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Economic Outlook January 2009 Stock Markets and the Economy “Stock markets offer a very useful forecast of the economy.” Markets are one of the best leading indicators of the economy Severe market reactions tend to foreshadow periods of severe economic stress Public sentiment may be effectively reflected in market valuations Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. Perspectives on the Stock Markets “To understand the economy, we need to understand all the forces driving the markets.” The “Rational” Side Objective situational characteristics: supply and demand The “Irrational” Side Emotional reactions: investor hopes and fears Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. Stages of Market Cycles “Shorter term: likely on the verge of a rally. Longer term: probably just starting a bottoming process.” I. Topping Out II. The Decline III. A Bottoming Process IV. A New Rally Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. Market Crashes: Lessons from the 1930s and 1970s “The next few years: painful but profitable!” M o n t h ly Da t a 1 2 / 3 1 / 1 9 2 5 St andar d & Poor 's 500 St ock I ndex - - Tr end Channel 17 37 14 74 12 51 10 62 90 1 76 5 64 9 55 1 46 8 39 7 33 7 28 6 24 3 20 6 17 5 14 8 12 6 10 7 91 77 65 55 47 40 34 29 24 21 18 15 13 11 9 8 7 6 5 4 1 2 / 3 1 / 2 0 0 8 ( L o g S c a le ) L Tops K Public Optimism Tops G F E J I Tops Public Pessimism H “bottoming” process B D “bottoming” process C Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. 20 05 20 00 19 95 19 90 19 85 19 80 Source: Ned Davis Research 19 75 19 70 19 65 19 60 19 55 19 50 19 45 19 40 19 35 A 19 30 K C P 6 6 - 17 37 14 74 12 51 10 62 90 1 76 5 64 9 55 1 46 8 39 7 33 7 28 6 24 3 20 6 17 5 14 8 12 6 10 7 91 77 65 55 47 40 34 29 24 21 18 15 13 11 9 8 7 6 5 4 Global Themes “The United States is becoming a much smaller piece of the overall global economy.” Effects of a global “savings glut” Cheap rates and investment “bubbles” Development of the emerging world Increased competition – Facing existing businesses – For energy and natural resources – For jobs Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. Deleveraging “Addressing the toxic effects of too much debt.” Reversing the excesses More restrictive lending standards Higher rates to compensate for borrower risk Will there be voluntary debt reduction as well? Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. The Immediate Economic Situation “Most segments of the economy are struggling.” Few positives shorter term Panicked consumers Extremely cautious domestic businesses Contracting exports State and local governments The Federal government will try to take up the slack Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. The Coming Months “Laying the foundation for improvement.” Recession through the first half of 2009 Consumers will continue to retrench Layoffs will likely accelerate Capital spending will deteriorate Business bankruptcies will mount Improvement in the second half of 2009 The financial system should stabilize Public confidence will begin to improve Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. The Next Few Years “As with recovery from a massive heart attack, it will take time for the economy to fully recover.” Longer-term issues: Consumers: tight budgets and deleveraging Businesses: coping with margin pressure Can we avoid both depression and high inflation? Federal deleveraging? Social Security and other retirement obligations Retiree health care Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. Contacts Bruce McCain, Ph.D., CFA Chief Investment Strategist Key Private Bank [email protected] (216) 689-5042 David Reavis Public Relations Manager Key Private Bank [email protected] (216) 689-7622 Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. Disclosure