1. Current Market Conditions and
Investor Behavior
Barry Mendelson, CFP®
925-988-0330 x22
Barry@JustPlans-Etc.com
As of September 30, 2010
1
2. Opinions expressed are those of Barry Mendelson, CFP® and Just Plans Etc.
This presentation should not be construed as investment advice.
The information contained in this presentation is compiled from sources believed to be reliable.
Investments in securities involve the risk of loss. Past performance is no guarantee of future
results.
The markets can remain irrational longer than you can remain solvent.
Disclosures
2
3. Barry Mendelson, CFP®
Investment management and personal finance guru. More than 15 years experience
working for leading financial services companies including Charles Schwab, AXA Rosenberg,
Neuberger Berman, and Franklin Templeton. Prior to joining Just Plans Etc. in 2010, was a
Vice President in Charles Schwab & Co’s $200 billion investment management division.
Certified Financial Planner™ certificate holder since 2008. B.A. in Business Economics &
Accounting from U.C. Santa Barbara in 1995.
Just Plans Etc.
Founded in 1982 and based in Walnut Creek, California - Just Plants Etc. is a fee-only wealth
management firm and SEC registered investment advisor. Just Plans provides investment
management and financial planning services to more than 100 individual, families, and
companies. As a fiduciary, the firm puts the interests of the client above all else.
About
3
4. Agenda
4
1. Current Market Environment
2. Current Economic Environment
3. Historical Perspective
4. Lessons for the Future
6. Returns by Style
6
Jan-10 Mar-10 May-10 Jul-10 Sep-10
1,000
1,050
1,100
1,150
1,200
1,250
Source: Russell Investment Group, Standard & Poor’s, FactSet, J.P. Morgan Asset Management.
All calculations are cumulative total return, including dividends reinvested for the stated period. Since Market Peak represents period 10/9/07
– 9/30/10 , illustrating market returns since the most recent S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09–
9/30/10 , illustrating market returns since the S&P 500 Index low on 3/9/09. Returns are cumulative returns, not annualized. For alltim e
periods, total return is based on Russell- style indexes with the exception of the large blend category, which is reflected by the S&P 500 Index.
Past performance is not indicative of future returns.
Data are as of 9/30/10.
Jan-07 Jan-08 Jan-09 Jan-10
600
800
1,000
1,200
1,400
1,600
S&P 500 Index
S&P 500 Index
2010: +3.9%
3Q10:
+11.3%
Since 10/9/07 Peak:
-22.0%
3Q 2010
Since Market Low (March 2009)
YTD 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:
+74.3%
Value Blend Growth Value Blend Growth
Large
10.1% 11.3% 13.0%
Large
4.5% 3.9% 4.4%
Mid
12.1% 13.3% 14.6%
Mid
11.1% 11.0% 10.9%
Small
9.7% 11.3% 12.8%
Small
7.9% 9.1% 10.2%
Value Blend Growth Value Blend Growth
Large
-27.5% -22.0% -14.8%
Large
80.8% 74.3% 73.7%
Mid
-16.1% -14.6% -14.0%
Mid
114.1% 106.0% 98.7%
Small
-17.9% -16.5% -15.5%
Small
103.0% 101.3% 99.5%
7. S&P 500 Index at Inflection Points
7
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
600
800
1,000
1,200
1,400
1,600
Index level 1,527 1,565 1,141
P/E Ratio (fwd) 25.6x 15.2x 12.3x
Dividend yield 1.1% 1.8% 2.1%
10-yr. Treasury 6.2% 4.7% 2.5%
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 byCompustat . Forward Price to Earnings Ratio is a bottom- up calculation based
on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next twelve months (NTM), and is provided by FactSet Market Aggregates.
Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Pastpe rformance is not indicative of future
results. Data are as of 9/30/10.
S&P 500 Index
-49%
Oct. 9, 2002
P/E (fwd) = 14.1
777
Mar. 24, 2000
P/E (fwd) = 25.6
1,527
Dec. 31, 1996
P/E (fwd) = 16.0
741
Sep. 30, 2010
P/E (fwd) = 12.3
1,141
+101%
Oct. 9, 2007
P/E (fwd) = 15.2
1,565
-57%
Mar. 9, 2009
P/E (fwd) = 10.3
677
+69%
Characteristic Mar-2000 Oct-2007 Sep-2010
8. Equity Scenarios: Bull, Bear, and In-Between
8
39.7%
19.6%
13.6%
10.7%
9.0%
7.9%
7.1%
6.5%
6.1%
5.7%
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 424
S&P 500 Index: Return Needed to Reach 2007 Peak
Source: Standard & Poor’s, J.P. Morgan Asset Management.
( Left) Data assume 2.5% 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 guaran tee 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 reflectthe 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 9/30/10.
Implied avg. annualized total return
Implied cumulative total returnX%
Analysis as ofSep. 30, 2010. Index has risen68.7% since low of 677.
X%
39.7%
43.1%
64.6%
50.3%
54.0%
57.9%
61.8%
65.9%
70.0%
74.3%
Recovery So Far 464
Decline Peak to Trough 888
9/30/10 Level 1,141
3/9/09 Trough 677
Bear Market Cycles vs. Subsequent Bull Runs
Market
Peak
Market
Low
Bear
Market
Return
Length of
Decline
Bull Run
Length
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 68.7%* - -
Average: -35.0% 14 mo's 176.0% 68 mo's 2.2 yrs
9. Various Asset Class Returns
9
10-yrs
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3Q10 YTD '00 - '09
Real
Estate
Real
Estate
DJ UBS
Cmdty
MSCI
EME
Real
Estate
MSCI
EME
Real
Estate
MSCI
EME
Barclays
Agg
MSCI
EME
MSCI
EME
Real
Estate
Real
Estate
26.4% 13.9% 23.9% 56.3% 31.6% 34.5% 35.1% 39.8% 5.2% 79.0% 18.2% 19.1% 174.5%
DJ UBS
Cmdty
Market
Neutral
Barclays
Agg
Russell
2000
MSCI
EME
DJ UBS
Cmdty
MSCI
EME
MSCI
EAFE
Market
Neutral
MSCI
EAFE
MSCI
EAFE
MSCI
EME
MSCI
EME
24.2% 9.3% 10.3% 47.3% 26.0% 17.6% 32.6% 11.6% 1.1%* 32.5% 16.5% 11.0% 162.0%
Market
Neutral
Barclays
Agg
Market
Neutral
MSCI
EAFE
MSCI
EAFE
MSCI
EAFE
MSCI
EAFE
DJ UBS
Cmdty
Asset
Alloc.
Real
Estate
Real
Estate
Russell
2000
Market
Neutral
15.0% 8.4% 7.4% 39.2% 20.7% 14.0% 26.9% 11.1% -23.8% 28.0% 12.8% 9.1% 108.7%.
Barclays
Agg
Russell
2000
Real
Estate
Real
Estate
Russell
2000
Real
Estate
Russell
2000
Market
Neutral
Russell
2000
Russell
2000
DJ UBS
Cmdty
Barclays
Agg
Barclays
Agg
11.6% 2.5% 3.8% 37.1% 18.3% 12.2% 18.4% 9.3% -33.8% 27.2% 11.6% 7.9% 84.8%
Asset
Alloc.
MSCI
EME
Asset
Alloc.
S&P
500
Asset
Alloc.
Asset
Alloc.
S&P
500
Asset
Alloc.
DJ UBS
Cmdty
S&P
500
S&P
500
Asset
Alloc.
Asset
Alloc.
0.6% -2.4% -5.4% 28.7% 12.5% 8.0% 15.8% 7.3% -36.6% 26.5% 11.3% 6.0% 60.8%
Russell
2000
Asset
Alloc.
MSCI
EME
Asset
Alloc.
S&P
500
Market
Neutral
Asset
Alloc.
Barclays
Agg
S&P
500
Asset
Alloc.
Russell
2000
S&P
500
DJ UBS
Cmdty
-3.0% -3.4% -6.0% 25.2% 10.9% 6.1% 14.9% 7.0% -37.0% 22.5% 11.3% 3.9% 50.9%
S&P
500
S&P
500
MSCI
EAFE
DJ UBS
Cmdty
DJ UBS
Cmdty
S&P
500
Market
Neutral
S&P
500
Real
Estate
DJ UBS
Cmdty
Asset
Alloc.
MSCI
EAFE
Russell
2000
-9.1% -11.9% -15.7% 22.7% 7.6% 4.9% 11.2% 5.5% -37.7% 18.7% 9.3% 1.5% 41.3%
MSCI
EAFE
MSCI
EAFE
Russell
2000
Market
Neutral
Market
Neutral
Russell
2000
Barclays
Agg
Russell
2000
MSCI
EAFE
Barclays
Agg
Barclays
Agg
DJ UBS
Cmdty
MSCI
EAFE
-14.0% -21.2% -20.5% 7.1% 6.5% 4.6% 4.3% -1.6% -43.1% 5.9% 2.5% 0.8% 17.0%
MSCI
EME
DJ UBS
Cmdty
S&P
500
Barclays
Agg
Barclays
Agg
Barclays
Agg
DJ UBS
Cmdty
Real
Estate
MSCI
EME
Market
Neutral
Market
Neutral
Market
Neutral
S&P
500
-30.6% -22.3% -22.1% 4.1% 4.3% 2.4% -2.7% -15.7% -53.2% 4.1% 0.1% -0.6% -9.1%
Asset
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 MSCIEAFE, 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. Please see disclosure page at end for index defi nitions. Data are
as of 9/30/10 , except for the CS/Tremont Equity Market Neutral Index, which reflects data through8/31/10. “10- yrs” returns represent
cumulative total return and are not annualized. These returns reflect the period from 1/1/00– 12/31/09.
*Market Neutral returns include estimates found in disclosures.
Data are as of 9/30/10.
10. The Federal Reserve
'86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10
0
2
4
6
8
10
12
Fed Funds Target Rate and 10-Year Treasury Yields
Source: Federal Reserve, FactSet, J.P. Morgan Asset Management.
Data are as of 9/30/10.
Grey bars represent
Fed tightening cycles
Fed Funds Target:
0.0% to 0.25%
10-year Treasuries:
2.53%
10
11. Fixed Income Yields, Returns, & Risks
11
U.S. Treasuries # of issues Mkt. Value 12/31/2009 9/30/2010 2009 3Q 2010 +1% -1%
2-Year 1.14% 0.42% 1.29% 0.60% -1.99% 0.83%*
5-Year 2.69 1.27 -1.35 3.31 -4.83 4.83
10-Year 3.85 2.53 -9.76 4.53 -8.63 8.63
30-Year 4.63 3.69 -25.88 4.71 -17.72 17.77
Sector
Broad Market 8,249 $15,404 bn 3.68% 2.56% 5.93% 2.48% -4.67% 4.67%
MBS 1,313 5,010 4.15 3.26 5.89 0.63 -2.94 2.92
Corporates 3,517 2,885 4.73 3.63 18.68 4.71 -6.72 6.72
Municipals 46,123 1,279 3.62 3.01 12.91 3.40 -8.08 8.08
Emerging Debt 338 524 6.59 5.27 34.23 8.14 -6.77 6.77
High Yield 1,747 882 9.06 7.80 58.21 6.71 -4.18 4.18
Yield Return
Impact on Price from 1%
Change in Rates
Source: U.S. Treasury, Barclay’s Capital, FactSet, J.P. Morgan Asset Management.
Fixed income sectors shown above are provided by Barclay’s Capital and are represented by- Broad Market: US Barclay’s 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. Treasury securitie s data for # of
issues and market value based on U.S. Treasury benchmarks from Barclay’s Capital. Yield and return information based on Bellweth ers 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 0.42% to 0.00% as interest rates can only fall to 0.00%.
Chart is for illustrative purposes only.
Data are as of 9/30/10.
# of issues: 129
Total value: $3.711 tn
12. Global Commodities
12
'70 '75 '80 '85 '90 '95 '00 '05 '10
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
'70 '75 '80 '85 '90 '95 '00 '05 '10
$0
$20
$40
$60
$80
$100
$120
$140
$160
-3%
-2%
-1%
0%
1%
2%
3%
4%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: BLS, U.S . Department of Energy, FactSet, J.P. Morgan Asset Management.
Data reflect most recently available as of9/30/10.
Source: IMF, Bloomberg, J.P. Morgan Asset
Management . Industrial metals are represented by
copper and aluminum consumption.
Data are as of 9/30/10.
World Oil Consumption Growth
Industrial Metals ConsumptionGrowth
-6%
-4%
-2%
0%
2%
4%
6%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
EM ex. China
China
DM ex. US
U.S.
EM ex. China
China
DM ex. US
U.S.
Gold Prices- Nominal and Inflation Adjusted
WTI Oil Prices- Nominal and Inflation Adjusted
9/30/10: $79.97
9/30/10: $1,307.00
14. Economic Growth & Composition of GDP
14
-$2,000
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Source: BEA, J.P. Morgan Asset Management.
Data reflect most recently available as of9/30/10 . GDP values shown in legend are % change vs. prior quarter annualized and reflect revised2Q10 GDP.
Real GDP
% chg at annual rate
20- yr avg. Latest
Real GDP: 2.5% 1.7%
Components of GDP
10.2% Investment ex-housing
70.6%
Consumption
20.5%
Gov’t Spending
Billions, USD
2.5% Housing / Construction
- 3.7% Net Exports
15. Economic Expansions and Recessions
15
0
25
50
75
100
125
1900 1912 1921 1933 1949 1961 1980 2001
- 26.7%
-1.7%
-2.6%
-3.7%
-1.6%
-0.6%
-3.2%
-2.2%
-2.9%
-1.4%
- 0.3%
-4.1%
0 yrs
1 yrs
2 yrs
3 yrs
4 yrs
5 yrs
1910 1930 1950 1970 1990 2010
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
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 of9/30/10.
Source: NBER, J.P. Morgan Asset Management.
*Chart assumes current expansion continued through September 2010.
Data for length of economic expansions and recessions obtained from the National
Bureau of Economic Research (NBER). This data can be found at www.nber.org/cycles/
and reflects information throughSeptember2010.
For illustrative purposes only.
Length of Economic Expansions and Recessions
Average Length (months):
Expansions: 43 months
Recessions: 15 months
*
16. Contributors to GDP Growth
16
conomy
Source: BEA, NBER, J.P. Morgan Asset Management.
Last 50 Years are from 2Q60– 2Q10. Last 7 Recessions are measured from peak real GDP to trough real GDP. Last 7 Recoveries are defined as the four quarters fo llo wing
the NBER- designated trough quarter. Most Recent Recession is defined from peak real GDP in4Q07 to trough real GDP in 2Q09.
Note that contribution numbers are approximations due to the use of chain- weighted GDP, which is not designed to sum exactly. Most recent data as of 9/30/10.
Percent Share Percent Share Percent Share Percent Share Percent Share
Overall GDP Growth 3.2 100.0% -1.8 100.0% 5.0 100.0% -4.1 100.0% 3.0 100.0%
Less Cyclical Components 2.6 81.2% 0.7 -39.9% 2.0 40.1% 0.6 -15.5% -0.0 -0.8%
Consumption Ex-Autos 2.1 66.6% 0.1 -4.0% 2.4 47.9% -1.0 23.4% 1.1 35.6%
Commercial Construction 0.1 1.9% -0.1 3.8% -0.1 -2.3% -0.6 14.6% -0.4 -14.8%
Net Exports -0.1 -2.5% 0.4 -23.8% -0.6 -12.7% 1.5 -37.4% -0.8 -26.1%
Government 0.5 15.2% 0.3 -15.9% 0.4 7.2% 0.7 -16.1% 0.1 4.4%
More Cyclical Components 0.6 18.8% -2.5 139.9% 3.0 59.9% -4.8 115.5% 3.0 100.8%
Auto Consumption 0.1 3.1% -0.2 11.4% 0.4 7.7% -0.6 15.2% 0.1 3.3%
Residential Construction 0.1 2.2% -0.5 27.3% 0.7 14.5% -1.3 32.4% 0.1 4.4%
Equipment 0.4 12.9% -0.3 15.7% 0.5 9.1% -1.6 38.0% 1.1 36.1%
Change in Inventories 0.0 0.6% -1.5 85.5% 1.4 28.6% -1.2 29.9% 1.7 57.0%
Current Recovery
(1st Yr)
Last 50 Years Last 7 Recessions Last 7 Recoveries
(1st Yr)
Most Recent
Recession
17. Employment
17
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10
-1,000
-800
-600
-400
-200
0
200
400
600
'60 '70 '80 '90 '00 '10
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
Source: BLS, J.P. Morgan Asset Management.
Data reflect most recently available as of9/30/10.
Civilian Unemployment Rate Employment - Total Private Payroll
50-yr. avg.: 6.0%
Source: BLS, J.P. Morgan Asset Management.
Data reflect most recently available as of9/30/10.
Seasonally adjusted Total job gain/loss (thousands)
Jan. 2009:
-806K
Aug. 2010: 67K
Aug. 2010: 9.6%
18. Consumer Finances
18
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
Personal Savings Rate
'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
0%
2%
4%
6%
8%
10%
12%
Annual, % of disposable income
Consumer Balance Sheet
Trillions 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 Ratio
Debt payments as % of disposable personal income, seasonally adjusted
Total Assets: $67 tn
Total Liabilities: $14 tn
Homes: 26%
Deposits: 11%
Pension funds: 17%
Other financial
assets: 36%
Other tangible: 10%
Mortgages: 73%
Revolving (e.g.: credit cards): 6%
Non-revolving: 11%
Other Liabilities: 10%
YTD 2010:
5.7%
1Q80:
11.2% 3Q10*:
11.9%
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 includedin personal savings.
Savings rate data are as ofAugust 2010. *3Q10 Household Debt Service Ratio is J.P. Morgan Asset Management estimate. Allother data are as of
2Q10.
19. Federal Finances
19
0%
25%
50%
75%
100%
125%
1940 1950 1960 1970 1980 1990 2000 2010 2020
-35%
-25%
-15%
-5%
5%
1940 1950 1960 1970 1980 1990 2000 2010 2020
% of GDP, 1940– 2020*
Federal Debt (Accumulated Deficits)
% of GDP, 1940– 2020*
Source: U.S. Treasury,BEA, CBO, OMB , J.P. Morgan Asset Management.
2010 numbers reflect CBO estimates for FY 2010. Other numbers are based on the
Administration’s proposed 2011 budget from the OMB.
Note : Years shown are fiscal years (Oct. 1 through Sep. 30). Bottom left chart displays
federal debt in the hands of the public . Data reflect most recently available as of 9/30/10.
Federal Budget Surplus/Deficit
*Administration’s proposed
2011 budget
Total Projected 2010 Budget Receipts: $2,143 billion
Total Projected 2010 Budget Outlays: $3,485 billion
Projected Surplus / Deficit: - $1,342 billion
Source: CBO, J.P. Morgan Asset Management.
U.S. Proposed Federal Budget Outlays - 2010
*Administration’s proposed
2011 budget
Other
12%
Entitlements:
Social Security
Medicare
Medicaid
43%
Defense
(Discretionary)
20%
Non- Defense
(Discretionary)
19%
Net
Interest
6%
20. The economic growth differential
20
Source: J.P. Morgan Global Economics Research, IMF, J.P. Morgan Asset Management.
Data are as of July 2010 and are provided by the International Monetary Fund. 2010 and 2011 data are estimates as provided by the IMF.
Emerging and Developed Economy GDP growth rates represent quarterly annualized growthestimated by J.P. Morgan Global Economics
Research and are as of 2Q10.
Data are as of 9/30/10.
U.S. GDP Growth
World GDP Growth
Difference
World GDP Growth vs. U.S. GDP Growth
Emerging and Developed GDP Growth Emerging Economies
Developed Economies
-3%
0%
3%
6%
9%
1970 1975 1980 1985 1990 1995 2000 2005 2010
-9%
-2%
5%
12%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
21. Consumer Price Index
21
'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
-3%
0%
3%
6%
9%
12%
15%
Source: BLS, J.P. Morgan Asset Management.
Data reflect most recently available as of9/30/10 . CPI values shown are % change vs. 1 year ago and reflectAugust
2010 CPI data. CPI component weights are as of Dec. 2009 and 12- month change reflects data throughAugust
2010. Core CPI is defined as CPI excluding food and energy prices.
CPI and Core CPI
50- yr. Avg. Latest
Headline CPI: 4.0% 1.2%
Core CPI: 4.0% 1.0%
% chg vs. prior year
CPI
Components
Weight in
CPI
12-month
Change
Food & Bev. 14.8% 1.0%
Housing 42.0% -0.2%
Apparel 3.7% -0.3%
Transportation 16.7% 4.8%
Medical Care 6.5% 3.2%
Recreation 6.4% -1.1%
Educ. & Comm. 6.4% 1.9%
Other 3.5% 3.0%
Headline CPI 100.0% 1.2%
Less:
Energy 8.6% 3.8%
Food 13.7% 1.0%
Core CPI 77.7% 1.0%
24. S&P 500
$2,048
January 1926–December 2009
The S&P data are provided by Standard & Poor's Index Services Group. Indexes are not available for direct investment. Index performance does not
reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be
construed as investment advice.
April 1999 Daily Returns
Total Month of April Return: 3.9%
During this month, the S&P 500
had 10 days of negative returns out
of 21 trading days.
1999 Monthly Returns
Total Annual Return: 21%
During this year, the S&P 500 had
5 out of 12 months with negative
returns.
• Even during periods of positive stock returns, investors may experience substantial volatility.
• Short-term volatility is a typical characteristic of stock market investing.
• Long-term returns are the sum of short-term volatility.
J F M A M J J A S O N D
1 15 30
-2.24%
-0.49%
-3.11% -2.36% -3.12% -2.74%
21.04%
Stocks vs. the Risk-Free Rate
24
25. Prior to 1979, there were no formal announcements of business cycle turning points.
Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual
portfolio. For illustrative purposes only. Past performance is not a guarantee of future results and there is always the risk that an investor will lose
money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by
Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data.
Recession Begins
November 1973
Recession Ends
March 1975
Unemployment
Peaks at 9.0%
May 1975
Recession
17 months
Recession Begins
July 1981
Recession Announced
January 6, 1982
Unemployment
Peaks at 10.8%
Nov/Dec 1982
Recession
17 months
Recession Ends
November 1982
Recession End Announced
July 8, 1983
Mid 1970s and Early 1980s
Recessionary Periods
25
26. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual
portfolio. For illustrative purposes only. Past performance is not a guarantee of future results and there is always the risk that an investor will lose
money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by
Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data.
Recession Begins
July 1990
Recession Announced
April 25, 1991
Unemployment
Peaks at 7.8%
June 1992
Recession
9 months
Recession Ends
March 1991
Recession End Announced
December 22, 1992
Recession Begins
March 2001
Recession Ends
November 2001
Unemployment
Peaks at 6.3%
June 2003
Recession
9 months
Recession Announced
November 26, 2001
Recession End Announced
July 17, 2003
Early 1990s and Early 2000s
Recessionary Periods
26
27. S&P 500 Index (USD)
Daily Returns: January 1, 1926-March 31, 2010
Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. The
S&P data are provided by CRSP (January 1, 1926-August 31, 2008) and Bloomberg (September 1, 2008-March 31, 2010). Returns include reinvested dividends.
Bull and bear markets are defined in hindsight using cumulative daily returns. A bear market (1) begins with a negative daily return, (2) must achieve a cumulative return less than or equal to -10%, and (3)
ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market. Performance
data represents past performance and does not predict future performance.
220%
-13%
-85%
20%
-16%
-39%
119%
88%
27%
-15%
-10%
-13%
100%
44%
-53%
25%
40%
-13%
-14%
26%
-25%
22%
-11%
23%
-33%
83%
-11%
99%
-26%
19%
-11%
-16%
26%
53%
91%
-13%
121%
-11%
26%
-13%
18%
69%
-21%
-11%
44%
-27%
15%
96%
-11%
59%
-27%
-10%
-21%
-32%
56%
-12%
38%
-45%
22%
-13%
50%
-13%
38%
-15%
27%
-13%
26%
-10%
21%
-16%
48%
-20%
78%
-11%
156%
-33%
73%
-10%
16%
-19%
303%
-11%
37%
50%
-19%
-12%
23%
-11%
13%
-47%
21%
-14%
113%
-55%
03/09/2009
-55%
3/31/2010
-20%1%
1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Average Duration
Bull Market: 413 Days
Bear Market: 220 Days
Average Return
Bull Market: 58%
Bear Market: -21%
Bull and Bear Markets
27
29. Historical returns by holding period
29
-37%
-8%
-15%
0.1% -2% -2% 1% 1%
-1%
1% 2% 0.5%
6%
1%
5%
0.3%
51%
43%
32%
14%
28%
23%
21%
11%
19%
16% 17%
9%
18%
12%
14%
7%
-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, 1950-2009*
Range of Stock, Bond, Blended and Cash Total Returns
Asset
Sources: Factset, Robert Shiller, Strategas/Ibbotson, Federal Reserve, J.P. Morgan Asset Management.
*The 20-yr. cash (T-Bill) returns were calculated using 20 year annualized returns from 1953 – 2009.
Data are as of 9/30/10.
50/50 Portfolio 9.0% $560,441
Bonds 6.2% $333,035
Stocks 10.8% $777,670
Annual Avg.
Total Return
50/50 Portfolio
Bonds
Stocks
Cash (T-Bills)
Cash (T-Bills) 2.1% $151,536
Growth of $100,000
over 20 years
30. $28.6 Trillion as of December 31, 2009
In US dollars. Map reflects countries in the MSCI All Country World IMI Index and MSCI Frontier Markets Index.
Market cap data is free-float adjusted. MSCI data copyright MSCI 2009, all rights reserved. Vietnam data provided by MFMI. Many small nations not
displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be construed as investment advice. 1. An example
large cap stock provided for comparison.
MSCI Index
Affiliation
Developed Markets Frontier Markets
Emerging Markets
SCALE
Ten Billion
One Trillion
World Market Capitalization
30
31. Mutual fund flows
31
-$60
-$40
-$20
$0
$20
Aug '07 Feb '08 Aug '08 Feb '09 Aug '09 Feb '10 Aug '10
Source: Investment Company Institute, J.P. Morgan Asset Management.
Data include flows throughAugust 2010 and exclude ETFs. ICI data are subject to periodic revisions. International 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 9/30/10.
Difference between net flows into stock and bond fundsNet fund flows (monthly)
Billions, USD, U.S. and international fundsBillions, USD, U.S. and international funds
Equity flows
Fixed income flows
Bond flows exceeded equity
flows by $47 billion in Aug ’10
Fund Flows
Billions, USD AUM YTD 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
Domestic Equity 3,471 (45) (39) (151) (48) 11 31 111 130 (25) 54 260 176
World Equity 1,242 27 31 (82) 139 148 105 67 23 (3) (22) 50 11
Taxable Bond 2,067 188 307 20 98 45 26 3 39 124 76 (36) 8
Tax-exempt Bond 513 28 69 8 11 15 5 (14) (7) 16 12 (14) (12)
Hybrid 653 12 23 (19) 24 7 25 43 32 8 10 (31) (14)
Money Market 2,827 (496) (539) 637 654 245 62 (157) (263) (46) 375 159 194
-$60
-$40
-$20
$0
$20
$40
$60
Aug '07 Feb '08 Aug '08 Feb '09 Aug '09 Feb '10 Aug '10
33. Lessons for the future
33
1. Define your goals
2. Create a plan
3. Put it into action
4. Stay on track
34. Barry Mendelson, CFP®
925-988-0330 ext. 22
Barry@JustPlans-Etc.com
www.JustPlans-Etc.com
1399 Ygnacio Valley Rd, Suite 24
Walnut Creek, CA 94598
Contact info
34
35. Index Definitions
35
All indexes are unmanagedandan individualcannotinvest directly inan index. Index returns do not
include feesor expenses.
The S&P 500 Index is widelyregarded asthe best single gauge of theU.S.equities market.Thisworld-renowned
index includes a representative sample of 500 leadingcompaniesin leading industriesof theU.S.economy.
Although the S&P 500 Index focuseson the large-cap segment of themarket,with approximately75% coverage
of U.S. equities,it is alsoan ideal proxyfor the total market.An investor cannotinvest directly in an index.
The S&P 400 Mid CapIndexis representative of 400 stocksin the mid-range sector of the domestic stock
market, representing all major industries.
The Russell 3000Index® measuresthe performanceof the 3,000 largest U.S. companiesbasedon total market
capitalization.
The Russell 1000Index ® measures theperformance of the 1,000 largestcompaniesin the Russell 3000.
The Russell 1000GrowthIndex ® measures theperformance of thoseRussell 1000companieswith higher
price-to-book ratiosand higher forecasted growth values.
The Russell 1000Value Index ® measures the performance ofthose Russell 1000 companieswith lowerprice-
to-book ratios and lower forecasted growth values.
The Russell MidcapIndex ® measures the performance ofthe 800 smallest companiesin the Russell 1000
Index.
The Russell MidcapGrowthIndex ® measures the performance ofthose Russell Midcap companies with higher
price-to-book ratiosand higher forecasted growth values.The stocks are also membersof the Russell 1000
Growth index.
The Russell MidcapValue Index® measuresthe performanceof those Russell Midcap companies with lower
price-to-book ratiosand lower forecasted growth values. The stocksare also members of the Russell 1000 Value
index.
The Russell 2000Index ® measures theperformance of the 2,000 smallestcompaniesin the Russell 3000
Index.
The Russell 2000GrowthIndex ® measures theperformance of thoseRussell 2000companieswith higher
price-to-book ratiosand higher forecasted growth values.
The Russell 2000Value Index ® measures the performance ofthose Russell 2000 companieswith lowerprice-
to-book ratios and lower forecasted growth values.
The MSCI® EAFE (Europe, Australia, Far East) NetIndexis recognized asthe pre-eminentbenchmark in the
United States tomeasure international equity performance. Itcomprises21 MSCI countryindexes, representing
the developed marketsoutside of North America.
The MSCI EmergingMarkets IndexSM isa free float-adjusted marketcapitalization indexthatis designed to
measure equity market performance in the global emerging markets. Asof June 2007, the MSCIEmerging
Markets Index consisted of the following 25 emerging marketcountryindices: 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(AllCountry WorldIndex)Index is a freefloat-adjustedmarket capitalization weighted index
that is designed to measurethe equitymarketperformanceof developed and emerging markets. Asof June 2009
the MSCI ACWI consisted of 45 countryindices comprising 23 developed and 22 emerging marketcountryindices.
The MSCI SmallCapIndicesSM target 40% ofthe eligible Small Cap universe within each industry group, within
each country.MSCI definesthe Small Cap universeas all listedsecurities that have a market capitalization in the
range of USD200-1,500 million.
The MSCI Value andGrowthIndicesSM cover the full rangeof developed,emerging and All Country MSCIEquity
indexes. As of the closeof May30, 2003,MSCI implementedan enhanced methodology forthe MSCI Global
Value and Growth Indices, adopting a two dimensional frameworkfor style segmentation in which value and
growth securitiesare categorized using differentattributes - three for value and five forgrowth including forward-
looking variables.The objective of theindex design is to divide constituentsof an underlying MSCIStandard
Country Indexinto a value indexand a growth index, each targeting 50% ofthe free float adjusted market
capitalization ofthe underlying country index. Country Value/Growth indices are then aggregated intoregional
Value/Growth indices.Prior to May 30,2003, theindicesusedPrice/BookValue (P/BV) ratiosto divide the
standard MSCIcountryindicesinto value and growth indices. All securitieswere classified as either "value"
securities (lowP/BV securities) or "growth" securities(high P/BV securities),relative to each MSCI country index.
The following MSCITotalReturnIndicesSM are calculated with grossdividends:
This series approximatesthe maximumpossible dividend reinvestment. The amount reinvestedis the dividend
distributed to individualsresident in the countryof thecompany, butdoes notinclude tax credits.
The MSCI Europe IndexSM is a free float-adjusted marketcapitalizationindex that is designed tomeasure
developed marketequityperformancein Europe. Asof June 2007, the MSCIEurope Indexconsisted of the
following 16 developed marketcountryindices:Austria,Belgium,Denmark,Finland,France,Germany, Greece,
Ireland, Italy,the Netherlands, Norway,Portugal, Spain,Sweden, Switzerlandand the United Kingdom.
The MSCI Pacific IndexSM is a free float-adjusted market capitalization indexthat isdesigned to measureequity
market performance in the Pacificregion.As of June 2007, the MSCI PacificIndexconsisted of the following5
Developed Market countries:Australia,HongKong, Japan,NewZealand, and Singapore.
36. Index Definitions
36
MunicipalBondIndex:To be included in the index, bondsmustbe rated investment-grade (Baa3/BBB- or higher)
by at least two of the following ratingsagencies: Moody's, S&P,Fitch.If onlytwo ofthe threeagencies rate the
security,the lowerrating is used to determine indexeligibility. Ifonly one of the three agenciesrates a security,the
rating must be investment-grade. They musthavean outstanding par value ofat least$7 million and be issued as
part of a transaction of at least $75 million. Thebonds mustbe fixed rate,have a dated-date after December 31,
1990, and must be at leastone year from their maturity date. Remarketed issues,taxable municipal bonds,bonds
with floating rates, and derivativesare excluded fromthe benchmark.
The Barclays CapitalEmergingMarkets Index includesUSD-denominated debtfromemerging markets in the
following regions: Americas, Europe, Middle East, Africa,and Asia.As with other fixed income benchmarks
provided by Barclays Capital,the indexis rules-based,which allowsfor an unbiased view ofthe marketplace and
easy replicability.
The Barclays CapitalCorporateBondIndex is the Corporate componentof the U.S. Creditindex.
The Barclays CapitalTIPSIndex consists of Inflation-Protection securitiesissued by theU.S.Treasury.
The NAREITEQUITY REIT Index is designed to provide the most comprehensive assessmentof overall industry
performance,and includes all tax-qualified real estate investment trusts (REITs) thatare listedon the NYSE,the
American StockExchange or the NASDAQ National MarketList.
The J.P. MorganEMBI GlobalIndex includesU.S. dollar denominated Bradybonds, Eurobonds, traded loans
and local market debt instrumentsissued by sovereign and quasi-sovereign entities.
The J.P. MorganDomestic HighYieldIndex is designedto mirrorthe investable universe of the U.S.dollar
domestic high yieldcorporate debtmarket.
The CS/Tremont Equity Market NeutralIndextakes both long and shortpositionsin stocks with theaim of
minimizing exposure tothe systematicriskof themarket (i.e.,a beta of zero).
The CS/Tremont Multi-StrategyIndex consists of fundsthat allocate capital based on perceived opportunities
among several hedge fund strategies. Strategiesadoptedin a multi-strategyfund may include,but are not limited
to, convertiblebond arbitrage, equitylong/short, statistical arbitrage and merger arbitrage.
*Market Neutral returnsfor November2008 are estimatesby J.P. Morgan FundsMarketStrategy, and are based
on a December 8, 2008 published estimate forNovember returns byCS/Tremont in which the Market Neutral
returns were estimated to be +0.85% (with 69% of all CS/Tremontconstituentshavingreported returndata).
Presumed to be excluded fromthe November returnare three funds,which were later marked to $0 by
CS/Tremontin connection with the Bernard Madoff scandal. J.P.Morgan Fundsbelievesthis distortion isnot an
accurate representationof returns in the category.CS/Tremont later published a finalized November return of -
40.56% for the month,reflecting thismark-down.CS/Tremontassumesno responsibility for these estimates.
All indexes are unmanagedandan individualcannotinvest directly inan index. Index returns do not
include feesor expenses.
Credit Suisse/Tremont Hedge FundIndexis compiled byCreditSuisse Tremont Index,LLC.It is an asset-
weighted hedge fund indexand includesonlyfunds, asopposed to separateaccounts.The Index usesthe Credit
Suisse/Tremontdatabase, which tracksover 4500 funds, and consistsonlyof fundswith a minimum of US$50
million under management, a 12-month track record,and audited financial statements. Itis calculated and
rebalanced on a monthly basis, and shown netof all performance fees and expenses. Itis the exclusive property of
Credit Suisse Tremont Index,LLC.
The NCREIFProperty Index isa quarterlytime seriescomposite total rate of return measure of investment
performance of a very large pool ofindividual commercial real estate propertiesacquired in the private market for
investmentpurposesonly.All propertiesin the NPIhavebeen acquired, atleastin part, on behalfof tax-exempt
institutional investors- the great majority being pension funds. As such, all propertiesare held in a fiduciary
environment.
The Dow Jones-UBS Commodity Index is composedof futurescontractson physical commoditiesand
represents nineteen separate commoditiestraded on U.S. exchanges, with the exception ofaluminum,nickel, and
zinc.
The Barclays CapitalU.S.Aggregate Index representssecurities that are SEC-registered,taxable, and dollar
denominated. Theindex covers theU.S.investment grade fixed rate bond market, with indexcomponentsfor
government and corporate securities, mortgage pass-throughsecurities,and asset-backedsecurities.These major
sectors are subdivided into more specific indexesthatare calculated and reported on a regular basis.
This U.S. Treasury Index isa componentof the U.S. Governmentindex.
West Texas Intermediate (WTI) isthe underlying commodity for the NewYorkMerchantile Exchange'soil futures
contracts.
The Barclays CapitalHighYieldIndex coversthe universe of fixed rate,non-investmentgrade debt. Pay-in-kind
(PIK) bonds, Eurobonds,and debt issuesfromcountriesdesignated as emerging markets(e.g., Argentina, Brazil,
Venezuela, etc.) are excluded, but Canadianand global bonds(SEC registered) of issuers in non-EMG countries
are included. Original issuezeroes,step-up coupon structures,and 144-Asare also included.
37. Additional Risks & Disclosures
37
Derivatives may 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.
There is no guarantee that the use oflong 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
involving 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.
NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE
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.
Hinweis der Redaktion
Today I’m going to give you an update on the financial and economic environment through the end the of the third quarter, put that it historical context and discuss a few things that you, as an investor, can do to make smarter decisions and maximize the probability of achieving your long-term financial goals.
But first, a word from the lawyers. If you want to ask a question during the presentation, you’ll see a message box in the lower righthand section of the screen – choose the drop down box to send it to me – the presenter, then type your answer and hit send. Time permitting, I’ll try to answer them as they come in.
Why listen to me? Well, prior to joining Just Plans, I worked for four leading financial services companies and most recently was a VP of institutional services in charles schwab’s $250 billion investment management division. There, I advised companies offering retirement plans, banks, financial advisors, and other institutional investors on investment strategies for the benefit of their own clients. This past January, I joined Jim Ellman at Just Plans – and we are a fee-only wealth management firm. That is, we serve as our clients personal financial officer – helping them identify and quantify their financial goals, then work with them to design a plan to maximize the probability of achieving those goals. Finally, we take over the day to day management of their financial assets – all while acting as a fiduciary.
There’s a lot of information contained on these slides, but we’re going to focus on some key themes and data points. Here on the two charts on the left, you see the YTD performance of the S&P 500 at 3.9% and a return of 11.3% for third quarter. What’s noteworthy is that four times this year, the S&P 500 has dipped into negative territory for the year and four times it has recovered. And whereas we considered much of the volatility of 2008 and 2009 due to deleveraging, we consider this year’s volatility more a function of uncertainty – that is uncertainty among investors.
Looking at the chart just below it, the S&P has returned a remarkable 74% since it’s low on March 3, 2009. Yet is still 22% off it’s peak on October 9, 2007.
This chart is interesting because it shows the value, performance and consensus estimate P/E ratio for the S&P 500 at various peaks and troughs over the last 15 years. What is particularly interesting is that on March 24, 2000 – the S&P had a forward P/E of 25.6 – clearly expensive by historical standards. Subsequently the market crashed and then recovered by October 9, 2007 to that 1,500 level, but only trading at 15x forward P/E – just below the long-term average of 16.6 times. Obviously it crashed from there because many asset values – particularly those around real estate were artificially high and as well the credit worthiness of many consumers and bonds whose debt theirs was packaged into. Subsequently it as rebounded from it’s low on March 9, 2009. Again, with forward EPS expected to be around $80, that could support a level for the S&P 35% higher than it is now (which it would take to reach it’s long-term average valuation). Now that’s not without risks, namely deflation and/or a double dip recession, but we’ll talk more about that in a few slides.
The left had side of this chart is interesting because it shows the implied average annual return needed for the S&P 500 to return to its peak reached in 2007. So we could have four strong years of returns with the S&P 500 returning 10.7%/year – just to get back to its peak! This just gives you a sense of the returns required to reach those peak levels again.
The chart on the right side is interesting because here we see the returns for various bear markets and the subsequent recovery.
Last column – 10 year cum return of various asset classes. In ’90s, every time you bought equities on dips, you made money. Not true in ‘00. but in fixed income, just about every time you buy a bond, you make money and it reinforces you to buy more – exactly the opposite of what you should be doing.
Here we can see the Fed Funds Target rate currently at 0.25%. The blue line above that shows the yield on the 10 year treasury, currently at about 2.53% - around a historic low. Though inflation may remain low for the time being, a record issuance of treasuries, combined with a rebounding global economy should push yields higher, including those of other high-quality, investment grade, and longer maturity bonds. What’s the implication of that?
Impact on a 1% change in interest rates on price of bonds – last two columns.
Commodity prices to move up, driven by growth in EM infrastructure demand. In general 5% is considered a prudent allocation. Gold – speculation. Not a use asset, not driven by inflation, but maybe fear. Back in the early ‘80s, gold lost 60% of its value in just a few years and has yet to recover in real terms. Oil peaked at over $130/barrel the summer of 2007 and had you bought back then, you would be out about 40% of your money since then. The point is, even within asset classes, such as commodities, stay diversified.
It is clear from the chart on the left that GDP growth is taking place. Why in the US, the consumption is so important to GDP growth – it makes up 70% of it! While it is certainly possible we could certainly see a double dip recession in the US, it is not probable. Here is why . . .
Economy growing since Sept ’09 per NBER. No recession has lasted more than 24 months except the great depression. And the average expansion has last 43 months – of which we’re 12 months into it.
Recession concentrated in certain sectors: Auto, Residential Construction, business equipment, and inventories. Which makes sense as these are often big ticket items and the first areas consumers and businesses are going to cut back in a recession. They account for only 20% of GDP, but in recessions, historically have accounted for over 100% of the change in GDP. So far, they’ve contributed to 100% of the growth of GDP – which is great, but that the rest of the economy really hasn’t started to kick in yet.
3% growth in first year of recovery below long term average of 5% over last 7 recoveries.
Now let’s talk about employment, on the right side – private payroll only, otherwise distorted by census and other seasonal workers. On the left you can see that unemployment nationally fallen to 9.6%, obviously it’s higher here around California and currently around 12%. Possible 1% per year decline in unemployment. Need 1.5% gdp growth to add payroll jobs, need 2.3% to bring unemployment down. Hence, why unemployment has stalled. Expect slow growth to continue around 3% annualized, but to pick up in 2011.
Bottom right, debt service ability improving b/c of refinancing, more personal investment, consumer spending building up and consumer in a better position to borrow and lenders more willing to lend. So a few slides ago, we talked about how cyclical expenditures have picked in the last year and the slide before that we talked about how consumption is the biggest component of GDP at 70%. Here we can see how personal balance sheets are actually improving, which will eventually lead to increased consumption. At top we see personal savings rate increasing to 5.7% and the debt service ratio falling. Again, with investors generally hoarding cash and other short-term low yielding investments, the could result in real lift to companies and GDP. Leading indicators that consumption should be rising.
But I want to give you a balanced view and the economy is not without its risks. Obviously, individual and companies have been hit, but so has the government – shelling out $250B in TARP money and another $787B in fiscal stimulus. This year will be a record budget deficit and it cannot be made-up for in GDP growth and tax receipts alone. In the future, the budget gap will have to be narrowed, buy reducing expenditures. Many people believe the Fed will have to raise rates significantly from where there are now, which could cause the Dollar to fall. The reality the other major developed nations are in no better shape that US – The Euro zone, UK, & Japan all have debt to GDP similar to us. Where the dollar is likely to lose ground is to EM nations, that are currently more financially sound that us. Concerns – grid lock after elections, let the bush tax cuts expire fully expire, don’t fix the budget, and the federal debt explodes, there is certainly an increased chance of double dip recession. The point is, the economy’s not without it risks, stay diversified.
No let’s look overseas, I talked about the US economy and the rest of the developed world. As you can see on the top chart, for the last 11 years, global growth has exceed that of the US. If you look at the bottom chart, you can see where that is specifically coming from - Emerging economies. Now GDP growth doesn’t always translate into investment opportunities, but certainly it’s a factor. Obviously, international investing is not without its risks. Including, currency risk, political risk, market risk, liquidity risk, and financial statement risk – just to name a few.
Little inflation, no wage inflation. Deflation is often associated with a significant drop in GDP – talk about why prolonged deflation is bad, three symptoms – wages need to fall, monetary policy may not work, wait and see mentality; 2 periods – great depression (four year recession with a 27% drop in real GDP and 25% unemployment) and Japan: four differences – larger asset bubble, stronger currency, higher savings rate (which has prevented Japanese consumers from adding to economic growth), slower population growth.
This graph documents compounded performance of fixed income and equity asset classes from 1926 to 2009, based upon growth of a dollar. It shows that US equities have offered higher compounded returns than fixed income investments. Within the equity asset classes, small cap stocks have outperformed large cap stocks, resulting in higher returns and greater wealth accumulation.
Markets throughout the world have a history of rewarding investors for the capital they supply. Their expected returns offer compensation for bearing market or equity risk.
Now in 1990, Stanford professor Bill Sharpe (among others) won the nobel prize in economics for his work on CAPM – which is a model that basically says investment risk and reward are related. But taken further, what it really says is that risk and expected return are related. That’s a subtle, but important difference. And I think warren buffet said it best when it said “be fearful when others are greedy and greedy when others are fearful.”
Now to be successful in investing, you need to understand many things. One of which is your ability to withstand changes in market values – which we refer to ask risk tolerance. And with equity investing, you need to have a long-term perspective. And that is, it is generally accepted that you should have a time horizon of at least five years before investing a significant part of your portfolio in equities.
This slide illustrates that short-term losses are often embedded in longer-term gains. The graph shows the growth of $1 invested in the S&P 500 Index in 1926 until the present, and details the index’s performance during a single year (1999). The first bubble plots monthly returns and the adjacent bubble shows daily returns for a single month (April 1999). Although the S&P 500 Index delivered a strong 21.04% return in 1999, five of the months had negative returns. The market delivered a 3.9% total return during April, even though it closed with losses on many days.
Investors who want to capture the higher returns of stocks must accept the possibility of experiencing daily, monthly, and yearly losses along the way. Disciplined investors must focus on the big picture while knowing that short-term volatility will often test their resolve.
The recessions during the mid 1970s and early 1980s each lasted 17 months. There was no formal announcement of the 1973-75 recession because the National Bureau of Economic Research (NBER) did not announce business cycles prior to 1979. However, the NBER announced the 1981-82 recession 6 months after it began, and announced the recession’s end 8 months into the next recovery.
In both recessions, unemployment peaked after the US economy had rebounded. Although the stock market declined early in both down cycles, stocks had begun to recover before the onset of each business upturn.
In both the early 1990s and 2000, the recessions lasted nine months each, but were not announced until after they were over. Moreover, the NBER did not announce each recession’s end until almost two years later. Unemployment also peaked in the months prior to the official end.
In the 1990s recession, the market began its recovery before the end, while the market languished for two years before rebounding after the 2001 downturn. This provides additional evidence that the stock market does not behave predictably through business cycles.
This graph documents bull and bear market periods in the S&P 500 Index from January 1, 1926 to March 2010.
The market cycles are identified in hindsight using historical cumulative daily returns. All observations are performed after the fact. A bear market is identified in hindsight when the market experiences a negative daily return followed by a cumulative loss of at least 10%. The bear market ends at its low point, which is defined as the day of the greatest negative cumulative return before the reversal. A bull market is defined by data points not considered part of a bear market.
The rising trend lines in blue designate the bull markets occurring since 1926, and the falling trend lines in red document the bear markets. The bars that frame the trend lines help to describe the length and intensity of the gains and losses. The numbers above or below the bars indicate the duration (in calendar days) and cumulative return percentage of the bull or bear market.
Keep in mind that this graph does not show total compounded returns or growth of wealth since 1926. Once the cycle is established in retrospect, the first day of that cycle resets the performance baseline to zero.
Investors may draw a number of lessons from this graph. First, since 1926, bull markets in the S&P 500 Index have lasted longer than bear markets and delivered price gains that are disproportionately greater than the bear market losses.
Second, fluctuating performance within each trend illustrates that volatility and uncertainty occur even within established market cycles: bull markets may have short-term dips, and bear markets may have short-term advances. The immediate trend is not readily apparent to market observers, and in fact, may become clear only in hindsight. This illustrates the difficulty of accurately predicting and timing market cycles.
Finally, the graph suggests the importance of maintaining a disciplined investment approach that views market events and trends from a long-term perspective. Investors who react emotionally to short-term movements are at risk of making ill-timed decisions that compromise long-term performance.
The third slide in this format compares the performance of short-term fixed income instruments to the S&P 500 Index.
The bars indicate the percentage of the time that S&P 500 Index outperformed one-month T-bills for each rolling period. For example, the S&P 500 Index beat T-bills in 68% of the one-year periods, in 76% of the five-year periods, and in 95% of the fifteen-year periods. Equally revealing, the S&P 500 outperformed Tbills 100# of the time in twenty-, thirty-, and forty-year holding periods.
Although the S&P 500 Index has outperformed Treasury bills for every twenty-year period since 1926, investors should not conclude that stocks are guaranteed to outperform over every twenty-year period in the future. There is no time period over which investors can be assured of a positive equity premium—that is the nature of risk.
In summary, long-term success in the capital markets requires a long-term exposure to the risk factors that reward investors with appropriate compensation.
This is what happens to volatility over time. Over the last ten years, gold has returned 15.5% a year on average and over the last 20 years, 5.2% year on average and over the last 30 years just 2%/year. No five year period in the last 60 when a 50/50 portfolio last money during a five year period. Per the chart in the upper right corner, 10.8% may not seem that much greater than 6.2%, but it compounds to create over twice the wealth over a 20 year period.
This cartogram depicts the world not according to land mass, but by the size of each country’s stock market relative to the world’s total market value (free-float adjusted). As you can see, the US stock market is 42% of the world’s market capitalization. However, the typical US investor has 76% of their equity invested there.
Population, gross domestic product, exports, and other economic measures may influence where people invest. But the map offers a different way to view the universe of equity investment opportunities. If markets are efficient, global capital will migrate to destinations offering the most attractive risk-adjusted expected returns. Therefore, the relative size and growth of markets may help in assessing the political, economic, and financial forces at work in countries.
The cartogram brings into sharp relief the investible opportunity of each country relative to the world. It avoids distortions that may be created or implied by attention to economic or fundamental statistics, such as population, consumption, trade balances, or GDP.
By focusing on an investment metric rather than on economic reports, the chart further reinforces the need for a disciplined, strategic approach to global asset allocation. Of course, the investment world is in motion, and these proportions will change over time as capital flows to markets offering the most attractive returns.
Given what we’ve been through, investors have been adopting an increasingly conservative posture. The amount of money held is cash in remarkable – at $2.8 trillion, it’s equal to 90% of the capitalized value of the S&P 500. What is equally remarkable, is this money is earning close to zero. Market is at extremes, stocks to bonds, and here investors are putting money into bonds at extremes. Another measure of conservative behavior is that more money has gone into bond funds in last two years than into equity funds of the last two years of the tech bubble. September marked the 33rd consecutive month more money has gone into bond funds than equity funds.