan, New Zealand, and Singapore.

Credit Suisse/Tremont Hedge Fund Index is compiled by Credit Suisse Tremont Index, LLC. It is an asset-weighted hedge fund index and includes only funds, as opposed to separate accounts. The Index uses the Credit Suisse/Tremont database, which tracks over 4500 funds, and consists only of funds with a minimum of US$50 million under management, a 12-month track record, and audited financial statements. It is calculated and rebalanced on a monthly basis, and shown net of all performance fees and expenses. It is the exclusive property of Credit Suisse Tremont Index, LLC.

The NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors - the great majority being pension funds. As such, all properties are held in a fiduciary environment.

The NAREIT EQUITY REIT Index is designed to provide the most comprehensive assessment of overall industry performance, and includes all tax-qualified real estate investment trusts (REITs) that are listed on the NYSE, the American Stock Exchange or the NASDAQ National Market List.

62

J.P. Morgan Asset Management – Index Definitions

The Barclays Capital Taxable Municipal Bond Index is a rules-based, market-value weighted index engineered for the long-term taxable bond market. To be included in the index, bonds must be rated investment -grade (Baa3/BBB- or higher) by at least two of the following ratings agencies if all three rate the bond: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment -grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate and must be at least one year from their maturity date. Remarketed issues (unless coverted to fixed rate), bonds with floating rates, and derivatives, are excluded from the benchmark.

Municipal Bond Index: To be included in the index, bonds must be rated investment -grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated -date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives are excluded from the benchmark.

The Barclays Capital Emerging Markets Index includes USD-denominated debt from emerging markets in the following regions: Americas, Europe, Middle East, Africa, and Asia. As with other fixed income benchmarks provided by Barclays Capital, the index is rules-based, which allows for an unbiased view of the marketplace and easy replicability.

The Barclays Capital MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae, Fannie Mae, and Freddie Mac. Aggregate components must have a weighted average maturity of at least one year, must have $250 million par amount outstanding, and must be fixed rate mortgages.

The Barclays Capital Corporate Bond Index is the Corporate component of the U.S. Credit index.

The Barclays Capital TIPS Index consists of Inflation-Protection securities issued by the U.S. Treasury.

The J.P. Morgan EMBI Global Index includes U.S. dollar denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi-sovereign entities.

The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market.

The CS/Tremont Equity Market Neutral Index takes both long and short positions in stocks with the aim of minimizing exposure to the systematic risk of the market (i.e., a beta of zero).

The CS/Tremont Multi-Strategy Index consists of funds that allocate capital based on perceived opportunities among several hedge fund strategies. Strategies adopted in a multi -strategy fund may include, but are not limited to, convertible bond arbitrage, equity long/short, statistical arbitrage and merger arbitrage.

*Market Neutral returns for November 2008 are estimates by J.P. Morgan Funds Market Strategy, and are based on a December 8, 2008 published estimate for November returns by CS/Tremont in which the Market Neutral returns were estimated to be +0.85% (with 69% of all CS/Tremont constituents having reported return data). Presumed to be excluded from the November return are three funds, which were later marked to $0 by CS/Tremont in connection with the Bernard Madoff scandal. J.P. Morgan Funds believes this distortion is not an accurate representation of returns in the category. CS/Tremont later published a finalized November return of -40.56% for the month, reflecting this mark-down. CS/Tremont assumes no responsibility for these estimates.

All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses.

The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities and represents nineteen separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc.

The S&P GSCI Index is a composite index of commodity sector returns representing an unleveraged, long -only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. Individual components qualify for inclusion in the index on the basis of liquidity and are weighted by their respective world production quantities.

The Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis. This U.S. Treasury Index is a component of the U.S. Government index.

West Texas Intermediate (WTI) is the underlying commodity for the New York Merchantile Exchange's oil futures contracts.

The Barclays Capital High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non -EMG countries are included. Original issue zeroes, step-up coupon structures, and 144-As are also included.

The Barclays Capital 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non convertible.

The Barclays Capital General Obligation Bond Index is a component of the Barclays Capital Municipal Bond Index. To be included in the index, bonds must be general obligation bonds rated investment -grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated -date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives, are excluded from the benchmark.

The Barclays Capital Revenue Bond Index is a component of the Barclays Capital Municipal Bond Index. To be included in the index, bonds must be revenue bonds rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives, are excluded from the benchmark.

The Barclays High Yield Municipal Index includes bonds rated Ba1 or lower or non-rated bonds using the middle rating of Moody’s, S&P and Fitch.

63

J.P. Morgan Asset Management – Definitions, Risks & Disclosures

Derivativesmay be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the original investment. The use of derivatives may not be successful, resulting in investment losses, and the cost of such strategies may reduce investment returns.

Price to forward earnings is measure of the price-to-earnings ratio (P/E) using forecasted earnings. Price to book value compares a stock's market value to its book value. Price to cash flow is a measure of the market's expectations of a firm's future financial health. Price to dividends is the ratio of the price of a share on a stock exchange to the dividends per share paid in the previous year, used as a measure of a company's potential as an investment.

There is no guarantee that the use of long and short positions will succeed in limiting an investor's exposure to domestic stock market movements, capitalization, sector swings or other risk factors. Investing using long and short selling strategies may have higher portfolio turnover rates. Short selling involves certain risks, including additional costs associated with covering short positions and a possibility of unlimited loss on certain short sale positions.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

The views expressed are those of J.P. Morgan Asset Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm.

Contact J.P. Morgan Funds Distribution Services at 1-800-480-4111 for a fund prospectus. You 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 before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing.

J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.

JPMorgan Distribution Services Inc., member FINRA/SIPC.

© JPMorgan Chase & Co., April 2011.

Unless otherwise stated, all data are as of March 31, 2011 or most recently available.

Prepared by:Andrew D. Goldberg, Joseph S. Tanious, David M. Lebovitz, Brandon D. Odenath and David Kelly.

NOT FDIC INSURED ı NO BANK GUARANTEE ı MAY LOSE VALUE JP-LITTLEBOOK

Past performance is no guarantee of comparable future results.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise.The price of equity securities may rise, or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries, or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to “stock market risk” meaning that stock prices in general may decline over short or extended periods of time.

Small-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies since smaller companies generally have a higher risk of failure. Historically, smaller companies' stock has experienced a greater degree of market volatility than the average stock.

Mid-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies. Historically, mid-cap companies' stock has experienced a greater degree of market volatility than the average stock.

Real estate investments may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower.

International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in emerging markets can be more volatile. As mentioned above, the normal risks of investing in foreign countries are heightened when investing in emerging markets. In addition, the small size of securities markets and the low trading volume may lead to a lack of liquidity, which leads to increased volatility. Also, emerging markets may not provide adequate legal protection for private or foreign investment or private property.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity -linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Can’t find a slide?Please visit www.jpmorganfunds.com/bench to access slides from previous editions that are now “on the bench”.

2Q | 2011 Guide to the Markets As of March 31, 2011.

Documents

Transcript of 2Q | 2011 Guide to the Markets As of March 31, 2011.