capital markets overview presented by fritz meyer senior market strategist cmo-ppt-2p 1.09
TRANSCRIPT
Capital Markets Overview
Presented by
Fritz MeyerSenior Market Strategist
CMO-PPT-2P 1.09
2 CMO-PPT-2P 1.09 invescoaim.com
Important Information
Consider the investment objectives, risks, and charges and expenses carefully. For this and other information about AIM funds, obtain a prospectus from your financial advisor and read it carefully before investing.
Note: Not all products, materials or services available at all firms. Advisors, please contact your home office.
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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
Source: Copyright 2008© S1060A. Ned Davis Research, Inc. All rights reserved. Data as of Dec. 31, 2008.
Plunges have often coincided
with market bottoms.
Dow Jones Industrial Average
Consumer Confidence
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Stock Market Volatility Volatility equals risk
Source: Copyright 2008© S0237. Ned Davis Research, Inc. All rights reserved. Data as of Dec. 29, 2008.
Volatility has spiked from recent lows, shaking investors out of stocks.
Because stocks are volatile they have historically delivered an “equity risk premium.”
S&P 500 Volatility Index100-day average of absolute change in S&P 500 Index
S&P 500 Index
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Taxable Bond Yield Spreads Versus U.S. Treasury Bonds
Source: Copyright 2008© B0384. Ned Davis Research, Inc. All rights reserved. Data as of Dec. 29, 2008.
U.S. Government
Agency Bonds
Mortgage- Backed
Securities
Investment-Grade
Corporate Bonds
High-Yield Bonds
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Sources: Standard & Poor’s; National Bureau of Economic Research (NBER). Data as of Nov. 30, 2008.
10
100
1000
10000
Nov-6
1
Nov-6
3
Nov-6
5
Nov-6
7
Nov-6
9
Nov-7
1
Nov-7
3
Nov-7
5
Nov-7
7
Nov-7
9
Nov-8
1
Nov-8
3
Nov-8
5
Nov-8
7
Nov-8
9
Nov-9
1
Nov-9
3
Nov-9
5
Nov-9
7
Nov-9
9
Nov-0
1
Nov-0
3
Nov-0
5
Nov-0
7
Clear bands indicate recession.
S&P 500
Stocks Have Bottomed Mid Recession
Nov-0
8
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Gross Domestic Product Growth — Actual and Forecast
Source: Bureau of Economic Analysis (BEA) data as of Dec. 23, 2008. Wall Street Journal survey taken Dec. 5-8, 2008.
2.8
-0.5
2.0
1.3
-0.5
-2.5
-4.3-5
-3
-1
1
3
5
7
9
1997-I
1997-III
1998-I
1998-III
1999-I
1999-III
2000-I
2000-III
2001-I
2001-III
2002-I
2002-III
2003-I
2003-III
2004-I
2004-III
2005-I
2005-III
2006-I
2006-III
2007-I
2007-III
2008-I
2008-III
2009-I
2009-III
Quart
er/
Quart
er
% C
hange (
annualiz
ed)
GDP (actual) Economists' Consensus Forecast (estimated)
Key recovery drivers: homebuilding, business investment in capital expenditures and inventories and consumer spending on durables (autos).
Stimuli: plunge in energy, lower mortgage rates and fiscal stimulus package.
Key recovery drivers: homebuilding, business investment in capital expenditures and inventories and consumer spending on durables (autos).
Stimuli: plunge in energy, lower mortgage rates and fiscal stimulus package.
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Consumer Outlook — Household Balance Sheet
10%
12%
14%
16%
18%
20%
22%
1980Q
1
1981Q
1
1982Q
1
1983Q
1
1984Q
1
1985Q
1
1986Q
1
1987Q
1
1988Q
1
1989Q
1
1990Q
1
1991Q
1
1992Q
1
1993Q
1
1994Q
1
1995Q
1
1996Q
1
1997Q
1
1998Q
1
1999Q
1
2000Q
1
2001Q
1
2002Q
1
2003Q
1
2004Q
1
2005Q
1
2006Q
1
2007Q
1
2008Q
1
Source: Federal Reserve. Data through Sept. 30, 2008.
This ratio has jumped higher mainly due to falling asset prices (denominator).
Household Debt as a Percent of Total Household Assets
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Housing Starts Outlook — Actual and Forecast
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.
600
800
1,000
1,200
1,400
1,600
1,800
Sep-0
6
Nov-0
6
Jan
-07
Mar-0
7
May-0
7
Jul-0
7
Sep-0
7
Nov-0
7
Jan
-08
Mar-0
8
May-0
8
Jul-0
8
Sep-0
8
Nov-0
8
Q1
09
(E)
Q3
09
(E)
Q1
10
(E)
Q3
10
(E)
600
800
1,000
1,200
1,400
1,600
1,800
Housing Starts (estimated)
Housing Starts (actual)
Annual Growth in Number of Households (actual and estimated)
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Big Picture: Echo Boom Bigger Than Baby Boom and Still GrowingLabor force to grow 0.8% per year through 2016
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.
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
190
9
191
2
191
5
191
8
192
1
192
4
192
7
193
0
193
3
193
6
193
9
194
2
194
5
194
8
195
1
195
4
195
7
196
0
196
3
196
6
196
9
197
2
197
5
197
8
198
1
198
4
198
7
199
0
199
3
199
6
199
9
200
2
200
5
Liv
e B
irth
s (0
00
)
Echo Boomers
(1977–2007)
120 million
Baby Boomers
(1946–1976)
117 million
U.S. Live Births 1909–2006
Is this the next baby boom?USA TodayJuly 17, 2008
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Inflation Has Plunged With Oil Prices
Source: Bureau of Labor Statistics. Data as of Nov. 30, 2008.
Consumer Price Index and Core Consumer Price Index
1.0
2.0
0
2
4
6
8
10
12
14
16
Feb-7
0
Feb-7
2
Feb-7
4
Feb-7
6
Feb-7
8
Feb-8
0
Feb-8
2
Feb-8
4
Feb-8
6
Feb-8
8
Feb-9
0
Feb-9
2
Feb-9
4
Feb-9
6
Feb-9
8
Feb-0
0
Feb-0
2
Feb-0
4
Feb-0
6
Feb-0
8
Perc
ent
Change Y
ear/
Year
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Federal Reserve PolicyShock and awe
“Sure we have mortgage money. It’s just that you can’t have any.”
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Quantitative EasingFlooding the banking system with excess (lendable) reserves
Required Reserves (left scale)
Excess Reserves (left scale)
Money Supply (M2) (right scale)
0
100
200
300
400
500
600
700
800
900
01
/03
/20
07
01
/31
/20
07
02
/28
/20
07
03
/28
/20
07
04
/25
/20
07
05
/23
/20
07
06
/20
/20
07
07
/18
/20
07
08
/15
/20
07
09
/12
/20
07
10
/10
/20
07
11
/07
/20
07
12
/05
/20
07
01
/02
/20
08
01
/30
/20
08
02
/27
/20
08
03
/26
/20
08
04
/23
/20
08
05
/21
/20
08
06
/18
/20
08
07
/16
/20
08
08
/13
/20
08
09
/10
/20
08
10
/08
/20
08
11
/05
/20
08
12
/03
/20
08
$ B
illio
ns
6,400
6,600
6,800
7,000
7,200
7,400
7,600
7,800
8,000
8,200
Source: Federal Reserve. H.3 Table 5 and H.6 Table 7. Data as of Dec. 17, 2008.
Slope = +5.6%
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Federal Budget Deficit
- 1200- 1100- 1000- 900- 800- 700- 600- 500- 400- 300- 200- 100
0100200300
$ B
illio
ns
-6.5%-5.3%
-5.0% -3.8%
- 9%
- 8%- 7%
- 6%- 5%
- 4%
- 3%- 2%
- 1%0%
1%2%
3%
1965Q
11966Q
11967Q
11968Q
11969Q
11970Q
11971Q
11972Q
11973Q
11974Q
11975Q
11976Q
11977Q
11978Q
11979Q
11980Q
11981Q
11982Q
11983Q
11984Q
11985Q
11986Q
11987Q
11988Q
11989Q
11990Q
11991Q
11992Q
11993Q
11994Q
11995Q
11996Q
11997Q
11998Q
11999Q
12000Q
12001Q
12002Q
12003Q
12004Q
12005Q
12006Q
12007Q
12008Q
1
Source: Actual: BEA. Quarterly data, seasonally adjusted annual rates. Data through Sept. 30, 2008. Projected: Congressional Budget Office, September 2008 Forecast. Annual data.
Federal Budget Deficit
Federal Budget Deficit as a Percent of GDP
Congressional Budget Office January 2009 Projections
Congressional Budget Office January 2009 Projections
200
8
201
0
201
2
201
4
201
6
201
8
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Federal DebtAs a percent of GDP compared to other nations
J apan
Belgium
Germany
Canada
France
U.S.
Netherlands
Brazil
Switzerland
U.K.
Sweden
I ndia
Norway
I taly
0
20
40
60
80
100
120
140
160
180
% o
f G
DP
Source: CIA World Factbook, last updated December 2008 with 2007 estimates.
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Congressional Budget Office Long-Term Spending Projections (2007)
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.
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
1962
1972
1982
1992
2002
2012
2022
2032
2042
2052
2062
2072
2082
Medicare and Medicaid
Social Security
Other Federal Noninterest Spending
Perc
ent
of
GD
P
Actual Projected
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10452
1
S&P 500 — Earnings Drive Stock Prices
1 Range of bottom-up/top-down estimated 2009 S&P 500 earnings Per Share (left scale): $76.43/$63.002 Average 2009 S&P 500 year-end forecast (right scale) of the 12 Wall Street strategists surveyed by Barron’s, published Dec. 22, 2008Source: 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
Source: Copyright© Thechartstore.com, with permission. Data through Oct. 31, 2008.
Trend Line Slope = 11%
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S&P 500 Index Total Return Since 1989
Source: Baseline. Data through Nov. 25, 2008.
Trend Line Slope = 11%
“History suggests that this is a smart time to invest in U.S. equities.”
- Warren Buffet Oct. 17, 2008
“History suggests that this is a smart time to invest in U.S. equities.”
- Warren Buffet Oct. 17, 2008
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Investment Strategy
“Winning is crucial to my retirement plans.”
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Asset Allocation Harvard-Yale Style
Source: Barron’s, June 2, 2008.
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.”
Portfolio for a New EraIn “When Markets Collide,” El-Erian proposes this neutral asset mix for long-term investors.
EquitiesU.S. 15%
Other advanced economies 15%
Emerging economies 12%
Private 7%
49%
BondsU.S. 5%
International 9%
Real AssetsReal estate 6%
Commodities 11%
Inflation protected bonds 5%
Infrastructure 5%
27%
Special Opportunities 8%Expected long-term real return 5%–7%
Expected standard deviation 8%–12%
Source: “When Markets Collide”
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Investment Theme: Dividend Growth Dividend growers have historically done the best
Source: Copyright 2008© S09. Ned Davis Research, Inc. All rights reserved. Used with permission. Data as of Oct. 31, 2008.
Past performance cannot guarantee comparable future results.
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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 price-earnings 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?”
Thank You
CMO-PPT-2P 1.09 Invesco Aim Distributors, Inc.
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