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Capital Markets Overview
Presented by
Fritz Meyer
Senior Market Strategist
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Important Information
The views and opinions expressed are those of the speaker and are subject to change
based on factors such as market and economic conditions. The author’s views and
opinions are not necessarily those of Invesco Aim and are not guaranteed or warranted
by Invesco Aim. These views and opinions are not an offer to buy a particular security
and should not be relied upon as investment advice. Past performance cannot
guarantee comparable future results.
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Important Information
Performance quoted is past performance and cannot guarantee comparable future results; current
performance may be higher or lower.
Results shown assume the reinvestment of dividends.
An investment cannot be made directly in an index.
Investments with higher return potential carry greater risk for loss.
Investing in small companies involves greater risks not associated with investing in more established
companies, such as business risk, significant stock price fluctuations and illiquidity.
Foreign securities have additional risks, including exchange rate changes, political and economic
upheaval, the relative lack of information about these companies, relatively low market liquidity and the
potential lack of strict financial and accounting controls and standards.
Investing in emerging markets involves greater risk than investing in more established markets such as
risks relating to the relatively smaller size and lesser liquidity of these markets, high inflation rates,
adverse political developments and lack of timely information.
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Important Information
Diversification and asset allocation do not assure profit or eliminate the risk of loss.
The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market.
Government securities, such as U.S. Treasury bills, notes and bonds offer a high degree of safety and
they guarantee the timely payment of principal and interest if held to maturity.
U.S. T-bills are short-term securities with maturities of one year or less.
Long-term government bonds used in this illustration have a maturity of approximately 20 years.
The Consumer Price Index (CPI) is a measure of change in consumer prices, as determined by the
U.S. Bureau of Labor Statistics.
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Consumer Confidence — So Bad It Might Be Good
Dow Jones Industrial Average
Consumer Confidence
Plunges
have often
coincided
with market
bottoms.
Source: Copyright 2008© S1060A. Ned Davis Research, Inc. All rights reserved. Data as of Dec. 31, 2008.
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Stock Market Volatility
Volatility equals risk
S&P 500 Index
S&P 500 Volatility Index
100-day average of absolute change in S&P 500 Index
Because
stocks are
volatile they
have
historically
delivered an
“equity risk
premium.”
Volatility has
spiked from
recent lows,
shaking
investors out
of stocks.
Source: Copyright 2008© S0237. Ned Davis Research, Inc. All rights reserved. Data as of Dec. 29, 2008.
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Taxable Bond Yield Spreads Versus U.S. Treasury Bonds
U.S.
Government
Agency Bonds
MortgageBacked
Securities
InvestmentGrade
Corporate
Bonds
High-Yield
Bonds
Source: Copyright 2008© B0384. Ned Davis Research, Inc. All rights reserved. Data as of Dec. 29, 2008.
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Stocks Have Bottomed Mid Recession
10000
1000
S&P 500
100
Clear bands indicate recession.
10
Nov-08
Nov-07
Nov-05
Nov-03
Nov-01
Nov-99
Nov-97
Nov-95
Nov-93
Nov-91
Nov-89
Nov-87
Nov-85
Nov-83
Nov-81
Nov-79
Nov-77
Nov-75
Nov-73
Nov-71
Nov-69
Nov-67
Nov-65
Nov-63
Nov-61
Sources: Standard & Poor’s; National Bureau of Economic Research (NBER). Data as of Nov. 30, 2008.
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Gross Domestic Product Growth — Actual and Forecast
Quarter/Quarter % Change (annualized)
9
GDP (actual)
Economists' Consensus Forecast (estimated)
7
5
2.8
3
2.0
1.3
1
-0.5
-1
Key recovery drivers: homebuilding, business
investment in capital expenditures and inventories
and consumer spending on durables (autos).
-3
-0.5
-2.5
Stimuli: plunge in energy, lower mortgage rates and
fiscal stimulus package.
-5
-4.3
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2009-III
2009-I
2008-III
2008-I
2007-III
2007-I
2006-III
2006-I
2005-III
2005-I
2004-III
2004-I
2003-III
2003-I
2002-III
2002-I
2001-III
2001-I
2000-III
2000-I
1999-III
1999-I
1998-III
1998-I
1997-III
1997-I
Source: Bureau of Economic Analysis (BEA) data as of Dec. 23, 2008. Wall Street Journal survey taken Dec. 5-8, 2008.
Consumer Outlook — Household Balance Sheet
Household Debt as a Percent of Total Household Assets
22%
20%
18%
16%
14%
This ratio has jumped higher mainly due to
falling asset prices (denominator).
12%
10%
2008Q1
2007Q1
2006Q1
2005Q1
2004Q1
2003Q1
2002Q1
2001Q1
2000Q1
1999Q1
1998Q1
1997Q1
1996Q1
1995Q1
1994Q1
1993Q1
1992Q1
1991Q1
1990Q1
1989Q1
1988Q1
1987Q1
1986Q1
1985Q1
1984Q1
1983Q1
1982Q1
1981Q1
1980Q1
Source: Federal Reserve. Data through Sept. 30, 2008.
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Housing Starts Outlook — Actual and Forecast
1,800
1,800
1,600
1,600
Annual Growth in Number of Households
(actual and estimated)
1,400
1,400
1,200
1,200
1,000
1,000
Housing Starts (actual)
800
800
Housing Starts (estimated)
600
600
Q3 10 (E)
Q1 10 (E)
Q3 09 (E)
Q1 09 (E)
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
Nov-06
Sep-06
Sources: U.S. Census Bureau. Data as of Nov. 30, 2008. Mortgage Bankers Association’s housing starts forecast dated Dec. 11, 2008.
Joint Center for Housing Studies, Harvard University, March 2006.
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Big Picture: Echo Boom Bigger Than Baby Boom and Still Growing
Labor force to grow 0.8% per year through 2016
U.S. Live Births 1909–2006
Is this
the next
baby
boom?
5,000
4,500
USA Today
July 17, 2008
Live Births (000)
4,000
3,500
3,000
Echo
Boomers
(1977–2007)
120 million
Baby
Boomers
(1946–1976)
117 million
2,500
2,000
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
1957
1954
1951
1948
1945
1942
1939
1936
1933
1930
1927
1924
1921
1918
1915
1912
1909
1,500
Sources: 1909 to 2004: U.S. Census Bureau; The 2007 Statistical Abstract; 2005 to 2007: U.S. Department of Health and Human
Services; National Center for Health Statistics. Preliminary data for 2006 and 2007. Bureau of Labor Statistics.
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Inflation Has Plunged With Oil Prices
Consumer Price Index and Core Consumer Price Index
16
Percent Change Year/Year
14
12
10
8
6
4
2
2.0
1.0
0
Feb-08
Feb-06
Feb-04
Feb-02
Feb-00
Feb-98
Feb-96
Feb-94
Feb-92
Feb-90
Feb-88
Feb-86
Feb-84
Feb-82
Feb-80
Feb-78
Feb-76
Feb-74
Feb-72
Feb-70
Source: Bureau of Labor Statistics. Data as of Nov. 30, 2008.
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Federal Reserve Policy
Shock and awe
“Sure we have mortgage money. It’s just that you can’t have any.”
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Quantitative Easing
Flooding the banking system with excess (lendable) reserves
900
8,200
Money Supply (M2)
$ Billions
800
8,000
(right scale)
700
7,800
600
7,600
500
7,400
400
7,200
Excess Reserves
(left scale)
300
7,000
200
6,800
Required Reserves
Slope = +5.6%
(left scale)
100
6,600
0
6,400
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12/03/2008
11/05/2008
10/08/2008
09/10/2008
08/13/2008
07/16/2008
06/18/2008
05/21/2008
04/23/2008
03/26/2008
02/27/2008
01/30/2008
01/02/2008
12/05/2007
11/07/2007
10/10/2007
09/12/2007
08/15/2007
07/18/2007
06/20/2007
05/23/2007
04/25/2007
03/28/2007
02/28/2007
01/31/2007
01/03/2007
Source: Federal Reserve. H.3 Table 5 and H.6 Table 7. Data as of Dec. 17, 2008.
$ Billions
Federal Budget Deficit
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
-800
-900
-1000
-1100
-1200
Congressional
Budget Office
January 2009
Projections
Federal Budget Deficit
Congressional
Budget Office
January 2009
Projections
-3.8%
Source: Actual: BEA. Quarterly data, seasonally adjusted annual rates. Data through Sept. 30, 2008. Projected: Congressional Budget Office,
September 2008 Forecast. Annual data.
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2018
2016
-5.0%
2014
-6.5%
-5.3%
2012
Federal Budget Deficit as a Percent of GDP
2010
2008
2008Q1
2007Q1
2006Q1
2005Q1
2004Q1
2003Q1
2002Q1
2001Q1
2000Q1
1999Q1
1998Q1
1997Q1
1996Q1
1995Q1
1994Q1
1993Q1
1992Q1
1991Q1
1990Q1
1989Q1
1988Q1
1987Q1
1986Q1
1985Q1
1984Q1
1983Q1
1982Q1
1981Q1
1980Q1
1979Q1
1978Q1
1977Q1
1976Q1
1975Q1
1974Q1
1973Q1
1972Q1
1971Q1
1970Q1
1969Q1
1968Q1
1967Q1
1966Q1
1965Q1
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%
Federal Debt
As a percent of GDP compared to other nations
180
Japan
160
140
% of GDP
120
100
Italy
Belgium
80
Norway
Germany
60
France
C anada
India
U.S.
40
Brazil
Netherlands
U.K.
Switzerland
Sweden
20
0
Source: CIA World Factbook, last updated December 2008 with 2007 estimates.
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Congressional Budget Office Long-Term Spending Projections (2007)
35.0
Actual
Projected
30.0
Percent of GDP
25.0
20.0
Medicare and Medicaid
15.0
Social Security
10.0
5.0
Other Federal Noninterest Spending
2082
2072
2062
2052
2042
2032
2022
2012
2002
1992
1982
1972
1962
0.0
Source: Congressional Budget Office (CBO), The Long-Term Budget Outlook, December 2007. The CBO’s actual and projected figures exclude
interest payments on the federal debt which amounted to an estimated 1.7% of the GDP in 2007.
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S&P 500 — Earnings Drive Stock Prices
1
10452
1 Range of bottom-up/top-down estimated 2009 S&P 500 earnings Per Share (left scale): $76.43/$63.00
2 Average 2009 S&P 500 year-end forecast (right scale) of the 12 Wall Street strategists surveyed by Barron’s, published Dec. 22, 2008
Source: Thomson Baseline. Data through Dec. 22, 2008. Reuters survey of consensus estimates as of Dec. 19, 2008.
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Stock Market Arithmetic
7% earnings growth + reinvested dividends = ~10%
* Growth paths are compounded monthly to yield 5% and 7% annually.
** Excludes write-offs. Data through Nov. 30, 2008.
Source: Copyright 2008© Yardeni Research, Inc. Strategist’s Handbook, Dec. 5, 2008, page 18. All rights reserved. Used with permission.
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S&P 500 Total Return Index Since 1925
Trend Line Slope = 11%
Source: Copyright© Thechartstore.com, with permission. Data through Oct. 31, 2008.
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S&P 500 Index Total Return Since 1989
Trend Line Slope = 11%
“History suggests that this is a smart time
to invest in U.S. equities.”
- Warren Buffet
Oct. 17, 2008
Source: Baseline. Data through Nov. 25, 2008.
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Investment Strategy
“Winning is crucial to my retirement plans.”
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Asset Allocation Harvard-Yale Style
Portfolio for a New Era
In “When Markets Collide,” El-Erian proposes
this neutral asset mix for long-term investors.
Equities
U.S.
15%
Other advanced economies
15%
Emerging economies
12%
Private
7%
49%
Bonds
U.S.
5%
International
9%
Real Assets
Real estate
Commodities
6%
11%
Inflation protected bonds
5%
Infrastructure
5%
27%
Special Opportunities
Expected long-term real return
Expected standard deviation
Source: “When Markets Collide”
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8%
Mohammed El-Erian, Pimco CEO
and CIO and former president of
Harvard’s endowment:
“U.S.-based individual investors
have too much invested in the
U.S. and not enough
internationally.”
“Use weakness to get exposure
to emerging economies because
that is where the growth is
going to be long term.”
“People should be asking how
much inflation protection they
have. At some point, real estate
will be attractive again as an
inflation hedge.”
5%–7%
8%–12%
Source: Barron’s, June 2, 2008.
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Investment Theme: Dividend Growth
Dividend growers have historically done the best
Past performance cannot guarantee comparable future results.
Source: Copyright 2008© S09. Ned Davis Research, Inc. All rights reserved. Used with permission. Data as of Oct. 31, 2008.
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About Risk
Investing in small companies involves greater risks not associated with investing in more established
companies, such as business risk, significant stock price fluctuations and illiquidity.
Foreign securities have additional risks, including exchange rate changes, political and economic
upheaval, the relative lack of information about these companies, relatively low market liquidity and
the potential lack of strict financial and accounting controls and standards.
Investing in emerging markets involves greater risk than investing in more established markets such
as risks relating to the relatively smaller size and lesser liquidity of these markets, high inflation rates,
adverse political developments and lack of timely information.
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To Conclude
• Stock market volatility has cycled up and
down over time. Spikes have marked stock
market turns.
• The economy is in recession.
• Stocks have bottomed mid recession.
• Stocks have historically low forward priceearnings multiples.
• Stocks have an 11% long-term trend.
• Taxable and tax-exempt bonds are on sale.
• Commodities have corrected sharply.
• Asset allocation (modern portfolio theory) is
one of the best investment methods yet.
• El-Erian’s recommended asset allocation is
something to consider.
“It’s just a correction.
The fundamentals are still good.”
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And Don’t Believe Everything You Hear
A study by Media Research
Center of a year’s worth of
economic coverage on ABC,
CBS and NBC found more
than twice as many stories
and briefs focused on
negative aspects of the
economy (62%) compared
to good news (31%).
Source: Media Research Center, “Bad News Bears,”
October 2006
“We were wondering if now would be a
good time to panic?”
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Thank You
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All data provided by Invesco Aim unless otherwise noted.
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