1. 1Q | 2013
As of December 31, 2012
®
Guide to the Markets
2. Table of Contents
EQUITIES 4
ECONOMY 16
FIXED INCOME 34
INTERNATIONAL 42
ASSET CLASS 55
U.S. Market Strategy Team
Dr. David P. Kelly, CFA david.p.kelly@jpmorgan.com
Joseph S. Tanious, CFA joseph.s.tanious@jpmorgan.com
Andrés D Garcia-Amaya
D. Garcia Amaya andres.d.garcia@jpmorgan.com
andres d garcia@jpmorgan com
Brandon D. Odenath brandon.d.odenath@jpmorgan.com
David M. Lebovitz david.m.lebovitz@jpmorgan.com
Gabriela D. Santos gabriela.d.santos@jpmorgan.com
Anthony M. Wile anthony.m.wile@jpmorgan.com
www.jpmorganfunds.com/mi
Past performance is no guarantee of comparable future results.
2
3. Page Reference
36. Fixed Income Yields and Returns
Equities 37. The Fed and the Money Supply
4. Returns by Style 38. Credit Conditions
5. Returns by Sector 39. High Yield Bonds
6. S&P 500 Index at Inflection Points 40. Municipal Finance
7. Stock Valuation Measures: S&P 500 Index 41. Emerging Market Debt
8. Earnings Estimates and Valuations by Style
9. Corporate Profits
International
10. Sources of Earnings per Share Growth 42. Global Equity Markets: Returns and Composition
11. Confidence and the Capital Markets 43. Global Economic Growth
12. Deploying Corporate Cash 44. Global Monetary Policy
13.
3 Broad Market Lagged Price to Earnings Ratio
oad a et agged ce a gs at o 45. The Importance of Exports
p p
14. P/E Ratios and Equity Returns 46. Global Manufacturing Wages
15. Equity Correlations and Volatility 47. The Impact of Global Consumers
48. European Crisis: Fiscal Challenges
Economy 49. European Crisis: Sovereign Bond Yields
16. Economic Growth and the Composition of GDP 50. Chinese Growth and Economic Policy
17. Cyclical Sectors 51. Global Equity Valuations – Developed Markets
18.
18 Consumer Finances 52.
52 Global Equity Valuations – Emerging Markets
19. Corporate Finances 53. Emerging Market Equity Composition
20. Federal Finances: Outlays and Revenues 54. International Economic and Demographic Data
21. Federal Finances: Deficits and Debt
22. Tax Rates and the Distribution of Income & Taxes Asset Class
23. Current Account Deficit and U.S. Dollar 55. Asset Class Returns
24. The Aftermath of the Housing Bubble 56. Correlations: 10-Years
25.
25 Employment 57.
57 Mutual Fund Flows
26. Job Growth, Productivity and Labor Force 58. Dividend Income: Domestic and Global
27. Employment and Income by Educational Attainment 59. Global Commodities
28. Consumer Price Index 60. Gold
29. Returns in Different Inflation Environments – 40 years 61. Historical Returns by Holding Period
30. Oil and the Economy 62. Diversification and the Average Investor
31. Global Oil Supply 63. Annual Returns and Intra-year Declines
32. Domestic Natural Gas 64. Cash Accounts
C
33. Consumer Confidence and the Stock Market 65. Corporate DB Plans and Endowments
66. The Dow Jones Industrial Average Since 1900
Fixed Income
34. Fixed Income Sector Returns
3 35. Interest Rates and Market Performance
4. Returns by Style
Charts reflect index levels (price change only). All returns and annotations reflect total return, including dividends.
4Q 2012 2012
S&P 500 Index
Value Blend Growth Value Blend Growth
1,500
, 4Q12:
Equities
-0.4%
Large
Large
1,450 1.5% -0.4% -1.3% 17.5% 16.0% 15.3%
1,400
Mid
Mid
1,350 3.9% 2.9% 1.7% 18.5% 17.3% 15.8%
2012: +16.0%
1 300
1,300
Small
Small
1,250
3.2% 1.9% 0.4% 18.1% 16.3% 14.6%
Dec-11 Mar-12 May-12 Aug-12 Oct-12 Dec-12
Since Market Peak (October 2007) Since Market Low (March 2009)
S&P 500 Index
Since 10/9/07 Peak: Value Blend Growth Value Blend Growth
1,600
1 600
+2.3% Large
Large
1,400 -5.5% 2.3% 12.7% 135.7% 128.7% 129.9%
1,200
Mid
Mid
1,000
10.0% 11.4% 11.6% 180.9% 168.9% 158.1%
Since 3/9/09
Low: +128.7%
800
Small
Small
5.6% 8.2% 10.1% 161.2% 160.9% 159.9%
600
Dec-06 Mar-08 May-09 Aug-10 Oct-11 Dec-12
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
return, period.
– 12/31/12, illustrating market returns since the most recent S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09 –
12/31/12, illustrating market returns since the S&P 500 Index low on 3/9/09. Returns are cumulative returns, not annualized. For all time
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 12/31/12.
4
5. Returns by Sector
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En
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He
Te
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Ut
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Fi
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Equities
S&P Weight 15.6% 19.0% 12.0% 10.1% 11.0% 11.5% 10.6% 3.1% 3.4% 3.6% 100.0%
Weight
Russell Growth Weight 4.6% 30.9% 12.0% 12.7% 4.0% 16.7% 12.5% 2.3% 0.2% 4.0% 100.0%
Russell Value Weight 27.5% 6.4% 11.5% 9.2% 16.1% 8.3% 7.2% 3.4% 6.5% 3.9% 100.0%
4Q 2012 5.9 -5.7 0.1 3.7 -2.7 2.1 -1.7 -6.0 -2.9 2.7 -0.4
2012 28.8 14.8 17.9 15.3 4.6 23.9 10.8 18.3 1.3 15.0 16.0
rn
Retur
Since Market Peak -48.6 15.8 23.3 -1.4 1.4 37.5 45.1 6.7 5.4 -0.6 2.3
(October 2007)
Since Market Low 180.8 142.6 98.9 171.1 85.6 218.3 103.5 103.8 84.5 136.8 128.7
(March 2009)
Beta to S&P 500 1.43 1.16 0.65 1.20 0.95 1.14 0.53 0.71 0.50 1.30 1.00
β
Forward P/E Ratio 10.9x
10 9x 12.2x
12 2x 12.6x
12 6x 13.0x
13 0x 11.0x
11 0x 14.9x
14 9x 15.1x
15 1x 16.2x
16 2x 14.3x
14 3x 13.2x
13 2x 12.5x
12 5x
15-yr avg. 12.8x 23.8x 18.4x 16.9x 14.7x 18.7x 18.1x 17.5x 13.6x 16.2x 16.7x
P/E
Trailing P/E Ratio 12.8x 14.6x 17.7x 14.6x 11.2x 15.4x 17.6x 40.9x 16.6x 18.5x 14.9x
20-yr avg. 15.8x 26.7x 24.1x 20.3x 18.1x 19.4x 21.1x 19.7x 14.4x 19.5x 19.5x
Dividend Yield 2.0% 1.7% 2.2% 2.5% 2.3% 1.6% 2.9% 4.7% 4.4% 2.8% 2.2%
Div
20-yr avg. 2.1% 0.6% 1.5% 1.8% 1.8% 1.0% 2.1% 3.8% 4.4% 2.1% 1.7%
Source: Standard & P ’ R
S St d d Poor’s, Russell I
ll Investment G
t t Group, F tS t J.P. Morgan Asset Management.
FactSet, J P M A tM t
All calculations are cumulative total return, not annualized, including dividends for the stated period. Since Market Peak represents period 10/9/07 – 12/31/12.
Since Market Low represents period 3/9/09 – 12/31/12.
Forward P/E 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 12
months (NTM), and is provided by FactSet Market Aggregates. Trailing P/E ratios are bottom-up values defined as month-end price divided by the last 12
months of available reported earnings. Historical data can change as new information becomes available. Note that P/E ratios for the S&P 500 may differ
from estimates elsewhere in this book due to the use of a bottom-up calculation of constituent earnings (as described) rather than a top-down calculation.
This methodology is used to allow proper comparison of sector level data to broad index level data. Dividend yields are bottom-up values defined as the
bottom up
annualized value of the most recent cash dividend as a percent of month-end price. Beta calculations are based on 10 years of monthly price returns for the
S&P 500 and its sub-indices.
Past performance is not indicative of future returns.
Data are as of 12/31/12.
5
6. S&P 500 Index at Inflection Points
S&P 500 Index Characteristic Mar-2000 Oct-2007 Dec-2012
Oct. 9, 2007
Mar. 24, 2000 Index level 1,527 1,565 1,426
1,600 P/E (fwd.) = 15.2x
P/E (fwd.) = 25.6x P/E ratio (fwd.) 25.6x 15.2x 12.5x
1,565 Dec. 31, 2012
,
1,527
1 527 Dividend yield 1.1%
1 1% 1.8%
1 8% 2 2%
2.2%
P/E (fwd.) = 12.5x
Equities
10-yr. Treasury 6.2% 4.7% 1.8%
1,426
1,400
+101%
101%
1,200
+106%
-57%
-49%
1,000
1 000 +111%
800
Dec. 31, 1996 Oct
Oct. 9, 2002
00
P/E (fwd.) = 16.0x Mar. 9,
Mar 9 2009
P/E (fwd.) = 14.1x P/E (fwd.) = 10.3x
741 777 677
600
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
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 p
y yp provided by Compustat. Forward Price to Earnings Ratio is a bottom-up calculation based
y p g p
on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates.
Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future
results.
Data are as of 12/31/12.
6
7. Stock Valuation Measures: S&P 500 Index
S&P 500 Index: Valuation Measures Historical Averages
Valuation 1-year 3-year 5-year 10-year 15-year
Latest*
Measure Description ago avg. avg. avg. avg.
P/E
/ Price to Earnings 12.5x 11.8x 12.6x 12.8x 14.2x 16.7x
Equities
P/B Price to Book 2.3 2.1 2.1 2.2 2.5 3.0
P/CF Price to Cash Flow 8.5 8.1 8.4 8.4 9.7 11.0
P/S Price to Sales 1.2 1.1 1.2 1.1 1.3 1.5
PEG Price/Earnings to Growth 1.3 1.2 0.9 1.7 1.5 1.5
Div. Yield Dividend Yield 2.4% 2.3% 2.2% 2.3% 2.1% 1.9%
S&P 500 Shiller Cyclically Adjusted P/E S&P 500 Earnings Yield vs. Baa Bond Yield
Adjusted using trailing 10-yr. avg. inflation adjusted earnings 10%
50x S&P 500 Earnings Yield:
9%
(
(Inverse of fwd. P/E) 8.0%
)
40x 8%
30x 4Q12: 7%
21.1x
6%
20x
Average: 19.0x
5%
10x
4% Moody’s Baa Yield: 4.6%
0x 3%
'55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Source: (Top) Standard & Poor’s, FactSet, Robert Shiller Data, J.P. Morgan Asset Management.
Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months. Price to Book is price divided by book value per share. Data
post 1992
post-1992 include intangibles and are provided by Standard & Poor’s Price to Cash Flow is price divided by consensus analyst estimates of cash flow per share for the next 12
Poor s.
months. Price to Sales is calculated as price divided by consensus analyst estimates of sales per share for the next 12 months. PEG Ratio is calculated as NTM P/E divided by
NTM earnings growth. Dividend Yield is calculated as consensus analyst estimates of dividends for the next 12 months divided by price. All consensus analyst estimates are
provided by FactSet. (Bottom left) Cyclically adjusted P/E uses as reported earnings throughout. *Latest reflects data as of 12/31/2012.
(Bottom right) Standard & Poor’s, Moody’s, FactSet, J.P. Morgan Asset Management.
Data are as of 12/31/12.
7
8. Earnings Estimates and Valuations by Style
S&P 500 Index: Forward P/E Ratio Current P/E vs. 20-year avg. P/E
28x Value Blend Growth
11.8 12.5 15.2
rge
24x
Lar
Equities
14.0 16.2 20.9
20x
12.7 14.4 16.7
Mid
Average: 16.1x
16x 14.0 16.3 21.8
13.2 14.6 16.3
Small
12x
Dec. 2012: 12.5x 14.2 17.1 21.3
8x
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Current P/E as % of 20-year avg. P/E
S&P 500 Operating Earnings Estimates E.g.: Large Cap Blend stocks are 23.1%
g g p
Consensus estimates of the next twelve months’ rolling earnings cheaper than their historical average.
4Q12: $112.62
$120 Value Blend Growth
Large
$100
84.8% 76.9% 72.7%
$80
$60
Mid
91.0% 88.3% 76.6%
$40
Small
$20
92.9% 85.7% 76.6%
$0
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Source: (Top and bottom left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Right) Russell Investment Group, IBES, FactSet.
Earnings estimates are for calendar years and taken at quarter end dates throughout the year. Forward Price to Earnings is price divided by
consensus analyst estimates of earnings per share for the next 12 months. P/E ratios are calculated and provided by Russell based on IBES
consensus estimates of earnings over the next 12 months except for large blend, which is the S&P 500.
Data are as of 12/31/12.
8
9. Corporate Profits
S&P 500 Earnings Per Share Adjusted After-Tax Corporate Profits (% of GDP)
Operating basis, quarterly Includes inventory and capital consumption adjustments
3Q12: $24.36
$26 2Q07: $24.06 11% 3Q12:
9.6%
9 6%
Equities
$23 10%
$20
9%
$17
8%
$14
7%
$11
50-yr. avg.: 6.2%
6%
$8
5%
$5
$2 4%
-$1 3%
'02 '04 '06 '08 '10 '12 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
Source: Standard & Poor’s, Compustat, BEA, J.P. Morgan Asset Management.
EPS levels are based on operating earnings per share. Most recently available data is 3Q12.
Past performance is not indicative of future returns.
Data are as of 12/31/12.
9
10. Sources of Earnings per Share Growth
S&P 500 Year-Over-Year EPS Growth
Growth broken into revenue growth and margin expansion, quarterly
50%
Margin Share of EPS Growth
Equities
40% Revenue Share of EPS Growth
30%
20%
10%
0%
-10%
-20%
-30%
-40%
3Q94 3Q96 3Q98 3Q00 3Q02 3Q04 3Q06 3Q08 3Q10 3Q12
Source: Standard & Poor’s, Compustat, J.P. Morgan Asset Management.
EPS levels are based on operating earnings per share. Most recently available data is 2Q12. *3Q12 data are Standard & Poor’s estimates.
Past performance is not indicative of future returns. 4Q2008, 1Q2010 and 2Q2010 reflect -101%, 92% and 51% growth in operating earnings, and
are adjusted on the chart.
Data are as of 12/31/12.
10
11. Confidence and the Capital Markets
Multiple Expansion and Contraction
Est. impact of a 10pt. rise in sentiment: +2.0 multiple points*
S&P 500 forward P/E based on consensus EPS estimates
26x Forward P/E Consumer Sentiment 120
24x 110
Equities
22x
100
20x
90
18x
80
16x
14x 70
12x Correlation Coefficient: 0.75 60
10x 50
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Sentiment & Real Yields Est.
Est impact of a 10pt. rise in sentiment: +54 basis points*
10pt
Real yield based on nominal 10-yr. yield minus year-over-year core CPI
6% Real 10-year Yield Consumer Sentiment 120
5% 110
4% 100
3% 90
2% 80
1% 70
0% Correlation Coefficient: 0.68 60
-1% 50
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Source: (Top) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Bottom) U.S. Treasury, BLS, University of Michigan, J.P. Morgan
Asset Management. Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next twelve months. Real 10-
year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month. *Estimated impact based on
11 coefficients from regression analysis. Data are as of 12/31/12.
12. Deploying Corporate Cash
Corporate Cash as a % of Current Assets Corporate Growth
S&P 500 companies – cash and cash equivalents, quarterly $bn, nonfarm nonfinancial capex, quarterly value of deals completed
30% $1,300 $1,600
Capital Expenditures M&A Activity
28%
% $1,200
$ $1,400
$1 400
Equities
26% $1,200
$1,100
24% $1,000
$1,000
22% $800
$900
20% $600
$800
18% $400
16% $700 $200
14% $600 $0
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Dividend Payout Ratio
y Cash Returned to Shareholders
S&P 500 companies, LTM S&P 500 companies, rolling 4-quarter averages, billions USD
60% $33 $160
$30
Dividends per Share $140
50% $120
$27
$100
40% $24
$80
$21
$60
30%
$18
Share Buybacks $40
20% $15 $20
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Source: Standard & Poor’s, FRB, Bloomberg, FactSet, J.P. Morgan Securities, J.P. Morgan Asset Management.
(Top left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Top right) M&A activity is the quarterly value of deals completed and
capital expenditures are for nonfarm nonfinancial corporate business. (Bottom left) Standard & Poor’s, FactSet, J.P. Morgan Asset
Management. (Bottom right) Standard & Poor’s, Compustat, FactSet, J.P. Morgan Asset Management. Data are as of 12/31/12.
12
13. Broad Market Lagged Price to Earnings Ratio
Lagged P/E Ratio – All U.S. Corporations
Ratio of market value of all U.S. corporations to adjusted after-tax corporate profits for prior four quarters
35x
Equities
30x
P/E Ratios
Avg. During Recessions 12.6x
25x Avg. During Expansions 13.9x
December 31, 2012 13.1x
20x
15x
Average: 13.7x
10x Dec. 31, 2012*: 13.1x
5x
0x
'52
52 '55
55 '58
58 '61
61 '64
64 '67
67 '70
70 '73
73 '76
76 '79
79 '82
82 '85
85 '88
88 '91
91 '94
94 '97
97 '00
00 '03
03 '06
06 '09
09 '12
12
Source: BEA, Federal Reserve Board, Wilshire Associates, J.P. Morgan Asset Management.
*The December 31, 2012 price is a J.P. Morgan Asset Management estimated based on the daily value of the Wilshire 5000 Total Market
Index.
Data are as of 12/31/12.
13
14. P/E Ratios and Equity Returns
P/E and Total Return Over 1-yr. Periods P/E and Total Return Over 5-yr. Annualized Periods
Quarterly, 1Q 1952 to 3Q 2011 Quarterly, 1Q 1952 to 3Q 2007
60% 60%
Current P/E: 13.1 Current P/E: 13.1
Equities
12/31/12 12/31/12
Implied Annual Return 15.1% Implied Annual Return 13.2%
40% Standard Error 17.2% 40% Standard Error 5.7%
20% 20%
0% 0%
5x 10x 15x 20x 25x 30x 5x 10x 15x 20x 25x 30x
-20% -20%
20%
-40% -40%
Source: BEA, FRB, J.P. Morgan Asset Management. Prices are based on the market value of all U.S. corporations and include quarterly
dividends. Valuation based on long-term PE ratio.
Note: Orange line denote results of linear regression with R-squared of 0.15 for 1-yr. returns (left) and 0.35 for 5-yr. returns (right).
Data are as of 12/31/12.
14
15. Equity Correlations and Volatility
Large Cap Stocks Sovereign Debt
Correlations Among Stocks Crisis
70%
Great Depression / Lehman
60% World War II Bankruptcy
1987 Crash
Equities
50% Cuban Missile Crisis OPEC Oil
40% Crisis Tech Bust & 9/11
30%
20%
Average: 26.7% Dec. 2012: 34.4%
10%
0%
'26 '32 '38 '44 '50 '56 '62 '68 '74 '80 '86 '92 '98 '04 '10
Daily Volatility of DJIA
3.5% Volatility Measure ’08 Peak Average Latest 90
DJIA (Left) 3.30% 0.72% 0.53%
3.0% DJIA vol. shown VIX (Right) 80.9 20.4 18.0 75
in 3-month
2.5% moving average
60
2.0%
2 0%
45
1.5%
30
1.0%
0.5% 15
0.0% 0
'30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
Source: (Top) Empirical Research Partners LLC, Standard & Poor’s, J.P. Morgan Asset Management. Capitalization weighted correlation of top
750 stocks by market capitalization, daily returns, 1926 – Dec. 31, 2012. (Bottom) CBOE, Dow Jones, J.P. Morgan Asset Management. DJIA
volatility are represented as three-month moving averages of the daily absolute percentage change in the Dow Jones Industrial Average.
Charts shown for illustrative purposes only. Data are as of 12/31/12.
15
16. Economic Growth and the Composition of GDP
Real GDP Components of GDP
% chg at annual rate 3Q12 nominal GDP, billions USD
10% 20-yr avg. 3Q12
$18,000
Real GDP: 2.5% 3.1% 2.5% Housing
8%
$16,000
10.7% Investment ex-housing
6%
$14,000
$625 bn of 19.6%
my
4% output lost
p
Econom
$12,000
$12 000 Gov t
Gov’t Spending
2%
$10,000
0%
$8,000
2%
-2% 71.0%
$951 b of
bn f
output $6,000 Consumption
-4% recovered
$4,000
-6%
$2,000
-8%
$0
-10% - 3.3% Net Exports
'04 '06 '08 '10 '12 -$2,000
Source: BEA, FactSet, J.P. Morgan Asset Management.
GDP values shown i l
l h in legend are % change vs. prior quarter annualized and reflect 3Q12 GDP
d h i t li d d fl t GDP.
Data are as of 12/31/12.
16
17. Cyclical Sectors
Light Vehicle Sales Change in Private Inventories
Millions, seasonally adjusted annual rate Billions of 2005 dollars, seasonally adjusted annual rate
24 $150
3Q12: 61.3
22 $100
20
$50
18 Nov. 2012:
$0
16
15.5
$-50
Average: 15.1 Average: 28.8
my
14
Econom
$-100
$ 100
12
10 $-150
8 $-200
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '95 '00 '05 '10
Housing Starts Real Capital Goods Orders
Thousands, seasonally adjusted annuall rate
Th d ll dj t d t Non-defense
Non defense capital goods orders ex. aircraft, $ bn seasonally adjusted
ex aircraft bn,
2,400 $75
$70
2,000
$65
1,600
$60 Average: 57.3
1,200
1 200 Average: 1 384
1,384 Nov.
Nov 2012:
$55
861
800
$50
400 $45 Nov. 2012:
55.8
0 $40
'95
95 '00
00 '05
05 '10
10 '98 '00 '02 '04 '06 '08 '10 '12
Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom left) Census Bureau,
FactSet, J.P. Morgan Asset Management. (Bottom right) Census Bureau, FactSet, J.P. Morgan Asset Management.
Capital goods orders deflated using the producer price index for capital goods.
Data are as of 12/31/12.
17
18. Consumer Finances
Consumer Balance Sheet Household Debt Service Ratio
Trillions of dollars outstanding, not seasonally adjusted Debt payments as % of disposable personal income, seasonally adjusted
15%
$80 Total Assets: $78 2tn
$78.2tn 2Q-’07 Peak: $81.5tn
1Q-’09 Low: $65.2tn
3Q07:
$70 14.1%
Homes: 25% 14%
my
$60
Econom
Other Tangible: 7%
13%
$50 Deposits: 10%
$40
Pension Funds: 18%
12%
$30 Revolving (e.g.: credit cards): 6%
Non-revolving: 14% 1Q80:
Other Liabilities: 8% 11.1%
$20
11%
Other Financial
Assets: 41% Total Liabilities: $13.4tn
$10
4Q12*:
Mortgages: 72% 10.4%
10%
$0 '80 '85 '90 '95 '00 '05 '10
Source: (Left) FRB, J.P. Morgan Asset Management. Data includes households and nonprofit organizations. (Right) BEA, FRB, J.P. Morgan Asset
Management. *4Q12 Household Debt Service Ratio is a J.P. Morgan Asset Management estimate.
Data are as of 12/31/12.
18
19. Corporate Finances
Corporate Financing Gap Total Leverage
Nonfarm nonfinancial corporate business, billions USD S&P 500, ratio of total debt to total equity, quarterly
$1,600 240%
Total Internal Funds
$1,400 Total Capital Expenditures
$1,200 220%
Companies
must
$1,000
borrow
my
Econom
$800 200%
Companies
$600 can fund
internally
$400 180%
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Average: 173%
Interest Coverage Ratio (EBIT / Net Interest)
S&P 500 quarterly
500, t l
9x
160%
2Q12:
8x
6.8x
7x
6x
140%
5x
4x
3x
120%
2x
1x 4Q12 : 107%
100%
0x
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '94
94 '96
96 '98
98 '00
00 '02
02 '04
04 '06
06 '08
08 '10
10 '12
12
Source: Federal Reserve, Compustat, Standard & Poor’s, FactSet, J.P. Morgan Asset Management.
(Top Left): All data is from the Fed’s Flow of Funds tables report Z.1, F.102 lines 9 and 11. Total internal funds equals retained earnings plus
depreciation.
Data are as of 12/31/12.
19
20. Federal Finances: Outlays and Revenues
The 2012 Federal Budget Federal Outlays and Receipts
CBO Baseline forecast, trillions USD 1960 – 2012, % of GDP
$4.0 26%
Total S
T t l Spending: $3.6tn
di $3 6t
$3.5
Other
24%
$482bn (14%)
Borrowing:
$3.0 Net Int.: $220bn (6%) $1,158bn (32%)
my
2012:
Econom
Non-defense
Non defense %
22% 22.8%
Discretionary:
$2.5
$620bn (17%) Other: $226bn (6%)
Average: 20.5%
$2.0 Defense: 20%
$669bn (19%) Social Insurance:
$841bn (23%)
$
$1.5
18%
Social Security: Corp.: $237bn (7%)
$768bn (22%) Average: 17.9%
$1.0
2012:
15.8%
16% Revenues
Income:
$0.5 Medicare & Medicaid: $1,165bn (32%) Outlays
$804bn (23%)
$0.0 14%
Total Government Spending Sources of Financing 1960 1970 1980 1990 2000 2010
Source: U.S. Treasury, BEA, OMB, CBO, J.P. Morgan Asset Management.
2012 Federal Budget is based on the CBO’s August 2012 Baseline Scenario.
Note: Years shown are fiscal years (Oct. 1 through Sep. 30).
Revenue breakout is based on 2012 tax revenue estimates from the Office of Management and Budget.
Data are as of 12/31/12.
20
21. Federal Finances: Deficits and Debt
Federal Budget Surplus/Deficit Federal Net Debt (Accumulated Deficits)
% of GDP, 1992 – 2022 % of GDP, 1992 – 2022
-12% 100%
Forecast
Forecast Adjusted CBO
Adjusted CBO Baseline Scenario
-10%
Baseline Scenario New Year’s
New Year’s 80% Compromise Scenario
2022: 72.8%
-8% Compromise Scenario
2012 actual: 72.5%
my
Econom
-6%
60%
2022: 58.3%
-4%
40%
-2%
0%
20%
2%
4% 0%
1990 1994 1998 2002 2006 2010 2014 2018 2022 1990 1994 1998 2002 2006 2010 2014 2018 2022
Source: U.S. Treasury, BEA, CBO, J.P. Morgan Asset Management.
2012 numbers are actuals Note: Years shown are fiscal years (Oct 1 through Sep. 30). Chart on the left displays federal surplus/deficit (revenues –
actuals. (Oct. Sep 30)
outlays). Federal net debt comprises all financial liabilities of the Federal government (gross debt) minus all intra-government holdings as assets. Deficit
and debt scenarios are based on CBO budget forecasts from August 2012 and the CBO cost estimate for the American Taxpayer Relief Act, as passed
by the Senate on January 1, 2013.
Data are as of 12/31/12.
21
22. Tax Rates and the Distribution of Income & Taxes
Historical Average Maximum Tax Rates by Decade Share of Income and Taxes by Income Level
100% Based on adjusted gross income and federal taxes, 2009
Income
80%
Dividends
Di id d
60% 5% to 25%
34.1%
Wage Income
40%
Capital Gains Top 5%
my
31.7%
Econom
20%
Bottom 75%
0% 34.2%
1930's 1940's 1950's 1960's 1970's 1980's 1990's 2000's Current
Potential Tax Rate Changes
2012 and 2013 maximum federal tax rates under current law Taxes
50%
43.4% 2012 2013
40.0%
40% 37.9%
35.0%
30% 5% to 25%
23.8% 23.8% Top 5% 28.6%
20%
58.7%
15.0% 15.0%
12.4%
10.4%
10%
Bottom 75%
0% 12.7%
Wage Income Capital Gains* Dividends* Payroll Tax** Estate Tax***
Source: (Top left) IRS, J.P. Morgan Asset Management. Wage income tax rates include employer and employee contributions to the Medicare tax. (Bottom left) IRS, The Tax
Foundation, J.P. Morgan Asset Management. Tax rates based on maximum U.S. individual income tax. Wage income tax rates include employer and employee contributions to
the Medicare tax. *Includes recently enacted healthcare tax of 3.8%. **In 2011 and 2012, the payroll tax cut reduced the employee’s share of Social Security taxes by 2% and
was allowed to expire for 2013. Rates shown include both employer and employee contributions to the payroll tax.
***For 2013, the estate tax exemption amount remained at $5.12 million. (Right) IRS, J.P. Morgan Asset Management.
Taxes paid are based on federal individual income taxes, which are responsible for about 25% of the nation's taxes paid.
Data are as of 12/31/12.
22
23. Current Account Deficit and U.S. Dollar
Current Account Balance, % of GDP U.S. Dollar Index
-8% Nominal trade-weighted exchange index: major currencies
115
4Q05:
4Q05
-6.5% 110
-6% 105
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Econom
100
95
-4%
90
Mar.
Mar 2009:
84.0
85
3Q12:
-2% -2.7%
80
75
0% 70 Mar. 2008: 70.3
Dec. 2012: 73.1
65
'94
94 '96
96 '98
98 '00
00 '02
02 '04
04 '06
06 '08
08 '10
10 '12
12 '94
94 '96
96 '98
98 '00
00 '02
02 '04
04 '06
06 '08
08 '10
10 '12
12
Source: BEA, FactSet, J.P. Morgan Asset Management. Source: Federal Reserve, FactSet, J.P. Morgan Asset Management.
Data are as of 12/31/12 and are reported quarterly. Data are as of 12/31/12.
23
24. The Aftermath of the Housing Bubble
Home Prices Monthly Rent vs. Monthly Mortgage Payment
Indexed to 100, seasonally adjusted Vacant properties
160 $1,100
Case Shiller 20-city Monthly
M thl
$950
FHFA Purchase Only Mortgage 4Q12*:
Payment $718
150 Average Existing Home $800
$650
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140 $500
Econom
$350 Monthly Rent 4Q12*: $481
130 $200
'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Home Inventories
120 Millions, annuall rate, seasonally adjusted
Milli t ll dj t d
4.5
4.0
110
3.5
3.0
30
100
2.5
2.0 Nov. 2012: 2.2
90 1.5
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Sources: (Left) National Association of Realtors, Standard & Poor’s, FHFA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, J.P. Morgan Asset Management.
Monthly mortgage payment assumes a 20% down payment at prevailing 30-year fixed-rate mortgage rates; analysis based on median asking rent and median mortgage payment
based on asking price. (Bottom right) Census Bureau, National Association of Realtors, J.P. Morgan Asset Management. *4Q12 rent and mortgage
payment values are J.P. Morgan Asset Management estimates.
Data are as of 12/31/12.
24
