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As of September 30, 2012
i h M rk
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Table of Contents
EQUITIES
ECONOMY
INTERNATIONAL
ASSET CLASS
U.S. Market Strategy Team
Dr. David P. Kelly, CFA [email protected]
Andrew D. Goldberg [email protected]
. , . . .
Andrs Garcia-Amaya [email protected]
Brandon D. Odenath [email protected]
David M. Lebovitz [email protected]
Anthony M. Wile [email protected]
2
www.jpmorganfunds.com/mi
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Page Reference
4. Returns by Style
5. Returns by Sector
6. S&P 500 Index at Inflection Points
34. Fixed Income Yields and Returns
35. The Fed and the Money Supply
36. The Fed Funds Rate: History and Expectations
37. Credit Conditions
38. High Yield Bonds
Equities
7. Bull and Bear Markets
8. Stock Valuation Measures: S&P 500 Index
9. Earnings Estimates and Valuations by Style
10. Corporate Profits
11. Sources of Earnings per Share Growth
12. Confidence and the Capital Markets
13. De lo in Cor orate Cash
39. Municipal Finance
40. Emerging Market Debt
41. Global Equity Markets: Returns and Composition
42. Global Economic Growth
43. Global Monetar Polic
International
14. Broad Market Lagged Price to Earnings Ratio
15. P/E Ratios and Equity Returns
16. Equity Correlations and Volatility
17. Economic Growth and the Composition of GDP
44. The Importance of Exports
45. The Impact of Global Consumers
46. European Crisis: Fiscal Challenges
47. European Crisis: Sovereign Bond Yields
48. European Crisis: Financial System Risks49. Chinese Growth and Economic Policy
Economy
.
19. Consumer Finances
20. Federal Finances: Outlays and Revenues
21. Federal Finances: Deficits and Debt
22. Tax Rates and the Distribution of Income & Taxes
23. U.S. Political Perspectives
24. The Aftermath of the Housing Bubble
.
51. Global Equity Valuations Emerging Markets
52. Emerging Market Equity Composition
53. International Economic and Demographic Data
54. Current Account Deficit and U.S. Dollar
Asset Class
.
26. Employment and Income by Educational Attainment
27. Consumer Price Index
28. Returns in Different Inflation Environments 40 years
29. Oil and the Economy
30. Global Oil Supply
31. Consumer Confidence and the Stock Market
.
56. Correlations: 10-Years
57. Mutual Fund Flows
58. Dividend Income: Domestic and Global
59. Global Commodities
60. Gold
61. Historical Returns by Holding Period
3
32. Fixed Income Sector Returns
33. Interest Rates and Inflation
62. Diversification and the Average Investor
63. Annual Returns and Intra-year Declines64. Cash Accounts
65. Corporate DB Plans and Endowments
66. The Dow Jones Industrial Average Since 1900
Fixed Income
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Returns by Style
1,500
S&P 500 Index3Q 2012 2012 YTD
Charts reflect index levels (price change only). All returns and annotations reflect total return, including dividends.
Value Blend Growth Value Blend Growth
1,350
1,400
1,450
Equ
ities
2012: +16.4%
3Q12:+6.4%
Large
6.5% 6.4% 6.1%Large
15.7% 16.4% 16.8%
Mid 5.8% 5.6% 5.3% M
id 14.0% 14.0% 13.9%
Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Sep-12
1,250
,
S&P 500 IndexSince Market Low (March 2009)Since Market Peak (October 2007)
Value Blend Growth Value Blend Growth
Small
5.7% 5.3% 4.8%Small
14.4% 14.2% 14.1%
1,000
1,200
1,400
,
2.7%
Since 3/9/09
Large
-6.9% 2.7% 14.2%Large
132.2% 129.6% 132.9%
M
id
5.8% 8.3% 9.8% Mid
170.3% 161.4% 153.8%
Dec-06 Feb-08 Apr-09 Jun-10 Aug-11 Sep-12600
800
Source: Russell Investment Group, Standard & Poors, FactSet, J.P. Morgan Asset Management.
Low: +129.6%
Small
2.3% 6.2% 9.6%Small
153.1% 156.2% 158.7%
4
, .
9/28/12, illustrating market returns since the most recent S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09 9/28/12, illustrating market returns since the S&P 500 Index low on 3/9/09. Returns are cumulative returns, not annualized. For all timeperiods, total return is based on Russell-style indexes with the exception of the large blend category, which is reflected by the S&P 500 Index.Past performance is not indicative of future returns.
Data are as of 9/30/12.
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S&P 500 Index at Inflection Points
1,600Index level 1,527 1,565 1,441P/E ratio (fwd.) 25.6x 15.2x 12.9x
S&P 500 Index
Mar. 24, 2000P/E (fwd.) = 25.6x
Se . 28 2012
Oct. 9, 2007P/E (fwd.) = 15.2x
1,565
Characteristic Mar-2000 Oct-2007 Sep-2012
1,400
. . .10-yr. Treasury 6.2% 4.7% 1.6%
Equ
ities , P/E (fwd.) = 12.9x
1,441
+101%
1,200
-49%
-57%
+106%
800
,
Oct. 9, 2002Dec. 31, 1996
+
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
600
Source: Standard & Poors, 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
P/E (fwd.) = 14.1x
777
P/E (fwd.) = 16.0x
741
ar. ,P/E (fwd.) = 10.3x
677
6
on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates.
Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of futureresults.
Data are as of 9/30/12.
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Bull and Bear Markets
Historical Bull Markets: Duration and Magnitude*
'87 - '00
400%600%
Bear Market Cycles vs. Subsequent Bull Runs
Market
Peak
Market
Low
Bear
MarketLength of
DeclineBull Run
Length
of Run
Yrs. to
Reach Old
Equ
ities
300%
350%550% 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.
-
'47 - '57
'82 - '87
Average200%
250%
arketR
eturn(%)
. . . .
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.
'57 - '61
'62 - '66' '
'74 - 80
'02 - '07
CurrentRun
100%
150%BullM 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.
'66 - '68
-
0%
50%
0 50 100 150
Bull Market Len th months
3/24/00 10/9/02 -49.1% 31 101.5% 60 4.6 yrs.
10/9/07 3/9/09 -56.8% 17 112.9% 43*
Average: -35.0% 14 mo's 176.0% 68 mo's 2.2 yrs.
7
Source: Standard & Poors, FactSet, J.P. Morgan Asset Management.Chart is for illustrative purposes only. Past performance does not guarantee future results. A bear market is defined as a peak-to-trough decline inthe 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 marketpeak. All returns are S&P 500 Index returns and do not include dividends. *Current bull run from 3/9/09 through 9/28/12.
Data are as of 9/30/12.
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Stock Valuation Measures: S&P 500 Index
S&P 500 Index: Valuation Measures Historical Averages
Valuation
Measure DescriptionLatest
1-year
ago
3-year
avg.
5-year
avg.
10-year
avg.
15-year
avg.
P/E Price to Earnings 12.9x 10.8x 12.8x 13.0x 14.3x 16.8x
P/B Price to Book 2.3 2.0 2.1 2.2 2.5 3.0
P/CF Price to Cash Flow 9.0 7.5 8.5 8.5 9.8 11.1P/S Price to Sales 1.3 1.0 1.2 1.1 1.3 1.5
PEG Price/Earnings to Growth 1.7 0.8 0.9 1.1 1.2 1.2
Equ
ities
Div. Yield Dividend Yield 2.3% 2.4% 2.2% 2.3% 2.1% 1.9%
50x9%
10%
S&P 500 Shiller Cyclically Adjusted P/EAdjusted using trailing 10-yr. avg. inflation adjusted earnings
S&P 500 Earnings Yield vs. Baa Bond Yield
S&P 500 Earnings Yield:(Inverse of fwd. P/E) 7.7%
20x
30x
40x
5%
6%
7%
8%
3Q12:22.2x
Average: 19.0x
'55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '100x
10x
'94 '96 '98 '00 '02 '04 '06 '08 '10 '123%
4% Moodys Baa Yield: 4.7%
Source: (Top) Standard & Poors, FactSet, Robert Shiller Data, J.P. Morgan Asset Management.Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months. Price to Book is price divided by book value per share. Data
-
8
.
months. Price to Sales is calculated as price divided by consensus analyst estimates of sales per share for the next 12 months. PEG Ratio is calculated as NTM P/E divided byNTM earnings growth. Dividend Yield is calculated as consensus analyst estimates of dividends for the next 12 months divided by price. All consensus analyst estimates areprovided by FactSet.(Bottom left) Cyclically adjusted P/E uses as reported earnings throughout.(Bottom right) Standard & Poors, Moodys, FactSet, J.P. Morgan Asset Management.Data are as of 9/30/12.
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Earnings Estimates and Valuations by Style
28x
S&P 500 Index: Forward P/E Ratio Current P/E vs. 20-year avg. P/E
11.6 12.9 15.2
Value Blend Growth
e
16x
20x
Average: 16.2xEqu
ities
14.0 16.2 21.0
12.3 14.1 16.6
14.0 16.3 21.8
Lar
Mid
'94 '96 '98 '00 '02 '04 '06 '08 '10 '128x
12x
S&P 500 Operating Earnings Estimates
Sep. 2012: 12.9x
Current P/E as % of 20-year avg. P/EE. .: Lar e Ca Blend stocks are 20.3%
13.0 14.4 16.2
14.2 17.1 21.3Small
Value Blend Growth
Large
82.7% 79.7% 72.3%
$80
$100
$1203Q12: $111.86
Consensus estimates of the next twelve months rolling earnings cheaper than their historical average.
Mid 87.8% 86.3% 75.9%
Small
91.2% 84.6% 75.8%
0
$20
$40
$60
9
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Source: (Top and bottom left) Standard & Poors, FactSet, J.P. Morgan Asset Management. (Right) Russell Investment Group, IBES, FactSet.Earnings estimates are for calendar years and taken at quarter end dates throughout the year. Forward Price to Earnings is price divided byconsensus analyst estimates of earnings per share for the next 12 months. P/E ratios are calculated and provided by Russell based on IBESconsensus estimates of earnings over the next 12 months except for large blend, which is the S&P 500.Data are as of 9/30/12.
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Corporate Profits
S&P 500 Earnings Per ShareOperating basis, quarterly
Adjusted After-Tax Corporate Profits (% of GDP)Includes inventory and capital consumption adjustments
11% 2Q12:26
Most recent:$25.43
2Q07: $24.06
Equ
ities
9%
10%
.
$20
$23
7%
8%
$14
$17
5%
6%
50-yr. avg.: 6.2%
$5
$8
$11
'65 '70 '75 '80 '85 '90 '95 '00 '05 '103%
4%
-$1
$2
'12'10'08'06'04'02
10
Source: Standard & Poors, Compustat, BEA, J.P. Morgan Asset Management.EPS levels are based on operating earnings per share. Most recently available data is 2Q12.Past performance is not indicative of future returns.
Data are as of 9/30/12.
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Sources of Earnings per Share Growth
S&P 500 Year-Over-Year EPS GrowthGrowth broken into revenue growth and margin expansion, quarterly
50%
Equ
ities
Revenue Share of EPS Growth
30%
40%
10%
20%
-20%
-10%
-40%
-30%
2Q122Q102Q082Q062Q042Q022Q002Q982Q962Q94
11
Source: Standard & Poors, Compustat, J.P. Morgan Asset Management.EPS levels are based on operating earnings per share. Most recently available data is 1Q12. *2Q12 data are Standard & Poors estimates.Past performance is not indicative of future returns. 4Q2008, 1Q2010 and 2Q2010 reflect -101%, 92% and 51% growth in operating earnings, andare adjusted on the chart.
Data are as of 9/30/12.
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Confidence and the Capital Markets
120
24x
26x
Multiple Expansion and Contraction
Consumer SentimentForward P/E
S&P 500 forward P/E based on consensus EPS estimatesEst. impact of a 10pt. rise in sentiment: +2.0 multiple points*
80
90
100
16x
18x20x
22x
Equ
ities
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
50
60
10x
12x
14x
Sentiment & Real Yields*
Correlation Coefficient: 0.75
100
110
120
4%
5%
6% Consumer SentimentReal 10-year Yield
Real yield based on nominal 10-yr. yield minus year-over-year core CPI. .
60
70
80
0%
1%
2%
Correlation Coefficient: 0.68
12
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '1250-1%
Source: (Top) Standard & Poors, FactSet, J.P. Morgan Asset Management. (Bottom) U.S. Treasury, BLS, University of Michigan, J.P. MorganAsset Management. Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next twelve months. Real 10-year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month. *Estimated impact based oncoefficients from regression analysis. Data are as of 9/30/12.
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Deploying Corporate Cash
Corporate Cash as a % of Current AssetsS&P 500 companies cash and cash equivalents, quarterly30%
Corporate Growth
Capital Expenditures M&A Activity
Nonfarm nonfinancial capex in billions USD, quarterly deal volume1,600$1,300
Equ
ities
20%
22%
24%
26%
600
800
1,000
1,200
,
$900
$1,000
$1,100
,
Cash Returned to ShareholdersDividend Payout Ratio'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
14%
16%
18%
0
200
400
$600
$700
800
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
$120
$140
$160
$24
$27
$30
50%
60%
S&P 500 companies, rolling 4-quarter averages, billions USDS&P 500 companies, LTM
Dividends per Share
$40
$60
$80
$18
$21
30%
40%
Share Buybacks
13
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12Source: Standard & Poors, FRB, Bloomberg, FactSet, J.P. Morgan Securities, J.P. Morgan Asset Management.
(Top left) Standard & Poors, FactSet, J.P. Morgan Asset Management. (Top right) M&A activity is quarterly number of deals of any value andcapital expenditures are for nonfarm nonfinancial corporate business. (Bottom left) Standard & Poors, FactSet, J.P. Morgan AssetManagement. (Bottom right) Standard & Poors, Compustat, FactSet, J.P. Morgan Asset Management. Data are most recent as of 9/30/12.
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Broad Market Lagged Price to Earnings Ratio
35x
Lagged P/E Ratio All U.S. CorporationsRatio of market value of all U.S. corporations to adjusted after-tax corporate profits for prior four quarters
25x
30x
Equ
ities
Avg. During Recessions 12.6x
Avg. During Expansions 13.9x
P/E Ratios
20x
September 30, 2012 13.2x
10x
15x Average: 13.7x
Sep. 30, 2012*: 13.2x
0x
5x
14
Source: BEA, Federal Reserve Board, Wilshire Associates, J.P. Morgan Asset Management.
*The September 28, 2012 price is a J.P. Morgan Asset Management estimated based on the daily value of the Wilshire Total Market Index.
Data are as of 9/30/12.
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P/E Ratios and Equity Returns
60%60%
P/E and Total Return Over 5-yr. Annualized PeriodsP/E and Total Return Over 1-yr. PeriodsQuarterly, 1Q 1952 to 2Q 2007Quarterly, 1Q 1952 to 2Q 2011
Current P/E: 13.2 Current P/E: 13.2
40%
9/30/12
Implied Annual Return 13.1%Standard Error 5.7%40%
9/30/12
Implied Annual Return 14.9%Standard Error 17.2%
Equ
ities
20%20%
0%5x 10x 15x 20x 25x 30x
0%5x 10x 15x 20x 25x 30x
-40%
-20%
-40%
-20%
15
Source: BEA, FRB, J.P. Morgan Asset Management. Prices are based on the market value of all U.S. corporations and include quarterlydividends. Valuation based on long-term PE ratio.
Note: Orange line denote results of linear regression with R-squared of 0.15 for 1-yr. returns (left) and 0.35 for 5-yr. returns (right).
Data are as of 9/30/12.
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Equity Correlations and Volatility
70%
Large Cap StocksCorrelations Among Stocks
Sovereign DebtCrisis
LehmanGreat Depression /
30%
40%
50%
Equ
ities
Tech Bust & 9/11
1987 Crash
OPEC Oil
Crisis
Cuban Missile Crisis
0%
10%
20%
'26 '32 '38 '44 '50 '56 '62 '68 '74 '80 '86 '92 '98 '04 '10
Average: 26.7% Sep. 2012: 40.9%
2.5%
3.0%
3.5%
60
75
90Volatility Measure 08 Peak Average LatestDJIA (Left) 3.30% 0.72% 0.51%VIX (Right) 80.9 20.5 15.7
DJIA vol. shownin 3-month
moving average
0.5%
1.0%
1.5%
.
15
30
45
16
'30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '100.0% 0
Source: (Top) Empirical Research Partners LLC, Standard & Poors, J.P. Morgan Asset Management. Capitalization weighted correlation of top750 stocks by market capitalization, daily returns, 1926 Sep. 28, 2012. (Bottom) CBOE, Dow Jones, J.P. Morgan Asset Management. DJIAvolatility are represented as three-month moving averages of the daily absolute percentage change in the Dow Jones Industrial Average.
Charts shown for illustrative purposes only. Data are as of 9/30/12.
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Economic Growth and the Composition of GDP
$18,00010%
Real GDP% chg at annual rate
20-yr avg. 2Q12
Components of GDP2Q12 nominal GDP, billions, USD
$14,000
$16,000
4%
6%
8%
y
Real GDP: 2.5% 1.3%
10.7% Investment ex-housing
19.6%
2.4% Housing
$625 bn ofout ut lost
$8,000
$10,000
,
0%
2%
Econo
71.0%
ov pen ng
$2,000
$4,000
$6,000
-6%
-4%
-Consumption
n ooutput
recovered
-$2,000
$0
'04 '06 '08 '10 '12-10%
-8%
Source: BEA, FactSet, J.P. Morgan Asset Management.
- 3.7% Net Exports
17
va ues s own n egen are c ange vs. pr or quar er annua ze an re ec .
Data are as of 9/30/12.
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Cyclical Sectors
24Millions, seasonally adjusted annual rateLight Vehicle Sales
150
Change in Private InventoriesBillions of 2005 dollars, seasonally adjusted annual rate
2Q12: 41.4
14
16
18
20
y Average: 15.1
Aug. 2012:14.5
-50
0
50
Average: 28.3
'94 '96 '98 '00 '02 '04 '06 '08 '10 '128
10
12
Econo
Real Capital Goods Orders
Housing Starts
'95 '00 '05 '10-200
-150
-
60
65
70
75
1,600
2,000
2,400
- . , ,ousan s, seasona y a us e annua ra e
Average: 57.4
'98 '00 '02 '04 '06 '08 '10 '1240
45
50
55
'95 '00 '05 '100
400
800
1,200
Aug. 2012: 750 Aug. 2012:53.4
,
18
Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom left) Census Bureau,FactSet, J.P. Morgan Asset Management. (Bottom right) Census Bureau, FactSet, J.P. Morgan Asset Management.Capital goods orders deflated using the producer price index for capital goods.
Data are as of 9/30/12.
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Consumer Finances
$80
Personal Savings Rate
12%
Annual, % of disposable incomeConsumer Balance SheetTrillions of dollars outstanding, not seasonally adjusted
2Q-07 Peak: $81.5tn
$60
$70
4%
6%
8%
10%o a sse s: . n
Homes: 25%
y
YTD 2012:4.2%
1Q-09 Low: $65.2tn
$40
$50'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
0%
2%
Household Debt Service RatioDebt payments as % of disposable personal income, seasonally adjusted
Deposits: 10%
Other tangible: 7%
Econo
13%
14%
15%
$20
$30
Revolving (e.g.: credit cards): 6%Non-revolving: 14%Other Liabilities: 7%
3Q07:14.1%
10%
11%
12%
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12$0
$10
Total Liabilities: $13.5 tn
assets: 40%
Mortgages: 73%
1Q80:11.1%
3Q12*:10.5%
19
Source: (Left) FRB, J.P. Morgan Asset Management. Data includes households and nonprofit organizations. (Right) BEA, FRB, J.P. Morgan Asset
Management. Personal savings rate is calculated as personal savings (after-tax income personal outlays) divided by after-tax income. Employer andemployee contributions to retirement funds are included in after-tax income but not in personal outlays, and thus are implicitly included in personalsavings. Savings rate data as of August 2012. *3Q12 Household Debt Service Ratio is a J.P. Morgan Asset Management estimate. All other data areas of 2Q12 which is most recently available as of 9/30/12.
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Federal Finances: Outlays and Revenues
$4.0 26%
The 2012 Federal BudgetCBO Baseline forecast, trillions USD
Federal Outlays and Receipts1960 2012, % of GDP
$3.0
$3.5
24%
y
Total Spending: $3.6tn
Other
$482bn (14%)
Net Int.: $220bn (6%)Borrowing:
$1,128bn (32%)2012*:24.3%
$2.0
$2.5
20%
22%
Econo
Defense:$669bn (19%)
-Discretionary:$620bn (17%)
Average: 20.5%
$1.0
$1.5
18%Social Security:$768bn (22%)
Revenues:$2,435bn (68%)
Average: 17.9%2012*:
15.8%
$0.0
$0.5
Total Government Spending Sources of Financing14%
16%
1960 1970 1980 1990 2000 2010
Medicare & Medicaid:$804bn (23%)
RevenuesOutlays
20
Source: U.S. Treasury, BEA, CBO, J.P. Morgan Asset Management.
2012 Federal Budget is based on the CBOs August 2012 Baseline Scenario. *2012 revenues and outlays are forecasts from the Congressional Budget Office (CBO).Note: Years shown are fiscal years (Oct. 1 through Sep. 30).
Data are as of 9/30/12.
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Federal Finances: Deficits and Debt
-12% 100%
Federal Budget Surplus/Deficit Federal Debt (Accumulated Deficits)% of GDP, 2007 2022 % of GDP, 2007 2022
ForecastFiscal Cliff Fiscal Ledge Fiscal Ladder
-10%
80%
y
2011 actual: 67.7%
2022*: 75.1%Forecast
2022*: 83.2%
- . - . - .
2012 Est. -7.3% -7.3% -7.3%
2013 Proj. -4.0% -5.7% -6.5%
-8%
-6%
60%
Econo
Fiscal Cliff
Fiscal Ledge Scenario
2022: 58.5%Fiscal Ladder Scenario
Fiscal Ladder Scenario
-4%
-2%
20%
Fiscal Cliff
Fiscal Ledge Scenario
Fiscal Cliff Fiscal Ledge Fiscal Ladder
0%'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
0%'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
Source: U.S. Treasury, BEA, CBO, J.P. Morgan Asset Management.
*
. . .
2012 Est. 72.8% 72.8% 72.8%
2022 Proj. 58.5% 75.1% 83.2%
21
. .households earning less than $250k per year, the AMT is fixed, dividend and capital gain tax rates increase to 20%, the payroll tax cut expires, extendedunemployment benefits expire on schedule, higher Medicare taxes take effect and both sets of spending cuts agreed to last fall are implemented. FiscalLadder scenario assumes Bush tax cuts are extended in full for 2013 and for households earnings less than $250k per year for 2014 the AMT fix,dividend and capital gain tax rates increase to 20% in 2014 payroll tax cut is maintained in 2013, phased down to 1% in 2014 and eliminated in 2016extended unemployment benefits expire on schedule higher Medicare taxes take effect and only the first round of spending cuts take effect. Note: Yearsshown are fiscal years (Oct. 1 through Sep. 30). Chart on the left displays federal surplus/deficit (revenues outlays).
Data are as of 9/30/12.
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Tax Rates and the Distribution of Income & Taxes
80%
100%
Historical Average Maximum Tax Rates by Decade Share of Income and Taxes by Income LevelBased on adjusted gross income and federal taxes, 2009
Dividends
Income
40%
60%
Top 5%31.7%
5% to 25%
34.1%Wage Income
Capital Gainsy
0%1930's 1940's 1950's 1960's 1970's 1980's 1990's 2000's Current
Bottom 75%34.2%
Potential Tax Rate ChangesCurrent and scheduled 2013 maximum federal tax rates under current law Taxes
Econo
Top 5%
58.7%
5% to 25%28.6%
Scheduled 20132012
37.9%35.0%
43.4%
23.8%
43.4%
55.0%
30%
40%
50%
Bottom 75%12.7%
15.0% 15.0%10.4% 12.4%
0%
10%
20%
Wage Income Capital Gains* Dividends* Payroll Tax** Estate Tax***
22
, . . . . ,Foundation, J.P. Morgan Asset Management. Tax rates based on maximum U.S. individual income tax. Wage income tax rates include employer and employee contributions tothe Medicare tax. *Includes recently enacted healthcare tax of 3.8%. **In 2011 and 2012, the payroll tax cut reduced the employees share of Social Security taxes by 2%.Rates shown include both employer and employee contributions to the payroll tax. ***In 2013, the estate tax exemption amount was expectedto fall to $1 million from $5.12 million in 2012. (Right) IRS, J.P. Morgan Asset Management. Taxes paid are based on federal individualincome taxes, which are responsible for about 25% of the nation's taxes paid.Data are as of 9/30/12.
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U.S. Political Perspectives
Congressional & Presidential Approval RatingsPolitical Polarization% of Representatives voting with the majority of their party*
Senate
100%80%
90%
y
House
80%
85%
90%
40%
50%
60%
Econo
Annual Market Returns by Political Party ControlPolitical Party Dominance
Presidential
Congressional
70%
75%
1901 1919 1937 1955 1973 1991 2009
10%
20%
1941 1951 1961 1971 1981 1991 2001 2011
70%
80%, , -
DemocraticPresident
Senate
House
17.4%
15.4%
12%
14%
16%
18%
20%
40%
50% 6.5%
10.6%
0%
2%
4%
6%
8%
23
Source: U.S. House of Representatives, U.S. Senate, Gallup Inc., FactSet, J.P. Morgan Asset Management.*In roll call votes where the majority in one party voted the opposite way to the majority in the other. Data compiled by Professors Keith T. Pooleand Howard Rosenthal, available at www.voteview.com. Stock market returns are total return and calculated by calendar year. RSPLIT denotesRepublican president and split government, and DSPLIT denotes Democratic President and split government.
Data are as of 9/30/12.
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The Aftermath of the Housing Bubble
$1,100160
Monthly Rent vs. Monthly Mortgage PaymentVacant propertiesIndexed to 100, seasonally adjusted
Home Prices
-
$500
$650
$800
950
140
150
y
3Q12*:$725
MortgagePayment
FHFA Purchase Only
Average Existing Home
$200
$350
'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12130E
cono
Home Inventories
3Q12*: $477Monthly Rent
3.5
4.0
4.5
110
120 ons, annua ra e, seasona y a us e
'94 '96 '98 '00 '02 '04 '06 '08 '10 '121.5
2.0
2.5
.
'03 '04 '05 '06 '07 '08 '09 '10 '11 '1290
100
Aug. 2012: 2.4
24
Sources: (Left) National Association of Realtors, Standard & Poors, FHFA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, J.P. Morgan Asset Management.Monthly mortgage payment assumes a 20% down payment at prevailing 30-year fixed-rate mortgage rates; analysis based on median asking rent and median mortgage paymentbased on asking price. (Bottom right) Census Bureau, National Association of Realtors, J.P. Morgan Asset Management. *3Q12 rent and mortgagepayment values are J.P. Morgan Asset Management estimates.
Data are as of 9/30/12.
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Employment
60012%
Civilian Unemployment Rate Employment Total Private Payroll
Seasonally adjusted Total job gain/loss (thousands)
200
400
10%
11%
y8.9mm
jobs lost
-200
0
7%
8%
9%
Econo
Aug. 2012: 8.1%4.6mm
jobsgained
-600
-400
5%
6%
50-yr. avg.: 6.1%
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12-1,000
-800
'70 '80 '90 '00 '103%
4%
25
, , . . .
Data are as of 9/30/12.
, , . . .
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Employment and Income by Educational Attainment
18%
Average Annual Earnings by Highest Degree EarnedFull-time workers aged 25 and older, 2009, USD
$87,194$90,000
Unemployment Rate by Education Level
14%
16%
y$70,000
$80,000
+31K
Less than High School Degree
High School No College
Some CollegeCollege or Greater
8%
10%Econo $56,665
$50,000
$60,000
+26K
Aug. 2012:8.8%
.12.0%
4%
6%$30,627
$20,000
$30,000
,
Aug. 2012:
Aug. 2012:6.6%
0%
2%
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12$0
$10,000
High School Graduate Bachelor's Degree Advanced Degree
4.1%
26
, . . ., , . . .
Unemployment rates shown are for civilians aged 25 and older.
Data are as of 9/30/12.
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Consumer Price Index
CPI
Components
Weight in
CPI
12-month
Change
Food & Bev. 15.3% 2.0%15%
CPI and Core CPI50-yr. Avg. Aug. 2012
Headline CPI: 4.2% 1.7%
% change vs. prior year, seasonally adjusted
Housing 41.0% 1.4%
Apparel 3.6% 1.6%
Transportation 16.9% 1.4%
12%
y
Core CPI: 4.1% 1.9%
Medical Care 7.1% 4.1%
Recreation 6.0% 1.2%
Educ. & Comm. 6.8% 1.5%
Other 3.4% 2.4%
6%
9%
Econo
Headline CPI 100.0% 1.7%
Less:
Energy 9.7% -0.6%0%
3%
Food 13.7% 2.0%
Core CPI 76.6% 1.9%'65 '70 '75 '80 '85 '90 '95 '00 '05 '10
-3%
Source: BLS, FactSet, J.P. Morgan Asset Management.
27
CPI values shown are % change vs. 1 year ago and reflect August 2012 CPI data. CPI component weights are as of
December 2011 and 12-month change reflects non-seasonally adjusted data through August 2012. Core CPI isdefined as CPI excluding food and energy prices.
Data are as of 9/30/12.
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Returns in Different Inflation Environments 40 years
High and Rising Inflation
High and Falling Inflation
Falling inflation scenariosRising inflation scenarios
y
ccurre mes s nce ccurre mes s nce
median
5%2%
7%
13%
5%
10%
15%
20%
25%
18%
23%
8%
5%
10%
15%
20%
25%
Econo
Abov
MedianInflation:
3.3%
-15%
-10%
-5%
Bonds Equities Cash Commodities
-15%-15%
-10%
-5%
Bonds Equities Cash Commodities
Occurred 7 times since 1972
Occurred 13 times since 1972 B
elowme
di6%
20%17%
10%
15%
20%
25%
8%
12%
4%
6%10%
15%
20%
25%
an
-15%
-10%
-5%
0%
5%
Bonds Equities Cash Commodities
-15%
-10%
-5%
0%
Bonds Equities Cash Commodities
28
, , , , , , , . . .
High or low inflation distinction is relative to median CPI-U inflation for the period 1971 to 2011. Rising or falling inflation distinction is relative toprevious year CPI-U inflation rate. Bond returns are based on the Barclays U.S. Aggregate index since its inception in 1976 and a composite bondindex 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-Billindex since its inception in 1992 and 3-month T-Bill rates prior to that. Commodities returns based on GSCI.
For illustrative purposes only. Past performance is not indicative of comparable future returns.
Data are as of 9/30/12.
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Oil and the Economy
$160$4.50
4%
WTI Crude Oil & Retail Gasoline Prices
OilGas 12/31/00 9/30/12Oil $26.72 $92.19
Economic Drag From Oil PricesU.S. petroleum imports as a % of GDP 3Q12*: 2.9%
3Q08: 3.8%
$120
$140
$3.50
$4.00
2%
3%
y
. .
$80
$100
$2.50
$3.00
'70 '75 '80 '85 '90 '95 '00 '05 '10
0%
1%
Econo
Oil Prices and Consum tion er Countr
$40
$60
$1.50
$2.00Energy Spending by Income Level% of after-tax income
Gasoline price per gallon, USD, annual barrels of oil consumed per capita
$8.67$8.06
$8.48
20bbls
25bbls
30bbls
$8
$10
$12 Annual Barrels of Oil Consumed per Capita (Right)
Gasoline Price per Gallon (Left)
0
$20
0.50
$1.00
$3.97
$5.38 $5.22
5bbls
10bbls
15bbls
-
$2
$4
$6
29
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Source: U.S. Department of Energy, FactSet, J.P. Morgan Asset Management. Price ofgas based on U.S. retail national average of all formulations and WTI for crude.
Data are as of 9/30/12.
Source: (Top) BEA, FactSet, J.P. Morgan Asset Management.(Bottom) EIA, J.P. Morgan Asset Management.*3Q12 drag on growth is a J.P. MorganAsset Management estimate.
US UK France Germany China India
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Global Oil Supply
250
Kuwait
Middle East Energy Production & Chokepoints
Percent of global liquid fuel production, 2011
U.S. Commercial & Strategic Oil StocksDays of net imports
Aug. 2012:235 days
100
150
200
Iran4.9%
Iraq3.0%
3.1%yr a
0.5%Suez Canal
2.2%
U.S. Commercial Oil Stocksy
Oct. 2005:129 days
0
50
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Libya0.6%
Egypt0.8% Saudi Arabia
12.8%
Strait ofHormuz OPEC Sur lus Production Ca acit
U.S. Strategic Petroleum Reserve
Econo
4
5
6
u an0.5%
UAE3.6%
.
Bab el-Mandeb
Millions of barrels per day
EIAforecast
1
2
33.4%
Average: 2.7mm bbl/day
Major Producers Major Consumers
Percent of global total, 2011 Percent of global total, 2011
Saudi Arabia 13% China 5% United States 22% India 4%
Russia 12% Iran 5% China 10% Saudi Arabia 3%
30
0
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13Source: EIA, J.P. Morgan Asset Management.
Forecast from the September EIA Short Term Energy Outlook.
Data are as of 9/30/12.
United States 12% Canada 4% Japan 5% Brazil 3%
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Consumer Confidence and the Stock Market
130
Consumer Sentiment Index University of Michigan
Average 12-month S&P 500 index return
110
120
y
Jan. 2000
-2.0%
Jan. 2004+4.4%
. . .
90
100
Average: 85.3
Econo
.+13.5%
May 1977+1.2%
.-6.2%
Jan. 2007-4.2%
60
70
Oct. 1990
Mar. 2003+32.8% Oct. 2005
+14.2%
' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' '40
50
Feb. 1975+22.2%
May 1980+19.2%
+29.1%
Nov. 2008+22.3%
Aug. 2011+15.4%
31
Source: University of Michigan, FactSet, J.P. Morgan Asset Management.
Peak is defined as the highest index value before a series of lower lows, while a trough is defined as the lowest index value before a seriesof higher highs. Subsequent 12-month S&P 500 returns are price returns only, which excludes dividends.
Data are as of 9/30/12.
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Fixed Income Sector Returns
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD 3Q12 Cum. Ann.
TIPS High Yield EMD EMD High Yield TIPS Treas. High Yield High Yield TIPS EMD EMD EMD EMD
10-yrs '02 - '11
16.6% 29.0% 11.9% 12.3% 11.8% 11.6% 13.7% 58.2% 15.1% 13.6% 14.2% 6.8% 185.6% 11.1%
EMD EMD High YieldAsset
Alloc.EMD Treas. MBS EMD EMD Muni High Yield High Yield High Yield High Yield
12.2% 26.9% 11.1% 3.6% 10.0% 9.0% 8.3% 34.2% 12.8% 10.7% 12.1% 4.5% 133.6% 8.9%
Treas.Asset
Alloc.TIPS Muni MBS
Barclays
Agg
Barclays
AggCorp. Corp. Treas. Corp. Corp. TIPS TIPS
. . . . . . . . . . . . . .
Barclays
AggTIPS
Asset
Alloc.TIPS
Asset
Alloc.MBS
Asset
Alloc.
Asset
Alloc.
Asset
Alloc.
Asset
Alloc.
Asset
Alloc.
Asset
Alloc.
Asset
Alloc.
Asset
Alloc.
10.3% 8.4% 6.3% 2.8% 5.1% 6.9% -1.4% 15.8% 7.6% 8.9% 6.7% 2.7% 96.0% 7.0%
Corp. Corp. Corp. Treas. Muni
Asset
Alloc. TIPS Muni
Barclays
Agg Corp. TIPS Muni Corp. Corp.
10.1% 8.2% 5.4% 2.8% 4.8% 6.2% -2.4% 12.9% 6.5% 8.1% 6.2% 2.3% 85.2% 6.4%com
e
Asset
Alloc.Muni MBS High Yield
Barclays
AggEMD Muni TIPS TIPS
Barclays
AggMuni TIPS
Barclays
Agg
Barclays
Agg
10.0% 5.3% 4.7% 2.7% 4.3% 5.2% -2.5% 11.4% 6.3% 7.8% 6.1% 2.1% 75.4% 5.8%
MuniBarclays
AggMuni MBS Corp. Corp. Corp.
Barclays
AggTreas. EMD
Barclays
Agg
Barclays
AggTreas. Treas.
9.6% 4.1% 4.5% 2.6% 4.3% 4.6% -4.9% 5.9% 5.9% 7.0% 4.0% 1.6% 74.3% 5.7%
FixedI
MBS MBS
Agg
AggTreas. Muni EMD MBS MBS MBS MBS MBS MBS MBS
8.7% 3.1% 4.3% 2.4% 3.1% 3.4% -14.7% 5.9% 5.4% 6.2% 2.8% 1.1% 73.9% 5.7%
High Yield Treas. Treas. Corp. TIPS High Yield High Yield Treas. Muni High Yield Treas. Treas. Muni Muni
-1.4% 2.2% 3.5% 1.7% 0.4% 1.9% -26.2% -3.6% 2.4% 5.0% 2.1% 0.6% 68.8% 5.4%
Source: Barclays Capital, FactSet, J.P. Morgan Asset Management.
32
Past performance is not indicative of future returns. Fixed income sectors shown above are provided by Barclays Capital and are represented by: Barclays Capital U.S. Aggregate
Index; MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index;Treasuries: Barclays Capital U.S. Treasury; TIPS: Barclays Capital TIPS. The Asset Allocation portfolio assumes the following weights:10% in MBS, 20% in Corporate, 15% in Municipals, 10% in Emerging Debt, 10% in High Yield, 25% in Treasuries, 10% in TIPS.Asset allocation portfolio assumes annual rebalancing.
Data are as of 9/30/12.
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Interest Rates and Inflation
20%
Nominal and Real 10-year Treasury Yields
15%
Sep. 30, 1981: 15.84%
Average 9/30/12
Nominal Yields 6.46% 1.65%Real Yields 2.58% -0.27%
5%
10%
com
e
Sep. 30, 2012: 1.65%
Nominal 10-yearTreasury Yield
0%FixedI
Sep. 30, 2012: -0.27%
-
-5% Real 10-yearTreasury Yield
33
'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
Source: Federal Reserve, BLS, J.P. Morgan Asset Management.
Real 10-year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month except for September 2012,where real yields are calculated by subtracting out August 2012 year-over-year core inflation.
Data are as of 9/30/12.
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Fixed Income Yields and Returns
U.S. Treasuries # of issues Mkt. Value Avg. Maturity 9/30/2012 9/30/2011 2012 YTD 3Q12
Yield Return
Source: U.S. Treasury, BarclaysCapital, FactSet, J.P. Morgan AssetManagement.
Fixed income sectors shown above areprovided by Barclays Capital and are
2-Year 2 years 0.23% 0.25% 0.25% 0.21%
5-Year 5 0.62 0.96 2.30 0.83
10-Year 10 1.65 1.92 4.37 0.93
30-Year 30 2.82 2.90 3.66 -0.28
Sector
represented by Broad Market: U.S.Barclays Capital Index; MBS: FixedRate MBS Index; Corporate: U.S.Corporates; Municipals: Muni Bond
Index; Emerging Debt: EmergingMarkets Index; High Yield: CorporateHigh Yield Index. TIPS: TreasuryInflation Protection Securities (TIPS).
# of issues: 164
Total value: $5.067 tn
Broad Market 7,967 $16,815 bn 6.7 years 1.61% 2.35% 3.99% 1.58%
MBS 861 5,052 3.8 1.77 2.82 2.80 1.13
Corporates 4,231 3,551 10.7 2.79 3.83 8.66 3.83
Municipals 46,180 1,339 13.7 2.17 3.02 6.06 2.32
com
e
Treasury securities data for of issuesand market value based on U.S.Treasury benchmarks from BarclaysCapital. Yield and return informationbased on Bellwethers for Treasurysecurities.
Change in bond price is calculated. . . . .
High Yield 1,931 1,082 6.7 6.51 9.51 12.13 4.53
TIPS 33 823 9.2 1.46 1.86 6.25 2.12
FixedI
us n g o ura on an convex yaccording to the following formula:New Price = (Price + (Price * -Duration *Change in Interest Rates))+(0.5 * Price* Convexity * (Change in InterestRates)^2)
*Calculation assumes 2-year Treasury
Price Impact of a 1% Rise/Fall in Interest Rates +1%20.1%25%
n eres ra e a s . o . anthe 5-year Treasury falls 0.62% to0.00%, as interest rates can only fall to0.00%.
Chart is for illustrative purposes only.Past performance is not indicative ofcomparable future results.
-
-2.0%-4.9%
-2.4% -4.0% -4.9% -5.3% -6.8% - -
0.5%3.0%
9.1%
2.3% 4.0%4.8% 5.3%
6.8% 6.9% 7.2%
-10%
-5%
0%
5%
10%
15%
34
Data are as of 9/30/12.-9.1%
-20.1%
. .
-25%
-20%
-15%
2-Year 5-Year 10-Year 30-Year MBS High Yield BroadMkt.
TIPS EMD Munis Corp.
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The Fed and the Money Supply
$3.5tn
Money MultiplierM2 / Monetary Base
Feds Balance Sheet: Assets$ trillions
10x
$1.5tn
$2.0tn
$2.5tn
3.0tn
5x
6x
7x
8x
er
U.S. Treasuries
Agency MBS
Aug. 2012:3.8x
$0.0tn
$0.5tn
. n
'03 '04 '05 '06 '08 '09 '10 '11
Feds Balance Sheet: Liabilities
com
e
Money Supply Growth
'03 '04 '05 '06 '07 '08 '09 '10 '11 '122x
3x
4x
r ons
FixedI
8%
10%
12%
14%
Year-over-year growth in M2
Aug. 2012: 6.3%
Monetary Base$2.0tn
$2.5tn
$3.0tn
'85 '90 '95 '00 '05 '100%
2%
4%
6%Excess Reserves
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12$0.0tn
$0.5tn
$1.0tn
.
35
Source: Federal Reserve, FactSet, J.P. Morgan Asset Management.
Monetary base is defined as the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held inthe central bank's reserves. Money multiplier defined as M2 divided by the monetary base.
Data are as of 9/30/12.
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The Fed Funds Rate: History and Expectations
12%
Federal Funds Rate & FOMC Interest Rate Projections
10%
6%
8%
com
e
Long-term Fed
4%FixedI
0%
2% Sep. 30, 2012:0.0%-0.25%
36
'84 '88 '92 '96 '00 '04 '09 '12 '14
Source: Federal Reserve, J.P. Morgan Asset Management.
Fed Funds Rate projections are based on an average of the FOMC interest rate projections for a given year.
Data are as of 9/30/12.
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Credit Conditions
760 60%
Consumer & Industrial Loan DemandNet percent of banks reporting stronger demand
Lending Standards for Approved Mortgage LoansAverage FICO score based on origination date
Aug. 2012: 750
680
700
720
740
-
-20%
0%
20%
40%
22%
620
640
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Delinquency Rates
com
e
Common Equity as a % of Total Assets
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12-80%
-60%
-
Large & Medium Firms
Small Firms
10%
12%
14%
8%
10%
12%
Consumer Loans
Residential Mortgages
an s, seasona y a us e
FixedI
Commercial and Industrial Loans
10.6%
nsure ns u ons,
2011:11.1%
4%
6%
8%
' ' ' ' ' ' ' ' ' ' ' ''92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
2%
4%
6%
1.4%
2.8%
Average: 7.6%
37
Source: (Top left) McDash, J.P. Morgan Securitized Product Research, J.P. Morgan Asset Management. (Top right) Federal Reserve, FactSet, J.P. Morgan AssetManagement. (Bottom left): Federal Reserve, FactSet, J.P. Morgan Asset Management. (Bottom right) FDIC, J.P. Morgan Asset Management.
All data reflect most recently available releases.
Data are as of 9/30/12.
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High Yield Bonds
20%Average Latest
HY Spreads 5.9% 5.9%HY Defaults 4.2% 1.8%
High Yield Spreads and Defaults
5%
10%
prea s
Default Rates
0%'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
com
e
Historical High Yield Recovery RatesHi h ield bonds cents on the dollar
Annual Flows into High Yield Mutual Funds & ETFsBillions USD
$10bn
$20bn
$30bn
$40bn
40
50
60
70
FixedI
Average: 39.2
.
-$20bn
-$10bn
$bn
'03 '04 '05 '06 '07 '08 '09 '10 '11 '120
10
20
30
'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10
38
Source (Top chart): U.S. Treasury, J.P. Morgan, J.P. Morgan Asset Management. Default rates are defined as the par value percentage of the total market trading at or below
50% of par value and include any Chapter 11 filing, prepackaged filing or missed interest payments. (Bottom left): J.P Morgan, Moodys, J.P. Morgan Asset Management.(Bottom right): Strategic Insight, J.P. Morgan Asset Management. Yield to worst is defined as the lowest potential yield that can be receivedon a bond without the issuer actually defaulting and reflects the possibility of the bond being called at an unfavorable time for the holder.Spreads indicated are benchmark yield to worst less comparable maturity Treasury yields. Past performance is not indicative of comparablefuture results. 2011 recovery rates are as of March 30, 2012.Data are as of 9/30/12.
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Municipal Finance
8%
State & Local Government Debt ServicePercent of current expenditures
Muni/Treasury RatioRatio of Barclays 10-year Municipal Bond yield to 10-year Treasury240%
6%
7%
200%
220%
2Q12: 5.1%
4%'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
com
e
Municipal Bond Issuance*Billions USD revenue and GO issues
160%
180%
Sep. 30, 2012:122%
FixedI
100%
120%
$300
$400
$500
'98 '00 '02 '04 '06 '08 '10 '1260%
80%
$0
$100
$200
'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
39
Source (Left chart): Barclays Capital, U.S. Treasury, FactSet, J.P. Morgan Asset Management. (Top right) BEA, J.P. Morgan Asset Management. (Bottom right) SIFMA,J.P. Morgan Asset Management.
*Excludes maturities of 13 months or less and private placements. 2012 issuance data is as of August 2012.
Data are as of 9/30/12.
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Emerging Market Debt
12%
Emerging Markets Debt SpreadsSpread to Treasuries of USD-denominated debt, percent
Index Breakdown USD Denominated EMD
Average Spread
Middle East &Africa 7%
Middle East &Africa 10%
100%
4%
6%
8%
Spread (9/30/12)
EMBIG 3.9% 3.1%
CEMBI 3.3% 3.6%
Europe 32%
Europe 16%
Latin America43%
Latin America39%
40%
60%
80%
0%
2%
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
com
e
Annual Flows into EMD Mutual Funds & ETFsBillions USD
Emerging Market Debt Credit RatingEMBIG average monthly credit rating, inverse scale -
Asia 18%
Asia 35%
0%
20%
EMBIG CEMBI
$8bn
$12bn
$16bn
$20bn
FixedI
.
BB+
BBB-
BB
BB-
: .
-$4bn
$bn
$4bn
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12'93 '95 '97 '99 '01 '03 '05 '07 '09 '11
B-
B
B+
40
Source: J.P. Morgan, IMF, MorganMarkets, FactSet, Strategic Insight, J.P. Morgan Asset Management.
Spreads measure the credit risk premium over comparable maturity U.S. Treasury bonds. The J.P. Morgan EMBI Global (EMBIG) Index is a USD-denominated external debtindex 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 localcurrency-denominated index tracking bonds issued by emerging market governments. Past performance is not indicative of comparable future results.Data are as of 9/30/12.
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Global Equity Markets: Returns and Composition
Country / Region
3Q12 YTD 2012
Local USD Local USD
Weights in MSCI All Country World Index% global market capitalization
Euro e ex-
Regions / Broad Indexes
USA (S&P 500) - 6.4 - 16.4EAFE 4.7 7.0 9.6 10.6
UnitedStates47%
U.K.15%
U.K. 8%
EmergingMarkets
- . . . . . .
Pacific ex-Japan 9.5 11.0 15.5 17.6
Emerging Markets 6.0 7.9 11.4 12.3
MSCI: Selected CountriesShare of Global GDP
Japan7%
United Kingdom 4.0 7.1 6.5 10.7
France 5.9 7.4 11.7 10.7
Germany 12.4 13.9 22.8 21.7
- -
Canada 2%
o
nal
Emer in
UnitedStates19%
. . . .
China 4.7 4.7 8.9 9.1
India 9.0 15.4 24.5 25.4
Brazil 5.3 4.8 5.4 -3.1Internati Markets
50%
Japan 5% OtherDeveloped
4%Europe ex-U.K.17%
41
Russia 6.0 9.4 8.9 11.6
Source: Standard & Poors, MSCI, IMF, FactSet, J.P. Morgan Asset Management.
All return values are MSCI Gross Index (official) data. Share of global GDP based on purchasing power parity (PPP)as calculated by the IMF for 2012. Definition of emerging markets is based on MSCI and IMF data sources, respectively.Percentages may not sum to 100% due to rounding.Data as of 9/30/12.
U.K. 3%
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Global Economic Growth
10%
Year-over-year % chg. forecasts from JPMSIEmerging Market Country Real GDP Growth
3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
Historical
2Q13
JPMSI Forecast
0%
2%4%
6%
-4%
-2%
Emerging Markets China India Russia Mexico South Africa Korea Brazil
Developed Market Country Real GDP Growth
4%
6%
8%
10%
Year-over-year % chg. forecasts from JPMSI
o
nal
3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
2Q13
-4%
-2%
0%
2%
DevelopedCountries
Japan Canada U.S. Germany France U.K. Italy
Internati
42
Source: J.P. Morgan Global Economic Research, J.P. Morgan Asset Management.
Forecast and aggregate data come from J.P. Morgan Global Economic Research.
Data are as of 9/30/12.
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Global Monetary Policy
30%
35%
Central Bank Assets Percent of Nominal GDP Real Policy Rates Monthly
3%
4%
10%
15%
20%
25%
European Central Bank
Bank of Japan
-1%
0%
1%
2%
0%
5%
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Developed Markets
Country Level Monetary Policy and Inflation
Emerging Markets
U.S. Federal Reserve
-3%
-2%
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
o
nal
0.0%
3.5%
7.0%
10.5%
14.0%
Internati
-7.0%
-3.5%
HongKong
U.K.
U.S.
Euroarea
Canada
Japan
Australia
Turkey
India
SouthAfrica
Taiwan
Thailand
Korea
Mexico
Poland
Indonesia
Colombia
Russia
Brazil
China
43
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. MorganGlobal Economics Research. (Bottom chart) Target policy rates are the short-term target interest rates set by central banks. Inflation rates shownrepresent year-over-year quarterly rates for 2Q12. Real policy rates are short-term target interest rates set by central banks minus year-over-yearinflation.Data are as of 9/30/12.
eve ope ar e s merg ng ar e s
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The Importance of Exports
Goods exports onlyExports as a % of GDP 2011
0.8%
4.5%
2.0%
.
9.5%
4.4%
3.1%
.
2.1%
1.7%
2.3%
.
14.4%
15.5%
10.2%
.
26.8%
26.1%
17.6%
.
Russia
China
India
2.2% 1.7%
1.5%
4.0%
1.4%
6.2%
6.9%
14.0%
9.8%
Japan
U.S.
o
nal
1.4%
1.1%
1.9%
12.4%
12.7%
10.0%
2.0%
1.5%
1.3%
7.6%
5.8%
4.8%
23.4%
21.1%
18.0%
Italy
France
U.K.
Internati
2.2%
19.2%
21.8%
2.5%
4.2%
1.6%
10.7%
2.8%
38.9%
26.0%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Germany
Canada
44
ource: , . . organ sse anagemen .
Numbers represent exports of goods only and would be higher if services were included.Data are as of 9/30/12.
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The Impact of Global Consumers
35%40%
Share of Global Nominal Consumption Foreign Sales, % of Total Sales
30%35%Mega Cap (Russell 200)
20%
25%
25%
30%
Large Cap (Russell 1000)
15%20%
o
nal U.S. Consumption % of Global
EM Consumption % of Global
10%'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10
15%1990 1994 1998 2002 2006 2010
Source: FactSet, Compustat, Russell, J.P. Morgan Global Economics Research, J.P. Morgan Asset Management.Estimates of global consumption for 2010 and 2011 provided by J.P. Morgan Global Economics Research.Foreign sales as a percentage of total sales is calculated as an unweighted average of individual index constituent companies reported sales figures
Internati
45
and does not capture all index members due to differences in reporting practices.
Data are as of 9/30/12.
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European Crisis: Fiscal Challenges
8%
Example of Fiscal Redistribution in the U.S.GDP Growth, Debt to GDP and Borrowing Costs
Bubble size = 10-yeargovernment bond yield
EM
4%
6%
13)
= 5%
= 10%
France
Germany
IrelandE.U.
U.S.
2%
The E.U. Lacks a Similar Fiscal Mechanismrowt
h(201120
Greece
Italy
Portugal
Spain
-2%
0%
o
nal R
ealGDPG
-6%
-4%
20% 40% 60% 80% 100% 120% 140% 160%
Internati
46
Source: IMF, BLS, J.P. Morgan Asset Management.Maps are for illustrative purposes only and are intended to show the current sources of stress in each region. The U.S. state colors are based on levelof unemployment rate. European country colors are based on levels of sovereign stress, including but not exclusively, the measure shown in theabove chart on the left. Growth and debt data based on the April 2012 World Economic Outlook. Bond yields as of 9/30/12.
Data are as of 9/30/12.
Net Debt-to-GDP Ratio (2012 est.)
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European Crisis: Sovereign Bond Yields
16%
European Sovereign Funding Costs10-year benchmark bond yields, daily
Introduction
9/30/12Portugal 8.39%Ireland 7.19%Spain 5.97%
12%
14%
Italy 5.03%France 2.18%Germany 1.46%
8%
10%
4%
6%
o
nal
0%
2%
Internati
47
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Source: FactSet, ECB, J.P. Morgan Asset Management.
Data are as of 9/30/12.
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European Crisis: Financial System Risks
European Bank Exposure Euribor and Libor Spreads3M Euribor - EONIA, 3M Libor - OISBillions USD4.0%
Spain
Spain
Greece
Ireland
Italy 3.0%
3.5%
U.K.
Libor SpreadPortugal
2.0%
2.5%
Germany
o
nal
Euribor Spread1.0%
1.5%
France
Internati
0.0%
0.5%
' ' ' ' ' '
48
Source: Bloomberg, BIS, J.P. Morgan Asset Management.
The Libor OIS spread is the difference between the interest rate at which banks borrow unsecured funds from other banking institutions and overnightindexed swaps at the effective federal funds rate. The Euribor EONIA spread is the difference between the interest rate at which European Unionbanks borrow unsecured funds from other Euro banking institutions and the standard interest rate for Euro area deposits calculated by the EuropeanCentral Bank. Both are standard measures of perceived risk in banking institutions. Data are as of 9/30/12.
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Chinese Growth and Economic Policy
30%10%Share of year-over-year change in nominal global GDPChina and U.S. Contribution to Global GDP Growth Chinese Inflation and the Money Supply
Year-over-year % change
China Most Recent40%
20%
25%
2%
4%
6%
8n e a es .
M2 (RHS) 13.5%
15%
20%
25%
30%
10%
15%
-2%
0%
'00 '02 '04 '06 '08 '10 '12
China Export Growth
Mortgage Debt
0%
5%
10%
'81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14
15%
25%
35%
45%
71%
73%
75%
77%
14%
16%
18%
o
nal
- - -
Aug. 2012:5.0%
1Q12: 14.0%United States (Right)
-25%
-15%
-5%
5%
Feb-08 Se -08 A r-09 Nov-09 Jun-10 Jan-11 Au -11 Mar-1261%
63%
65%
67%
69%
8%
10%
12%
' ' ' ' ' ' ' '
Internati
1Q12: 62.9%
China (Left)
49
Source: (Top left) IMF, J.P. Morgan Asset Management. (Top right) National Bureau of Statistics, J.P. Morgan Economics, J.P. Morgan Asset Management. (Bottom left) IMF, J.P.
Morgan Asset Management. (Bottom right) Barclays Capital, Federal Reserve, J.P. Morgan Asset Management.*In 2009, global growth was negligible, while Chinese growth was robust, which resulted in China contributing more than 1200% to global growth.Calculations based on PPP exchange rates and 2012 2016 growth forecasts are from the IMF.
Data are as of 9/30/12.
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Global Equity Valuations Developed Markets
Developed Market Countries
verage Expensive
relative toworld
Example
+5 Std Dev
+4 Std Dev
+6 Std Dev
dDevfrom
Global
Expensiverelative to own
history
Cheap relative toown history
Average
Current
+ ev
+2 Std Dev
+1 Std Dev
Average
-1 Std Dev
-2 Std Dev
-3 Std Dev
CurrentComposite
Current 10-year avg.
World(ACWI)
EAFEIndex
France Japan U.K. Germany Australia Canada Switzerland UnitedStates
St
relative toworld
-4 Std Dev
-5 Std Dev
. . . . . .
World (ACWI) -0.88 12.0 1.7 6.9 2.8% 13.4 2.1 7.0 2.5%
EAFE Index -1.88 10.9 1.3 5.5 3.7% 12.9 1.7 6.2 3.3%
France -2.39 10.2 1.1 5.2 4.2% 11.5 1.6 5.8 3.7%
Japan -2.00 11.5 0.9 3.9 2.7% 17.9 1.4 6.2 1.9%
U.K. -1.78 10.2 1.6 6.1 4.1% 11.4 2.0 7.1 3.9%
o
nal
ermany - . . . . . . . . .
Australia -1.48 12.1 1.7 6.5 4.9% 13.4 2.2 8.2 4.5%
Canada -0.92 12.7 1.8 5.1 2.8% 13.8 2.1 7.2 2.4%
Switzerland 0.34 12.2 2.0 11.9 3.5% 13.7 2.4 9.8 2.9%
United States 0.55 12.6 2.2 8.2 2.0% 14.4 2.4 8.4 2.0%
Source: MSCI, FactSet, J.P. Morgan Asset Management.
Internati
50
Note: Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (Fwd. P/E), price to current book
(P/B), price to last 12 months cash flow (P/CF) and price to last 12 months dividends. Results are then normalized using means and averagevariability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). Seedisclosures page at the end for metric definitions.
Data are as of 9/30/12.
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Global Equity Valuations Emerging Markets
Emerging Market Countries
erage
+5 Std Dev
+4 Std Dev
+6 Std DevExpensiverelative to
Example
Devfrom
GlobalA +3 Std Dev
+2 Std Dev
+1 Std Dev
Average-1 Std Dev
-2 Std Dev
-3 Std Dev
Expensiverelative to own
history
Cheap relative toown history
Average
Current
Chea
Current
Com ositeCurrent 10-year avg.
World(ACWI)
EMIndex
Russia China Brazi l Taiwan SouthAfrica
Korea Mexico India
Std
-4 Std Dev
-5 Std Dev
relative to
world
Fwd. P/E P/B P/CF Div. Yld. Fwd. P/E P/B P/CF Div. Yld.
World(ACWI) -0.88 12.0 1.7 6.9 2.8% 13.4 2.1 7.0 2.5%
EM Index -1.43 10.3 1.6 6.1 2.9% 10.9 1.9 5.7 2.7%
Russia -3.71 5.2 0.8 3.6 3.6% 7.9 1.3 4.9 2.2%
China -2.28 9.0 1.5 4.5 3.3% 12.2 2.1 4.1 2.8%
Brazil -1.92 10.8 1.4 6.2 4.1% 9.6 1.9 5.5 3.5%
Index
o
nal
Taiwan -0.74 15.0 1.8 5.9 3.3% 15.2 1.8 6.5 3.5%
South Africa -0.21 11.6 2.3 9.7 3.5% 10.9 2.3 7.5 3.4%
Korea 0.19 8.7 1.3 5.7 1.1% 9.4 1.5 5.0 1.8%
Mexico 1.76 16.7 2.9 6.3 1.6% 13.4 2.6 5.6 2.0%
India 2.69 14.0 2.5 12.7 1.5% 15.1 3.2 12.0 1.5%
Source: MSCI FactSet J.P. Mor an Asset Mana ement.
Internati
51
, , . . .
Note: Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (Fwd. P/E), price to current book(P/B), price to last 12 months cash flow (P/CF) and price to last 12 months dividends. Results are then normalized using means and averagevariability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). Seedisclosures page at the end for metric definitions.
Data are as of 9/30/12.
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Emerging Market Equity Composition
MSCI EM Index by Region MSCI EM Index by Sector
60%
10%
22%
Africa/Mideast
Asia/Pacific ex Japan
Europe
Latin America
20%
25%
14%
16% Other
Commodities
Financials
25%
Consumer
MSCI EM Country Index by Sector
o
nal
13%37%
21%22%
19%
14%
16% 12% 17%24%
34%
16%
60%
80%
100%
Other
Commodities
Internati
17% 18%
38%23%
4%16%
7%
33%26%
15%
28%
37%9%
20%
40%Financials
Tech
Consumer
52
Source: MSCI, FactSet, J.P. Morgan Asset Management. Other is comprised of Healthcare, Industrials, Telecom, and Utilities sectors.*Mexican Telecom sector accounts for 28% of the countrys market capitalization. Values may not sum to 100% due to rounding.
Data are as of 9/30/12.
4%0%
Brazil Russia India China Mexico* Korea
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International Economic and Demographic Data
Economics Demographics
GDP USD(B$s)
GDP Per
Ca ita
GDP
Growth
Unempl.
Rate
Inflation(CPI)
C.A.(%GDP)
PopulationPopulation
Growth
Median
A e
Migration
er 1000
Developed
U.S. $15,094 $48,387 1.3% 8.1% 1.7% -3.6% 314 mm 0.9% 37.1 yrs +3.6
Canada 1,737 50,436 1.9 7.3 1.4 -2.5 34 0.8 41.2 +5.7
U.K. 2,418 38,592 2.0 8.1 2.5 -2.3 63 0.6 40.2 +2.6
ermany , , . . . . - . . +.
France 2,776 44,008 -0.3 10.2 2.2 -1.9 66 0.5 40.4 +1.1
Japan 5,869 45,920 -2.0 4.3 -0.4 1.5 127 -0.1 45.4 -
Italy 2,199 36,267 -2.5 10.6 3.2 -2.3 61 0.4 43.8 +4.7
Emerging
Russia 1,850 12,993 2.0 5.2 6.9 5.4 143 -0.5 38.8 +0.3
Mexico 1,155 10,153 3.5 5.4 4.6 -0.4 115 1.1 27.4 -3.1
Brazil 2,493 12,789 4.8 5.3 5.3 -2.1 199 1.1 29.6 -0.1
China 7,298 5,414 7.4 4.1 2.0 2.8 1,343 0.5 35.9 -0.3
o
nal
, , . . . - . , . . - .
Source: FactSet, Eurostat, CIA, J.P. Morgan Securities, J.P. Morgan Asset Management.
GDP levels represent 2011 data and are from the April 2012 World Economic Outlook published by the IMF, except for the U.S. levels, which come directly from the BEA. AllGDP Growth data are from J.P. Morgan Economics and expressed as % change versus prior quarter annualized. All GDP growth data are for 3Q12. India unemployment isfrom CIA estimates and is as of 2011. CPI Inflation is shown as % change versus a year ago and all data are for August 2012, except for Japan, which is as of July 2012.Unemployment rate for developed countries comes from FactSet Economics, Eurostat and Statistics Canada and represent the most recently available data. Demographicdata provided by CIA World Factbook at CIA.gov.
Internati
53
Current Account (C.A.) represents each countrys current account balance as of 6/30/12. Russia, China and Brazils current accounts are as of 12/31/11.
Data are as of 9/30/12.
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Current Account Deficit and U.S. Dollar
115-8%
Current Account Balance, % of GDP U.S. Dollar IndexNominal trade-weighted exchange index: major currencies
105
110
-6%
4Q05:-6.5%
90
95-4% 2Q12:
-3.0%
80
85
-2%
o
nal
.84.0
'94 '96 '98 '00 '02 '04 '06 '08 '10 '1265
70
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12
0%
Internati
Mar. 2008: 70.3
Sep. 2012: 72.5
54
Source: BEA, FactSet, J.P. Morgan Asset Management.Data are as of 9/30/12 and are reported quarterly.
Source: Federal Reserve, FactSet, J.P. Morgan Asset Management.Data are as of 9/30/12.
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Correlations: 10-Years
Large
Cap
Small
Cap EAFE EME
Core
Bonds
Corp.
HY EMD Cmdty. REITs
Hedge
Funds
EqMarket
Neutral*
-. . . . . . . . . . .
Small Cap 1.00 0.88 0.79 -0.27 0.73 0.59 0.46 0.84 0.76 0.55
EAFE 1.00 0.93 -0.15 0.75 0.66 0.59 0.72 0.87 0.72
. - . . . . . . .
Core Bonds 1.00 -0.03 0.27 -0.27 0.00 -0.22 -0.09
Corp. HY 1.00 0.85 0.56 0.70 0.78 0.44
EMD 1.00 0.44 0.61 0.65 0.40
Commodities 1.00 0.40 0.72 0.50
REITs 1.00 0.59 0.50
Source: Standard & Poors, 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: BarclayssetClass
Hedge Funds 1.00 0.60
Eq Market Neutral* 1.00
56
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 MarketNeutral Index. *Market Neutral returns include estimates found in disclosures.
All correlation coefficients calculated based on quarterly total return data for period 9/30/02 to 9/30/12.
This chart is for illustrative purposes only.
As
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Mutual Fund Flows
Billions, USD AUM YTD 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998
Fund Flows
,
World Equity 1,492 18 4 58 28 (80) 139 149 106 71 24 (3) (22) 53 11 8
Taxable Bond 2,724 169 135 230 311 22 97 45 26 5 40 125 76 (36) 8 59
Tax-exempt Bond 562 39 (12) 11 69 8 11 15 5 (15) (7) 17 11 (14) (12) 15
Hybrid 946 39 31 24 10 (26) 42 18 37 49 38 9 9 (36) (14) 10
$1,400 $40
Difference Between Flows Into Stock and Bond FundsBillions, USD, U.S. and international funds, monthly
Bond flows exceeded equity flows
Cumulative Flows into Stock & Bond FundsIncludes both mutual funds and ETFs, $ billions
Aug. 12: $1,288 billion into bond funds
,
$800
$1,000
$1,200
$0
$20
y on n ugus
$0
$200
$400
' ' ' ' ' '-$60
-$40
-$20
' ' ' ' ' 'setClass
Bonds
Stocks
.into stock funds andequity ETFs since 07
57
ay ar an ov ep u
Source: Investment Company Institute, J.P. Morgan Asset Management.Data include flows through August 2012 and exclude ETFs. ICI data are subject to periodic revisions. World equity flows are inclusive ofemerging market, global equity and regional equity flows. Hybrid flows include asset allocation, balanced fund, flexible portfolio and mixedincome flows.Data are as of 9/30/12.
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Dividend Income: Domestic and Global
S&P 500 Total Return: Dividends vs. Capital AppreciationAverage annualized returns Capital Appreciation
Dividends20%
4.7% 5.4% 6.0% 5.1% 3.3% 4.2% 4.4% 2.5%1.8%
4.1%
13.9%
3.0%
13.6%
4.4%1.6%
12.6% 15.3%
-2.7%
5.5%
0%
5%
10%
Equity Dividend YieldsREIT Dividend Yields
- .
-10%
-5%
1926 - 1929 1930's 1940's 1950's 1960's 1970's 1980's 1990's 2000's 1926 to 2011
3.5%
5.5% 5.5% 5.4%
5.0%4.7%
4.2%4.0%
4%
5%
6%
-bond yield 10-year government
bond yield4.8%
4.1%3.8%
3.4%4%
5%
6%
1%
2%
3%
setClass 2.2%
. . 2.6%
1%
2%
3%
58
0%U.S. F rance Aus tralia Singapore Canada Japan Global U.K.
Source: (Top chart) Standard & Poors, Ibbotson, J.P. Morgan Asset Management. (Bottom left) FactSet, NAREIT, J.P. Morgan Asset Management.Yields shown are that of the appropriate FTSE NAREIT REIT index, which excludes property development companies. (Bottom right) FactSet, MSCI,J.P. Morgan Asset Management. Yields shown are that of the appropriate MSCI index.
Data are as of 9/30/12.
As 0% U. S. Aust ralia F rance U .K. Sw itzerland Canada ACWI Japan
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Global Commodities
600
Commodity PricesWeekly index prices rebased to 100
Oil Demand: Emerging Markets ShareEmerging markets as % of total global oil consumption40%
500
Precious Metals
Industrial Metals
34%
36%
38%
300
400
Commodit Prices and Inflation
30%
32%
'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
4%
6%
8%
40%
60%
80%
200
Energy
Grains
Year-over-year % chg.
DJ-UBS Commodity Index (Y/Y % chg.)
-4%
-2%
0%
2%
-40%
-20%
0%
20%
100
setClass
Livestock Headline CPI (Y/Y % chg.)
59
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12-6% -60%
'03 '04 '05 '06 '07 '08 '09 '10 '11 '120
Source: Dow Jones/UBS, FactSet, J.P. Morgan Asset Management.
Commodity prices represented by the appropriate DJ/UBS Commodity sub-index.
Data are as of 9/30/12.
Source: (Top) BP Statistical Review of World Energy, J.P.Morgan Asset Management. (Bottom) BLS, DJ/UBS,FactSet, J.P. Morgan Asset Management.
Data are as of 9/30/12.
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Gold
$3,000
Gold Prices$ / oz Year Troy Ounces Total Value
2000 83.3 mm $23 bn
World Gold Production
$2,500
Jan. 1980:$2,480.36
Gold, Inflation Adjusted
Gold
2001 83.6 mm $23 bn
2002 82.0 mm $25 bn
$1,500
$2,000Sep. 2012:$1,763.00
. mm n
2004 77.8 mm $32 bn
2005 79.4 mm $35 bn
$1,000Jan. 1980:
$850.00
2006 76.2 mm $46 bn
2007 75.6 mm $53 bn
2008 73.3 mm $64 bn
$0
$500
setClass 2009 79.1 mm $77 bn
2010 82.3 mm $101 bn
60
'75 '80 '85 '90 '95 '00 '05 '10
Source: (Left chart) EcoWin, BLS, U.S. Department of Energy, FactSet, J.P. Morgan Asset Management. (Right table) U.S. Geological Survey, WorldGold Council, J.P. Morgan Asset Management. CPI adjusted gold values are calculated using month averages of gold spot prices divided by the CPIvalue for that month. CPI is rebased to 100 at the end of the chart. 2011 world production is a U.S. Geological Survey estimate.
Data are as of 9/30/12.
As
.
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Historical Returns by Holding Period
Annual total returns, 1950 2011Range of Stock, Bond and Blended Total Returns
Annual Avg. Growth of $100,00060%
50/50 Portfolio 8.9% $552,853
Bonds 6.3% $337,713
Stocks 10.8% $771,337
o a e urn over 20 years
51%
43%40%
50%
32%
28%
23%21% 19%
16% 17%18%
12%14%10%
20%
Stocks
-8%
-15%
-2% -2% 1%-1% 1%
2%
6%
1%
5%
-10%
0%
setClass 50/50 Portfolio
Bonds
-37%
-40%
-30%
-20%
61
As
Sources: Barclays Capital, FactSet, Robert Shiller, Strategas/Ibbotson, Federal Reserve, J.P. Morgan Asset Management.
Returns shown are based on calendar year returns from 1950 to 2011.
Data are as of 9/30/12.
1-yr. 5-yr. rolling 10-yr. rolling 20-yr. rolling
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Diversification and the Average Investor
Equity Mkt. Neutral
(Top) Indexes and weights of thetraditional portfolio are as follows:U.S. stocks: 55% S&P 500, U.S.bonds: 30% Barclays CapitalAggregate. International stocks:15% MSCI EAFE. Portfolio with 25%
Traditional Portfolio More Diversified Portfolio
Maximizing the Power of Diversification (1994 2011)
8%8%
8%
4%
26%REIT
S&P 500Russell 2000
in alternatives is as follows: U.S.stocks: 22.2% S&P 500, 8.8%Russell 2000; International Stocks:4.4% MSCI EM, 13.2% MSCI EAFE;
U.S. Bonds: 26.5% Barclays CapitalAggregate; Alternatives: 8.3%CS/Tremont Equity Market Neutral,8.3% DJ/UBS Commodities, 8.3%NAREIT E uit REIT Index Return
55%
30% S&P 500
MSCI EAFE
Barclays Agg.
9%
MSCI EM
Barclays Agg.
.and standard deviation calculatedusing Morningstar Direct.
Charts are shown for illustrativepurposes only. Past returns are noguarantee of future results.Diversification does not guarantee
investment returns and does noteliminate risk of loss. Data are as of
Return: 6.75%Standard Deviation: 10.94% Return: 7.09%Standard Deviation: 9.97%
20-year Annualized Returns by Asset Class (1992 2011)
9/30/12.
(Bottom) Indexes used are asfollows: REITS: NAREIT Equity REITIndex, EAFE: MSCI EAFE, Oil: WTIIndex, Bonds: Barclays Capital U.S.Aggregate Index, Homes: mediansale price of existing single-familyhomes, Gold: USD/troy oz, Inflation:
10.9%
8.6%10%
12%
.investor return is based on ananalysis by Dalbar Inc., which utilizesthe net of aggregate mutual fundsales, redemptions and exchangeseach month as a measure of investorbehavior. Returns are annualized(and total return where applicable)and represent the 20-year periods
etClass
. .
6.5%
4.0%
2.5% 2.5%2.1%
4%
6%
8%
62
ending 12/31/11 to match Dalbarsmost recent analysis.A
s
0%
2%
REITs Oil S&P 500 Gold Bonds EAFE Inflation Homes AverageInvestor
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Annual Returns and Intra-year Declines
50%
S&P 500 Intra-year Declines vs. Calendar Year ReturnsDespite average intra-year drops of 14.5%, annual returns positive in 25 of 32 years
26
1517
26
15
2726
34
20
31
27
20
26 23
20%
35%
-10
1 2
12
-74
7 -2 -10 -13 -23
9
3 4-38
13
0
--3
5%
-17 -17-14
-7
-12
-8-9
-8 -8
-20
- --9 -8
-11
-19
-12
-17
-26
-14
-8 -7 -8-10
-28
-16
-19-25%
-
-34 -
-47-55%
-40%
'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 '11setClass
63
Source: Standard & Poors, FactSet, J.P. Morgan Asset Management.
Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops over periods of 6 months orless. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2011.
Data are as of 9/30/12.
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Cash Accounts
$8,000
$10,000
Annual Income Generated by $100,000 Investment in a 6-month CD
$ Billions
Weight in
Money
Supply
Money Supply
Component
$2,000
$4,000
$6,000
2011:$419
,
M2-M1 7,688 76.7%
Retail MMMFs 641 6.4%
$01986 1990 1994 1998 2002 2006 2010
6-month CD rate vs. Core CPICash AccountsCash as a % of Total Household Financial Assets28%
Savings deposits 6,348 63.3%
Small time deposits 700 7.0%
16%
20%
24% Oct. 02 S&P 500 low
.
Institutional MMMFs 1,723 17.2%
616 6.1%Cash in IRA & Keogh
accounts
setClass
Source: Federal Reserve, St. Louis Fed, Bankrate.com, J.P. Morgan Asset Management. All cash measures obtained from the Federal Reserve areseasonally adjusted monthly numbers. All numbers are in billions of U.S. dollars.
'98 '00 '02 '04 '06 '08 '10 '12
12% Total 10,026 100.0%
64
As ma - enom na on me epos s are ose ssue n amoun s o ess an , . an eog accoun a ances a commerc a an s
and thrift institutions are subtracted from small time deposits.
Annual income is for illustrative purposes and is calculated based on the 6-month CD yield on average during each year and $100,000 invested.
IRA and Keogh account balances at money market mutual funds are subtracted from retail money funds.
Past performance is not indicative of comparable future results.
Data are as of 9/30/12.
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Corporate DB Plans and Endowments
Underfunded
Defined Benefit Plans Funded Status: S&P 500 Companies
Overfunded
Asset Allocation: Corporate DB Plans vs. Endowments
Endowments
45.3%
13.0%
32.0%
Fixed Income
Equities
92%78
22%
2.7%
35.5%
21.9%Hedge Funds
Pension Return Assumptions: S&P 500 companies
20101999
27%29%
20%
33%
27%
20%
30%
40%
3.1%
4.7%
6.1%
.
Real Estate
Private Equity
anies
2010: Average 7.4%
1999: Average 9.2%
2% 1%
5%
9%7%8%
0% 0% 0%
0%
10%
< 7% 7 to 7.5 to 8 to 8.5 to 9 to 9.5 to > 10%4.7%
4.1%
4.0%
12.2%
Cash
Other
%o
fCom
setClass
% of total
65
7.5% 8% 8.5% 9% 9.5% 10%0% 10% 20% 30% 40% 50%
Return AssumptionSource: NACUBO (National Association of College and University Business Officers), Towers Watson, Compustat/FactSet, J.P. Morgan AssetManagement. Endowments represents dollar-weighted average data of 842 colleges and universities. Pension Return Assumptions based on allavailable and reported data from S&P 500 Index companies. Funded Status based on 351 companies reporting pension funding status as of3/31/11. Return assumption bands are inclusive of upper range. All information is shown for illustrative purposes only. Data are as of 9/30/12.
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The Dow Jones Industrial Average Since 1900
Dow Jones Industrial Index, Price Return (Since 1900)
Log Scale
10,000
2000 present
3,000
1,0001966 1982
400
100
1937 1949
'10 '20 '30 '40 '50 '60 '70 '80 '90 '00 '10
1906 1924
setClass
66
Source: IDC, FactSet, J.P. Morgan Asset Management.
Data shown in log scale to best illustrate l
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