Economy and Markets · Treasury and the 10-year Treasury Inflation Protected Security (TIPS),...
Transcript of Economy and Markets · Treasury and the 10-year Treasury Inflation Protected Security (TIPS),...
Economy and MarketsRetrospective and Perspective
October 1, 2012
Economy and Markets • October 1, 2012 1
Table of Contents
REVIEW 2
• Retrospective and Perspective 2
• Spotlight 3
• Highlighted Charts 4
• Market Performance Summary 5
ECONOMY 7
STOCKS 21
BONDS 26
ALTERNATIVE ASSETS 32
Economy and Markets • October 1, 2012 2
Retrospective and PerspectiveReview
Europe, particularly southern Europe, continues to struggle. For example, both Italy and Spain are riding through serious economic contraction. And while Germany and France have dodged the recessionary bullet so far, the drag of Europe strains growth in China with over 15% of their exports to EU, the U.S. and elsewhere. The good news is the European Central Bank (ECB) made substantial progress for plans to provide assistance to these troubled countries, subject to certain conditions. Just the verbal commitment to these initiatives substantially reduced the yields and volatility on debt issued by Spain and Italy. Hopefully in the next few months, the ECB will also take the reins of oversight of EU banks. The main debate here is whether the ECB should oversee all EU banks (some 6,000) or just the largest ones.
China is in a slowdown, but its current GDP growth of roughly 7.5% is still a lift to the globe. Troubling aspects in China include not only slowing exports to EU but to other countries such as Brazil, which is seeing a pull back in manufacturing, and slowing profits in their industrial complex. However, China’s push back included lower bank reserve requirements, lower lending rates, and additional lending initiatives. The Chinese consumer uptick helped offset some of the export slippage. The formal handoff to new political leadership in China comes in early October. It is important to remember that this is a one party system, tightly controlled by the Communist Party of China.
U.S. had a heck of a monetary and market month. The aggressive Fed actions (see our Spotlight) motivated investors, and stocks jumped over 1.5% on the day. Add those actions to those of other central banks and we are awash in liquidity. The world-wide reaction was a push-up in asset prices. So, in spite of concerns on global and local growth, our fiscal cliff, etc., the “risk on” assets outperformed in September, as well as for the third quarter and year-to-date. Stocks in Europe (e.g. Stoxx 600 Index) actually outshined U.S stocks in the 3rd Quarter.
Within the U.S. economy, September produced more of the same: mixed results. On the positive side, unemployment claims declined, retail and vehicle sales were up, and the service sector survey remained positive. On the downside, durable goods orders fell, the manufacturing survey deteriorated, and private job creation is still slow. Looking just a bit ahead to the third quarter corporate results the consensus estimates from Bloomberg are S&P 500 corporate profits to grow 1.8% and sales up 3.0%. The 4th quarter estimates, particularly for corporate profits growing nearly 10%, may be tough to hit.
Potential Actions:
1) Can Draghi, ECB and EU convert plans into actions?
2) Spain’s 2013 budget, bank stress tests/funding and loan agreement, each to be released in the very near term.
3) Congress in lame duck session seizes chance to reduce size of the Fiscal Cliff
4) U.S. companies meet or beat consensus earnings and sales targets for third quarter
5) Consumers hold steady
6) Solid solutions addressed for fiscal and tax reform
"Risk On" Worked Again
TOTAL RETURNS (as of 09/30/2012) September
Third Quarter Year-to-Date
S&P 500® Index 2.58 6.35 16.45
STOXX 600 Index 1.03 7.48 13.64
U.S. 10-Yr Treasury -0.54 0.92 4.39
Sources: Bloomberg L.P., BMO Global Asset Management
Economy and Markets • October 1, 2012 3
Spotlight: QE3 or Pushing on a String“Nothing is so permanent as a temporary government program.”
Milton Friedman, Nobel prize economistReview
On September 13th, Chairman Ben Bernanke emerged from the Fed’s scheduled meeting and announced QE3, another step in its Quantitative Easing effort; the Fed will continue indefinitely to purchase Government Agency mortgage bonds. The financial markets rallied on the announcement, with the S&P 500® Index surging 2% by the end of the next day. The 10-year Treasury yield initially declined 3 basis points, but by the time markets had closed on the following day, the yield had climbed 14 basis points. Inflation expectations, measured as the difference between the nominal 10-year Treasury and the 10-year Treasury Inflation Protected Security (TIPS), increased 24 basis points, and the price of gold increased 2% over the two- day period. Since the announcement, Treasury yields have declined below their level before the announcement, while the equity market and inflation expectations have returned close to their pre-announcement levels. The price of gold has remained at its highest level.
Investors can be forgiven for asking several related questions: Just what has the Fed accomplished with its on-going bond purchases, and what more does it expect to accomplish with its open-ended extension? With rates already near historical lows, how much lower can they go? With the Fed ‘s success in keeping rates low, where are their effects in the economy? Finally, what else can (should?) be done to get the economy on a sound footing?
The only interest rate that the Fed can effectively control is the short-term Federal Funds rate. Through its ongoing bond purchases, the Fed has attempted to influence longer-term Treasury rates, along with other interest rates that are based on Treasury yields. In this, the Fed has appeared to have had some success. (See Exhibit 1 on page 4.)
Despite the Fed’s unrelenting stimulus, the economic recovery from the Great Recession has been extremely slow, which has kept unemployment stubbornly high. However, other than the reaction to Lehman, the announcement and launch of each of the Fed’s actions has been followed by a small dip in unemployment. (See Exhibit 2 on page 4.) The challenge has been that the declines were small and short-lived. The nominal results from this unprecedented activity has been disappointing, to say the least.
The Fed does appear to be merely pushing on the proverbial string. Skeptics voicing doubts about the effectiveness of the Fed action do have a point.
Chairman Bernanke knows the limits of the Fed’s tools, and he also knows what else needs to be done. He has communicated this to those who also must act: the fiscal policy makers (Congress and the President). A simple chart studied by everyone who has taken an Economics course provides useful insight. The mechanism by which lower interest rates work through the economy is to lower financing costs to consumers and businesses, thereby spurring spending and investment. In supply and demand curve space, demand shifts right, resulting in a higher level of equilibrium GDP (See Exhibit 3 on page 4.)
The slow growth, however, is in part a result of a basic economic fact: Consumers and business operators respond to incentives and expectations and are waiting to see how the Fiscal Cliff will play out. The cliff will shift aggregate demand left (see Exhibit 4 on page 4). The lower demand comes from less government spending, as well as reduced spending by consumers and businesses as a result of tax increases. In addition, the higher tax rates in top income tax brackets amounts to an increase in taxes on most small businesses, as their corporate structures result in taxes being paid through the individual returns of their owners. As a consequence, the aggregate supply curve will shift left. The result is an unambiguous decline in equilibrium GDP.
Fiscal policy makers face a dilemma that should be dealt with carefully. A cut in government spending and increase in taxes will reduce GDP; it is only a matter of the magnitude depending on the details. A cut in government spending, upon which nearly all participants in the debate agree, only affects demand. Tax increases, the topic of heated differences of opinion, provide a “double whammy.” The consumption and investment sectors of the economy have the potential to offset the effects of only a cut in spending. Tax increases, even if delayed for some years, could make it more difficult for the economy to grow to offset the initial declines in consumption and investment.
Economy and Markets • October 1, 2012 4
Highlighted ChartsThe Fed’s actions are trying to push aggregate demand up to bolster GDP (Exhibit 3).The fiscal cliff threats to shift both aggregate demand and supply leftward, which would severely reduce GDP (Exhibit 4).
Review
Unemployment and Fed Action
Lehman Reaction
QE2Oper. Tw ist
QE3
0
2
4
6
8
10
12
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
%
Unemployment Rate
Source: Bloomberg L.P., BMO Global Asset Management
Interest Rates and Fed Action
Lehman Reaction
QE2 Oper. Tw istQE3
0
2
4
6
8
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
%
30-year Mortgage Rates
10-Yr Tsy Note
Source: Bloomberg L.P., BMO Global Asset Management
QESupply & Demand
Current Demand
Current Supply QE Demand
70
80
90
100
110
120
130
70 80 90 100 110 120 130
GDP
Pric
e
Source: Bloomberg L.P., BMO Global Asset Management
Fiscal Cliff Supply & Demand
Current Demand
Current SupplyClif f Demand
Clif f Supply
70
80
90
100
110
120
130
70 80 90 100 110 120 130
GDP
Pric
e
Source: Bloomberg L.P., BMO Global Asset Management
Exhibit 1 Exhibit 2
Exhibit 3 Exhibit 4
Economy and Markets • October 1, 2012 5
Highlighted items represent either the best- or worst-performing equity sector for the period.Total returns for periods of one year or more are annualized. MSCI indices performance is net of foreign taxes on dividends. Sources: Bloomberg L.P., BMO Global Asset Management
Market Performance SummaryAs of September 30, 2012 Review
EQUITIES (% Returns) 1-Mo 3-Mo 6-Mo 1-Yr 3-Yrs 5-Yrs 10-Yrs 1Q 2012 2Q 2012 3Q 2012 YTD 2012 2011
U.S. Large Cap EquitiesS&P 500® Index 2.58 6.35 3.42 30.21 13.21 1.05 8.01 12.59 -2.75 6.35 16.45 2.11Dow Jones Industrial Average Index 2.75 5.02 3.08 26.52 14.45 2.16 8.60 8.84 -1.85 5.02 12.19 8.38Russell 1000® Index 2.57 6.32 3.01 30.11 13.30 1.24 8.38 12.91 -3.11 6.32 16.31 1.53Russell 1000® Growth Index 1.96 6.11 1.84 29.19 14.73 3.24 8.42 14.69 -4.02 6.11 16.80 2.64Russell 1000® Value Index 3.17 6.50 4.16 30.91 11.83 -0.91 8.17 11.12 -2.20 6.50 15.74 0.39
U.S. Mid Cap EquitiesRussell Midcap® Index 2.14 5.63 1.20 28.43 14.42 2.33 11.27 12.95 -4.19 5.63 14.30 -1.50Russell Midcap® Growth Index 2.00 5.35 -0.56 26.68 14.73 2.53 11.14 14.52 -5.60 5.35 13.88 -1.65Russell Midcap® Value Index 2.23 5.80 2.35 29.27 13.85 1.73 10.98 11.41 -3.26 5.80 14.03 -1.38
U.S. Small-Mid Cap Equities (SMID)Russell 2500TM Index 2.65 5.63 1.28 31.14 13.76 2.34 - 13.04 -4.12 5.63 14.49 -2.75
U.S. Small Cap EquitiesRussell 2000® Index 3.28 5.25 1.60 31.91 12.99 2.22 10.20 12.44 -3.47 5.25 14.23 -4.17Russell 2000® Growth Index 3.00 4.84 0.71 31.18 14.19 2.96 10.59 13.28 -3.94 4.84 14.08 -2.91Russell 2000® Value Index 3.56 5.67 2.49 32.63 11.72 1.35 9.69 11.59 -3.01 5.67 14.37 -5.50
International EquitiesMSCI ACWI ex USA Index (Devlp. & EM) 3.04 7.30 -0.43 13.76 2.50 -4.84 8.66 10.37 -7.20 7.30 9.90 -12.21MSCI EAFE Index (Developed Markets) 2.96 6.92 -0.70 13.75 2.12 -5.24 8.20 10.86 -7.13 6.92 10.08 -12.14MSCI European Monetary Union Index (in €) 0.89 7.99 1.66 18.03 -0.06 -7.51 4.99 9.42 -5.86 7.99 11.23 -15.06MSCI AC Asia Pacific Index 4.57 5.56 -1.55 11.33 3.87 -3.22 8.88 12.01 -6.74 5.56 10.27 -15.11MSCI Emerging Markets Index 6.03 7.74 -1.84 16.93 5.63 -1.28 17.00 14.07 -8.89 7.74 11.98 -18.42
Technology and Growth StocksNASDAQ Composite Index 1.70 6.54 1.47 30.64 14.90 3.96 11.20 18.98 -4.76 6.54 20.73 -0.79
ALTERNATIVES (% Returns) 1-Mo 3-Mo 6-Mo 1-Yr 3-Yrs 5-Yrs 10-Yrs 1Q 2012 2Q 2012 3Q 2012 YTD 2012 2011
DJ UBS Commodity Index 1.71 9.69 4.70 5.99 5.26 -3.03 5.20 0.89 -4.55 9.69 5.63 -13.32MSCI ACWI Commodity Producers Index 4.28 6.90 -4.60 9.79 1.53 -5.11 10.42 4.79 -10.76 6.90 -0.03 -13.84Wilshire U.S. REIT Index -2.23 -0.99 1.81 27.81 16.29 -2.74 6.18 9.87 2.82 -0.99 11.86 5.35S&P Global REIT Index -0.48 2.60 4.63 24.59 11.02 -5.62 5.34 9.90 1.98 2.60 15.00 -2.65S&P Global Infrastructure Index 2.71 4.63 2.21 15.43 5.57 -4.20 9.30 6.85 -2.32 4.63 9.21 -0.21
Economy and Markets • October 1, 2012 6
Total returns for periods of one year or more are annualized. Sources: Barclays Capital, Bloomberg L.P., BMO Global Asset Management
Market Performance SummaryAs of September 30, 2012 Review
U.S. FIXED INCOME (% Returns) 1-Mo 3-Mo 6-Mo 1-Yr 3-Yrs 5-Yrs 10-Yrs 1Q 2012 2Q 2012 3Q 2012 YTD 2012 2011
Barclays U.S. Aggregate Index 0.14 1.58 3.68 5.16 6.19 6.53 5.32 0.30 2.06 1.58 3.99 7.84Barclays U.S. Interm. Gov/Crd Index 0.24 1.40 2.90 4.40 5.18 5.71 4.76 0.61 1.48 1.40 3.53 5.80Barclays U.S. Corporate Index 0.70 3.83 6.45 10.76 9.09 8.06 6.56 2.08 2.52 3.83 8.66 8.15Barclays U.S. Treasury Index -0.31 0.57 3.42 2.99 5.41 6.24 4.81 -1.29 2.83 0.57 2.08 9.81Barclays Securitized Index 0.27 1.28 2.37 4.17 5.56 6.25 5.17 0.74 1.07 1.28 3.13 6.22Barclays High Yield Index 1.39 4.53 6.45 19.37 12.90 9.34 10.98 5.34 1.83 4.53 12.13 4.98Merrill Lynch High Yield BB/B Constr. Index 1.28 4.45 6.44 17.70 11.90 8.35 9.61 4.43 1.91 4.45 11.16 5.40Barclays 1-10 yr Municipals Index 0.50 1.41 2.70 5.14 4.61 5.44 4.30 0.53 1.27 1.41 3.25 7.62Barclays Global Aggregate Bond Index 1.22 3.27 3.91 5.07 5.04 6.22 6.45 0.87 0.62 3.27 4.82 5.64Barclays Global Credit Index 1.46 4.75 5.13 10.97 7.26 6.34 7.37 4.19 0.36 4.75 9.54 4.36
BOND YIELDS Sep 2012 Aug 2012 Jul 2012 Mar 2012 Dec 2011 Sep 2011
Fed Funds Rate (Effective Rate) 0.09 0.13 0.13 0.09 0.04 0.063-month Treasury Bill 0.09 0.07 0.10 0.07 0.01 0.022-year Treasury Note 0.23 0.22 0.21 0.33 0.24 0.255-year Treasury Note 0.63 0.59 0.58 1.04 0.83 0.9510-year Treasury Note 1.63 1.55 1.47 2.21 1.88 1.9230-year Treasury Bond 2.82 2.67 2.55 3.34 2.90 2.91Barclays U.S. Aggregate Index 1.61 1.75 1.73 2.23 2.24 2.35Barclays Corporate Index 2.80 2.90 2.94 3.41 3.76 3.84Barclays High Yield Index 7.19 7.39 7.56 7.73 8.66 9.63Barclays Emerging Markets Index 4.69 4.84 5.00 5.37 6.10 6.61Barclays Emerging Markets Corporate Index 5.10 5.21 5.39 5.55 6.85 7.47
INFLATION Sep 2012 Aug 2012 Jul 2012 Mar 2012 Dec 2011 Sep 2011
Headline CPI YoY NA 1.70 1.40 2.70 3.00 3.90Core CPI YoY NA 1.90 2.10 2.30 2.20 2.00Core PCE YoY NA 1.60 1.60 2.00 1.90 1.60
OTHER MARKETS Sep 2012 Aug 2012 Jul 2012 Mar 2012 Dec 2011 Sep 2011
US$ / Euro 1.286 1.258 1.230 1.334 1.296 1.339WTI Crude Oil Price ($/barrel) 92.2 96.5 88.1 103.0 98.8 79.2Gold ($/troy oz) 1,772 1,692 1,614 1,668 1,564 1,624
Economy and Markets • October 1, 2012 7
Components of Nominal GDP
Government Spending 20.0%
Consumption 70.4%
Investment (ex. Housing) 10.9%
Housing 2.4%
Net Exports-3.8%
Sources: Bloomberg L.P., BMO Global Asset Management
As of 06/30/2012
U.S. GDP Growth
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0D
ec 0
1
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
QoQ
gro
wth
(%)
11,000
11,500
12,000
12,500
13,000
13,500
14,000
GD
P Le
vel (
$ bl
n)
RecessionReal GDP QoQReal GDP Level
Sources: Bloomberg L.P., BMO Global Asset Management
$625 bln of output lost
$848 bln of output gained
Nominal GDP Annualized Percentage Growth By Components
-0.1
3.7
0.2
9.8
23.0
-0.6
3.4
12.6
10.9
-0.8
Government Spending
Consumption
Investment (ex. Housing)
Housing
Net Exports
YoY 06/30/2012
QoQ 06/30/2012
Sources: Bloomberg L.P., BMO Global Asset Management
U.S. Economic GrowthThe U.S. economy grew modestly in the second quarter, with real GDP inching upwards by 1.3%, a number that was revised downward from a previously reported 1.7% growth. Housing and other investments made the largest contribution to economic growth in the last year.
Economy
Economy and Markets • October 1, 2012 8
Inflation Expectations and Nominal CPI
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Dec
05
Jun
06
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
CPI YoYShort-Term Inflation ExpectationsLong-Term Inflation Expectations
Sources: Bloomberg L.P., BMO Global Asset Management
Headline Inflation and 5-yr Treasury Bond Yield
-3.0-2.0-1.00.01.02.03.04.05.06.07.08.0
Dec
99
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
5-Yr Tsy BondCPI YoY
Sources: Bloomberg L.P., BMO Global Asset Management
negative real yield
negative real yield
Urban CPI Components YoY % Change
Weight in Headline CPI
(%)
Headline CPI 1.7 100.0
Food 2.0 13.7
Energy -0.6 8.4
Core CPI (excl. Food and Energy) 1.9 77.9
Housing 1.4 37.9
Transportation 1.4 12.3
Medical Care 4.1 6.5
Recreation 1.2 6.4
Education & Communication 1.5 6.4
Apparel 1.6 3.7
Other Goods & Services 2.4 3.5
Beverages 1.6 1.1
Seasonally adjusted values, as of 08/31/2012
Sources: Bloomberg L.P., BMO Global Asset Management
U.S. InflationDeclining nominal yields pushed real yields into negative territory, despite moderate inflation near the Fed’s unofficial 2% target. Headline inflation (CPI including food and energy) increased by 1.7% in August, but remains materially lower than the 2.0 - 2.3% earlier in the year.
Economy
Economy and Markets • October 1, 2012 9
Consumer Confidence
0
20
40
60
80
100
120
Dec
05
Jun
06
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Univ. Of Michigan Survey of Consumer Confidence SentimentConference Board Consumer Confidence Index
Sources: Bloomberg L.P., BMO Global Asset Management
Savings Rate and Debt
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Dec
05
Jun
06
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Savi
ngs
Rat
e (%
)
2,200
2,300
2,400
2,500
2,600
2,700
2,800
Deb
t
U.S. Savings RateTotal Consumer Debt
Sources: Bloomberg L.P., BMO Global Asset Management
38.9%
17.9%
11.4%
6.8%
25.0%Real Estate
Other Tangible
Deposits
Pension Funds
Other Financial Assets
Consumer Balance Sheet
U.S. ConsumerConsumer confidence reports were mixed in August, as one indicator showed an improvement, while another one declined. A nominal and temporary decline in consumer debt in 2011 has given way to rising consumer debt.
Economy
82.3%
12.6%
5.1%Other Liabilities
Mortgages
Net Worth
38.7%
16.8%
9.3%
5.9%
29.2%Real Estate
Other Tangible
Deposits
Pension Funds
Other Financial Assets
Sources: Federal Reserve Bank, BMO Global Asset Management
82.0%
13.3%
4.8%Other Liabilities
Mortgages
Net Worth
12/31/2007 6/30/2012
Economy and Markets • October 1, 2012 10
U.S. Home Prices-30%
-60%
-48%
-47%
-44%
-38%
-37%
-37%
-35%
-30%
-30%
-28%
-23%
-23%
-22%
-21%
-17%
-12%
-9%
-5%
-3%
1%
-1%
17%
5%
4%
0%
6%
1%
5%
-1%
-10%
6%
-3%
4%
3%
3%
0%
1%
2%
5%
4%
S&P/Case-Shiller Home Prices
Las Vegas NV
Phoenix AZ
Miami FL
Tampa FL
Los Angeles CA
Detroit MI
San Diego CA
San Francisco CA
Chicago IL
Atlanta GA
Minneapolis MN
New York NY
Washington DC
Portland OR
Seattle WA
Cleveland OH
Boston MA
Charlotte NC
Denver CO
Dallas TX
Jul 2012 vs. Peak (Jul 2006)
Jul 2012 vs. Jul 2011
Sources: Bloomberg L.P., BMO Global Asset Management
Housing Affordability Index and Existing Home Sales
100
120
140
160
180
200
220
Dec
98
Dec
99
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Affo
rdab
ility
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
Sale
s (m
ill un
its)
Housing Affordability Index
Existing Homes Sales
Source: Bloomberg L.P., BMO Global Asset Management
Homebuilders Sentiment and Building Permits
0
10
20
30
40
50
60
70
Dec
05
Jun
06
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Build
ers
Sent
imen
t
0
500
1,000
1,500
2,000
2,500
Perm
its (t
hous
and
units
)Homebuilders Sentiment
Building Permits
Source: Bloomberg L.P., BMO Global Asset Management
U.S. Housing MarketRecent housing indicators came in below expectations. Nonetheless, the S&P/Case-Shiller price index has been steadily increasing for four consecutive months, and homebuilders continue to express confidence in sales.
Economy
Economy and Markets • October 1, 2012 11
Job Gain/Losses
-1,000
-800
-600
-400
-200
0
200
400
600
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Mon
thly
(tho
usan
d jo
bs)
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
Cum
ulat
ive
(mill
jobs
)
MonthlyCumulative
Sources: Bloomberg L.P., BMO Global Asset Management
Payrolls Change by Industry
-3%
15%
11%
2%
2%
0%
-1%
-2%
-3%
-5%
-6%
-7%
-13%
-13%
-28%
1%
5%
2%
2%
2%
3%
-1%
1%
2%
1%
2%
1%
1%
2%
0%
Total Non-Farm Payrolls
Mining
Education and Health Services
Utilities
Leisure and Hospitality
Professional and Business Services
Govt Payrolls
Other Services
Transportation and Warehousing
Retail
Wholesale
Finance, Insurance, and Real Estate
Information
Manufacturing
Construction
5-Yr Payroll Change
1-Yr Payroll Change
Sources: Bloomberg L.P., BMO Global Asset Management
As of 08/31/2012
U.S. Job Gains/LossesThe economy added only 96,000 jobs in August, below expectations, and prior month’s gains were revised downward. Total non-farm payrolls increased 1% on a year-over-year basis through the end of August 2012.Cumulative job losses since the onset of the 2008 recession stand at 4.6 million.
Economy
Jobless Claims
300
350
400
450
500
550
600
650
700
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Initia
l Cla
ims
(4 w
eek
avg,
in th
ousa
nds)
2.02.53.03.54.04.55.05.56.06.57.0
Con
tinui
ng C
laim
s (th
ousa
nds)
Continuing ClaimsInitial Jobless Claims
Sources: Bloomberg L.P., BMO Global Asset Management
Economy and Markets • October 1, 2012 12
Unemployment RateWorst 10 States
13.5
12.1
10.7
10.6
9.9
9.7
9.6
9.4
9.2
9.1
Puerto Rico
Nevada
Rhode Island
California
New Jersey
North Carolina
South Carolina
Michigan
Georgia
New York
Sources: Bloomberg L.P., BMO Global Asset Management
Best 10 States
3.0
4.0
4.5
5.1
5.3
5.5
5.7
5.7
5.8
5.9
North Dakota
Nebraska
South Dakota
Oklahoma
Vermont
Iow a
New Hampshire
Wyoming
Utah
Minnesota
08/31/201208/31/2011
Sources: Bloomberg L.P., BMO Global Asset Management
Unemployment Rate and Duration
3
4
5
6
7
8
9
10
11
12
Dec
71
Dec
76
Dec
81
Dec
86
Dec
91
Dec
96
Dec
01
Dec
06
Dec
11
Une
mpl
oym
ent R
ate
(%)
5
10
15
20
25
30
35
40
45
Dur
atio
n (w
eeks
)
RecessionAvg. Unemployment DurationUnemployment Rate
Sources: Bloomberg L.P., BMO Global Asset Management
U.S. UnemploymentThe unemployment rate unexpectedly declined 20 bps in August to 8.1%, primarily due to workers leaving the workforce. The private sector has been steadily adding jobs since early 2010.
Economy
Government and Private Employment
19.0
19.5
20.0
20.5
21.0
21.5
22.0
22.5
23.0
23.5
Dec
95
Dec
96
Dec
97
Dec
98
Dec
99
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Gov
ernm
ent E
mpl
oym
ent (
mill
95
100
105
110
115
120
Priv
ate
Empl
oym
ent (
mill)
Private EmploymentGovernment Employment
Source: Bloomberg L.P., BMO Global Asset Management
Economy and Markets • October 1, 2012 13
Other U.S. Economic IndicatorsRecent leading economic indicators have hooked up.Chicago Fed National Activity Index affirms current growth is below its trend-line average, approaching its lowest point since the recession.
Economic Cycle Research Institute (ECRI) Weekly Leading Index
-40
-30
-20
-10
0
10
20
30
Dec
87
Dec
89
Dec
91
Dec
93
Dec
95
Dec
97
Dec
99
Dec
01
Dec
03
Dec
05
Dec
07
Dec
09
Dec
11
Inde
x G
row
th (%
)
RecessionECRI US Weekly Leading Grow th Rate
Sources: w w w .businesscycle.com, BMO Global Asset Management
Chicago Fed National Activity Index (CFNAI) and Credit Spreads(3-month moving average for CFNAI)
-4.5
-3.5
-2.5
-1.5
-0.5
0.5
1.5
Dec
87
Dec
89
Dec
91
Dec
93
Dec
95
Dec
97
Dec
99
Dec
01
Dec
03
Dec
05
Dec
07
Dec
09
Dec
11
CFN
AI M
A3
50
150
250
350
450
550
650
Cor
pora
te O
AS (b
ps)
RecessionCFNAI 3-Mo MA-0.7 LineCorporate OAS
Sources: Chicago Federal Reserve Bank, Barclays Capital, BMO Global Asset Management
Economy
Conference Board Leading Index Growth
-25
-20
-15
-10
-5
0
5
10
15
Dec
87
Dec
89
Dec
91
Dec
93
Dec
95
Dec
97
Dec
99
Dec
01
Dec
03
Dec
05
Dec
07
Dec
09
Dec
11
Inde
x G
row
th (%
)
Recession LEI CHNG (YoY)
Sources: Bloomberg L.P., BMO Global Asset Management
Economy and Markets • October 1, 2012 14
U.S. Corporate Profits
65
265
465
665
865
1,065
1,265
1,465
1,665
Dec
80
Dec
82
Dec
84
Dec
86
Dec
88
Dec
90
Dec
92
Dec
94
Dec
96
Dec
98
Dec
00
Dec
02
Dec
04
Dec
06
Dec
08
Dec
10
($ b
illion
s)
RecessionU.S. Corporate Profits
Sources: Bloomberg L.P., BMO Global Asset Management
U.S. Business ActivityHousing investment level remains weak, but other fixed investment activity has steadily increased to pre- recession levels. Corporations have reported solid profits, but the growth has recently leveled off.
U.S. Fixed Investment
65
265
465
665
865
1,065
1,265
1,465
1,665
1,865
Dec
80
Dec
82
Dec
84
Dec
86
Dec
88
Dec
90
Dec
92
Dec
94
Dec
96
Dec
98
Dec
00
Dec
02
Dec
04
Dec
06
Dec
08
Dec
10
($ b
illion
s)
RecessionInvestment (ex. Housing)Housing
Sources: Bloomberg L.P., BMO Global Asset Management
Capacity Utilization
65
70
75
80
85
90
Dec
80
Dec
82
Dec
84
Dec
86
Dec
88
Dec
90
Dec
92
Dec
94
Dec
96
Dec
98
Dec
00
Dec
02
Dec
04
Dec
06
Dec
08
Dec
10
(%)
Recession
% Capacity Utilization
Avg. Capacity Utilization During Non-Recessionary Periods
Sources: Bloomberg L.P., BMO Global Asset Management
ISM Purchasing Managers Index (PMI)
30
35
40
45
50
55
60
65
70
75
Dec
80
Dec
82
Dec
84
Dec
86
Dec
88
Dec
90
Dec
92
Dec
94
Dec
96
Dec
98
Dec
00
Dec
02
Dec
04
Dec
06
Dec
08
Dec
10
Inde
x Le
vel
RecessionISM Manufacturing PMIISM Non-Manufacturing PMI
Sources: Institute for Supply Management, Bloomberg L.P., BMO Global AssetManagement
Economy
Economy and Markets • October 1, 2012 15
Net % of U.S. Lenders Reporting Higher Demand for Commercial and Industrial Loans
-80
-60
-40
-20
0
20
40
60
Dec
03
Jun
04
Dec
04
Jun
05
Dec
05
Jun
06
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
(%)
Large and Medium Size FirmsSmall Firms
Sources: Bloomberg L.P., BMO Global Asset Management
U.S. Lending and Banking ActivityDemand for commercial and industrial loans has decreased and banks are tightening credit standards. Loan growth, though, has varied by region.Commercial banks recorded a slow but steady growth in total loans and leases.
U.S. Banks Tightening or Easing Credit Standards(based on Fed survey)
0
10
20
30
40
50
60
70
80
90
2Q 2
007
3Q 2
007
4Q 2
007
1Q 2
008
2Q 2
008
3Q 2
008
4Q 2
008
1Q 2
009
2Q 2
009
3Q 2
009
4Q 2
009
1Q 2
010
2Q 2
010
3Q 2
010
4Q 2
010
1Q 2
011
2Q 2
011
3Q 2
011
4Q 2
011
1Q 2
012
(%)
% Tightening
% Easing
Source: Bloomberg L.P., BMO Global Asset Management
Economy
U.S. Commercial Banks Assets
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
Dec
03
Jun
04
Dec
04
Jun
05
Dec
05
Jun
06
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
($ b
illion
s)
Loans & LeasesTotal Assets
Sources: Bloomberg L.P., BMO Global Asset Management
Economy and Markets • October 1, 2012 16
Developed Countries CPI (YoY %)
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
World Europe G10 CountriesU.S. Japan
Sources: Bloomberg L.P., BMO Global Asset Management
Emerging Markets CPI (YoY %)
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
World BRIC U.S. China
Sources: Bloomberg L.P., BMO Global Asset Management
World Economic Growth and InflationSeveral European economies have slipped into recession. Economic growth slowed in Brazil and India in the first quarter of 2012.World inflation has been declining slightly since the end of 3Q 2011.
Economy
Real GDP Growth for Eurozone and PIIGS Countries
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
2006
2007
2008
2009
2010
2011
YoY
GD
P G
row
th (%
)
Portugal Italy IrelandGreece Spain EurozoneGermany
Sources: Bloomberg L.P., BMO Global Asset Management
Real GDP Growth for BRIC Countries
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
2006
2007
2008
2009
2010
2011
YoY
GD
P G
row
th (%
)
Brazil Russia India China
Sources: Bloomberg L.P., BMO Global Asset Management
Economy and Markets • October 1, 2012 17
Eurozone Percentage Debt to GDP by Country on 12/31/2011
67.7
16.9
37.5
44.2
48.6
52.4
56.7
65.2
68.1
73.6
81.8
84.7
86.3
99.7
105.4
120.1
128.3
161.7
UNITED STATES
LUXEMBOURG
SWEDEN
DENMARK
FINLAND
SWITZERLAND
POLAND
NETHERLANDS
SPAIN
AUSTRIA
GERMANY
FRANCE
BRITAIN
BELGIUM
IRELAND
ITALY
ICELAND
GREECE
Sources: Bloomberg L.P., BMO Global Asset Management
European Governments 10-yr Bond Yields
0
5
10
15
20
25
30
35
Dec
07
Apr 0
8
Aug
08
Dec
08
Apr 0
9
Aug
09
Dec
09
Apr 1
0
Aug
10
Dec
10
Apr 1
1
Aug
11
Dec
11
Apr 1
2
Aug
12
(%)
GermanGreeceItalyIreland (9-year)PortugalSpain
Greek debt restructured
Sources: Bloomberg L.P., BMO Global Asset Management
European EconomiesMany European economies are struggling, being hampered by recession, high debt-to-GDP ratios and high sovereign yields.Efforts to restrain spending are facing hostile opposition with demonstrations in Greece and Spain.
Economy
Real GDP
100
105
110
115
120
125
130
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
GD
P (4
Q02
= 1
00)
USWorldEurozone
G10Japan
Sources: Bloomberg L.P., BMO Global Asset Management
Economy and Markets • October 1, 2012 18
European Central Bank SurveyChange in Demand for Loans to Enterprises Last 3 Months
-50
-40
-30
-20
-10
0
10
20
30
Dec
03
Jun
04
Dec
04
Jun
05
Dec
05
Jun
06
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Inde
x Le
vel
ECB Survey - Loan Demand
Sources: Bloomberg L.P., BMO Global Asset Management
European Countries Purchasing Managers Index (PMI)
30
35
40
45
50
55
60
65
Dec
04
Jun
05
Dec
05
Jun
06
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Inde
x Le
vel
European Countries PMI Output Index
Sources: Bloomberg L.P., BMO Global Asset Management
European Economic Sentiment Indicators
60
70
80
90
100
110
120
Dec
04
Mar
05
Jun
05
Sep
05
Dec
05
Mar
06
Jun
06
Sep
06
Dec
06
Mar
07
Jun
07
Sep
07
Dec
07
Mar
08
Jun
08
Sep
08
Dec
08
Mar
09
Jun
09
Sep
09
Dec
09
Mar
10
Jun
10
Sep
10
Dec
10
Mar
11
Jun
11
Sep
11
Dec
11
Mar
12
Jun
12
Inde
x Le
vel
Eurozone Economic SentimentPortugalItalyGreeceSpainGermany
Sources: Bloomberg L.P., BMO Global Asset Management
European EconomiesDownward trending sentiment indicators from several European countries have been the norm since late 2010. A declining trend in the European Purchasing Managers Index has been broken, the index remaining relatively flat in the last three months.
Economy
Economy and Markets • October 1, 2012 19
BRIC EconomiesOver the past 10 years, emerging markets economies boomed. China grew by approximately 50%, while other Asian and BRICs economies doubled in size. As the world economies slow, near term growth prospects are unambiguously much lower.
Economy
BRIC CountriesPercentage Debt to GDP by Country on 12/31/2011
54.2
8.3
48.5
43.5
64.2
67.7
BRAZIL
RUSSIA
INDIA
CHINA
ENTIRE WORLD
UNITED STATES
Sources: Bloomberg L.P., BMO Global Asset Management
BRIC Governments 10-yr Bond Yields
0
2
4
6
8
10
12
14
Apr 1
0
Jun
10
Aug
10
Oct
10
Dec
10
Feb
11
Apr 1
1
Jun
11
Aug
11
Oct
11
Dec
11
Feb
12
Apr 1
2
Jun
12
Aug
12
(%)
Brazil Russia India China
Sources: Bloomberg L.P., BMO Global Asset Management
Real GDP
100
120
140
160
180
200
220
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
GD
P (4
Q02
= 1
00)
US
World
BRICS
China
Sources: Bloomberg L.P., BMO Global Asset Management
Economy and Markets • October 1, 2012 20
U.S. Dollar Strength Relative to a Basket of Currencies
60
70
80
90
100
110
120
130
Dec
90
Dec
92
Dec
94
Dec
96
Dec
98
Dec
00
Dec
02
Dec
04
Dec
06
Dec
08
Dec
10
Inde
x Le
vel
Sources: Bloomberg L.P., BMO Global Asset Management
U.S. Dollar Strength Relative to Euro
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
Dec
90
Dec
92
Dec
94
Dec
96
Dec
98
Dec
00
Dec
02
Dec
04
Dec
06
Dec
08
Dec
10
USD
/Eur
o
Sources: Bloomberg L.P., BMO Global Asset Management
Stronger Dollar
Stronger Euro
U.S. Dollar Strength Relative to Chinese Yuan
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Dec
90
Dec
92
Dec
94
Dec
96
Dec
98
Dec
00
Dec
02
Dec
04
Dec
06
Dec
08
Dec
10
Yuan
/USD
Sources: Bloomberg L.P., BMO Global Asset Management
Stronger Yuan
Stronger Dollar
U.S. Dollar Strength Relative to Japanese Yen
60
7080
90
100110
120
130140
150
Dec
90
Dec
92
Dec
94
Dec
96
Dec
98
Dec
00
Dec
02
Dec
04
Dec
06
Dec
08
Dec
10
Yen/
USD
Sources: Bloomberg L.P., BMO Global Asset Management
Stronger Yen
Stronger Dollar
CurrenciesThe U.S. dollar has been strengthening since early 2011. The dollar’s relative strength is one factor which explains weak revenue growth in the second quarter.The Fiscal Cliff has the potential to reverse the dollar’s recent strength.
Economy
Economy and Markets • October 1, 2012 21
Total returns are based on Russell-style indices performance and include dividends. Graphs depict price levels only. Sources: Bloomberg L.P., BMO Global Asset Management.
Investment Style PerformanceAll equity styles and market caps posted positive returns YTD. Large cap stocks have outperformed the small cap stocks YTD, as investors de-risked their portfolios in light of renewed concerns regarding the Eurozone debt crisis.
Large Cap Stocks
550
600
650
700
750
800
850
Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12
Inde
x Le
vel
Russell 1000 Index
2011: 1.5% TRYTD 2012 : 16.3% TR
Sources: Bloomberg L.P., BMO Global Asset Management
Small Cap Stocks
600
650
700
750
800
850
900
Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12
Inde
x Le
vel
Russell 2000 Index
Sources: Bloomberg L.P., BMO Global Asset Management
2011: -4.2% TRYTD 2012 : 14.2% TR
YTD9/30/2012
Value Blend Grow th
Larg
e
15.7 16.3 16.8
Mid 14.0 14.3 13.9
Smal
l
14.4 14.2 14.1
Stocks
Total Returns (%)
2011Value Blend Grow th
Larg
e
0.4 1.5 2.6
Mid -1.4 -1.5 -1.7
Smal
l
-5.5 -4.2 -2.9
Economy and Markets • October 1, 2012 22
Total returns are based on Russell-style indices performance and include dividends. Total returns are cumulative returns for the period, not annualized. Peak market date is 10/09/2007. Low market date is 03/09/2009. Graphs depict price levels only. Sources: Bloomberg L.P., BMO Global Asset Management.
Investment Style PerformanceAll equity indices across styles and sizes have doubled in size since their post-crisis lows. However, large cap value stocks remain below their all time highs.
Total Returns (%)As of 09/30/2012
Small Cap Stocks
300
400
500
600
700
800
900
Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11
Inde
x Le
vel
Russell 2000 Index
Sources: Bloomberg L.P., BMO Global Asset Management
Since 10/09/2007Peak: 6.2% TR
Since 03/09/2009 Low: 156.2% TR
Large Cap Stocks
350
450
550
650
750
850
Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11
Inde
x Le
vel
Russell 1000 Index
Since 10/09/2007Peak: 3.6% TR
Since 03/09/2009 Low: 132.4% TR
Sources: Bloomberg L.P., BMO Global Asset Management
10/9/2007Value Blend Grow th
Larg
e
-6.9 3.6 14.2
Mid 5.8 8.8 9.8
Smal
l
2.3 6.2 9.6
Since Peak
Stocks
3/9/2009Value Blend Grow th
Larg
e
132.2 132.4 132.9
Mid 170.2 162.5 153.8
Smal
l
153.1 156.2 158.8
Since Low
Economy and Markets • October 1, 2012 23
Investment Style ValuationsCurrent multiples of U.S. small cap companies are near their historical norms, but appear elevated relative to large cap companies P/Es. Growth stocks appear cheap across the market cap spectrum.
*Data begins in June 1988. Data based on Russell- style indices. Earnings are estimated earnings for the next 12 months (NTM). Sources: Factset, BMO Global Asset Management.
Stocks
Value vs. Growth Price to NTM Earnings
0.3x
0.4x
0.5x
0.6x
0.7x
0.8x
0.9x
1.0x
1.1x
Jun 88 Jun 90 Jun 92 Jun 94 Jun 96 Jun 98 Jun 00 Jun 02 Jun 04 Jun 06 Jun 08 Jun 10 Jun 12
Valu
e PE
/ G
row
th P
E
Value / Grow th Avg. sinceJun '88
Russell 1000 Value PE /Russell 1000 Grow th PE
Grow th Cheaper
Value Cheaper
Sources: FactSet, BMO Global Asset Management
Small vs. Large Price to NTM Earnings
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
Jun 88 Jun 90 Jun 92 Jun 94 Jun 96 Jun 98 Jun 00 Jun 02 Jun 04 Jun 06 Jun 08 Jun 10 Jun 12
Smal
l Cap
PE
/ Lar
ge C
ap P
E
Small / Large Avg. since Jun '88Russell 2000 PE / Russell 1000 PE
Sources: FactSet, BMO Global Asset Management
Large Cap Cheaper
Small Cap Cheaper
Current P/E (Avg. P/E)
Value Blend Grow th
Larg
e 11.6 (13.5)
13.0 (16.0)
14.9 (19.9)
Mid 12.7
(13.6)14.1
(15.5)16.2
(19.6)
Smal
l 13.2 (13.6)
14.4 (15.4)
15.8 (18.0)
Current PE as % of Avg PE
Value Blend Grow th
Larg
e
86.2% 81.5% 74.9%
Mid 92.9% 91.0% 82.7%
Smal
l
97.2% 93.1% 88.0%
P/E vs. Long Term Average* As of 09/30/2012
Economy and Markets • October 1, 2012 24
As of 09/30/2012 Russell Index Materials and
Processing Utilities Consumer Staples Energy Producer
Durables Health Care Consumer Discretionary Financials Technology
YTD 2012 16.3% 12.9% 12.7% 9.6% 6.9% 11.8% 19.6% 22.3% 20.9% 20.0%
MTD 2.6% 3.5% 2.6% 1.1% 3.5% 2.1% 4.2% 3.0% 3.1% 0.8%
2011 1.5% -6.9% 12.6% 12.1% 3.5% -1.9% 11.8% 5.5% -12.9% 0.3%
YTD 2012 14.2% 18.2% 8.6% 11.2% -3.0% 8.2% 26.3% 19.5% 18.6% 6.7%
MTD 3.3% 5.8% 4.2% 2.0% 5.5% 3.4% 4.6% 3.1% 3.0% 0.6%
2011 -4.2% -8.9% 10.5% 5.0% -6.4% -6.1% 2.2% -7.2% -2.9% -8.4%
LARG
E CA
P EQ
UITI
ESSM
ALL
CAP
EQUI
TIES
Russell 1000 Index Composition
4.4%6.2%
10.6%
11.2%14.7%
16.8%
17.1%
10.3%
8.6%
Russell 2000 Index Composition
7.2%4.1%
13.1%
13.3%15.2%
22.6%
14.3%
3.8%
6.5%
Sources: Bloomberg L.P., BMO Global Asset Management . Sector break-down based on Russell categories.
Sector PerformanceThe Consumer Discretionary sector was the top performer in the large cap category and the Health Care sector was the leader in the small cap category through the end of September 2012.The energy sector was the laggard in 2012 through the end of September 2012.
Materials and Processing
Utilities
Consumer Staples
Energy
Producer Durables
Health Care
Consumer Discretionary
Financials
Technology
Stocks
Economy and Markets • October 1, 2012 25
Dividend Yield
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Dec
82
Dec
84
Dec
86
Dec
88
Dec
90
Dec
92
Dec
94
Dec
96
Dec
98
Dec
00
Dec
02
Dec
04
Dec
06
Dec
08
Dec
10
(%)
Russell 1000 Div YldAverage Div YldAvg +/- Stdev Div Yld5-Yr Tsy Bond
Sources: FactSet, Bloomberg L.P., BMO Global Asset Management
Year-End Consensus EPS Estimate for the S&P500 Index
2011 YE 96.8
2012 YE
103.1
114.9
2013 YE
90
95
100
105
110
115
120
125
Dec
09
Mar
10
Jun
10
Sep
10
Dec
10
Mar
11
Jun
11
Sep
11
Dec
11
Mar
12
Jun
12
($)/S
hare
Sources: FactSet, BMO Global Asset Management
Implied Stock Market Volatility and the S&P 500 Index
600700
800900
1,0001,1001,200
1,3001,400
1,5001,600
Dec
07
Mar
08
Jun
08
Sep
08
Dec
08
Mar
09
Jun
09
Sep
09
Dec
09
Mar
10
Jun
10
Sep
10
Dec
10
Mar
11
Jun
11
Sep
11
Dec
11
Mar
12
Jun
12
Sep
12
S&P
500
Inde
x
0
10
20
30
40
50
60
70
80
90
VIX
Inde
x
S&P 500 IndexVIX Index
Sources: Bloomberg L.P., BMO Global Asset Management
Other Stock Valuations and MetricsStocks offer an attractive dividend yield when compared to the risk-free rate. The estimated EPS for 2012 translates into an 6.5% growth in earnings, recording a small improvement from prior month. At its 2012 peak, the estimated growth in earnings was 10.2%.
Stocks
U.S. Large Cap Stocks Price to NTM Earnings
8
10
12
14
16
18
20
22
24
26
Jun
88
Jun
90
Jun
92
Jun
94
Jun
96
Jun
98
Jun
00
Jun
02
Jun
04
Jun
06
Jun
08
Jun
10
Jun
12
Larg
e C
ap P
E
Russell 1000 PEAvg. Large Cap PE since Jun '88
Sources: FactSet, BMO Global Asset Management
Economy and Markets • October 1, 2012 26
0.1 0.0 0.21.3
0.2 0.7 0.21.4
0.61.6
0.8 1.2
3.8
1.1
3.82.5
4.5
2.1
4.0
2.03.4
8.3
2.8
8.7
6.7
12.1
-0.3
-3.0-1.50.01.53.04.56.07.59.0
10.512.013.5
Treasuries U.S. Agg. Agencies ABS CMBS MBS Corporates Non-Corp HY
Bon
ds T
otal
Ret
urns
(%)
1-Mo 3-Mo YTD (09/28/2012)
U.S. Bond Market Performance All bond sectors posted positive returns in 2012. Despite renewed Eurozone fears, credit sectors posted strong returns and High Yield leads with 12.1% YTD. Bonds
40 15 21129
30117 62
14710737 77
332
71
324191
394
19886
226
713
115
604
427
1,025
NA
-300-150
0150300450600750900
1,0501,200
Treasuries U.S. Agg. Agencies ABS CMBS MBS Corporates Non-Corp HYBon
ds E
xces
s R
etur
ns v
s. T
reas
urie
s W
ith S
imila
r Dur
atio
n (b
ps)
Sources: Barclays Capital, BMO Global Asset Management
Economy and Markets • October 1, 2012 27
Fed Funds Futures- Market Expectations for the Fed Funds Rate -
0.0
0.1
0.2
0.3
0.4
Sep
11
Dec
11
Mar
12
Jun
12
Sep
12
Dec
12
Mar
13
Jun
13
Sep
13
Dec
13
Mar
14
Jun
14
Sep
14
Futures Expiration Date
(%)
09/30/201106/29/201209/28/2012Target
Sources: Bloomberg L.P., BMO Global Asset Management
Treasury Yield Curve
0.0
1.0
2.0
3.0
4.0
5.0
3 m
o6
mo
2 yr
5 yr
10 y
r
20 y
r
30 y
r
(%)
12/31/201012/31/201109/30/2012
Sources: Bloomberg L.P., BMO Global Asset Management
U.S. Treasury Yields
0.0
1.5
3.0
4.5
6.0
Dec
05
Jun
06
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
(%)
3-Mo T-Bill2-Yr Tsy Note10-Yr Tsy Note
Sources: Bloomberg L.P., BMO Global Asset Management
Implied Forecast of Treasury Yields from Futures Market
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
3 m
o6
mo
2 yr
5 yr
10 y
r
20 y
r
30 y
r(%)
Implied Yields from FuturesCurve on 06/28/2013
Yield Curve on 09/30/2012
Sources: Bloomberg L.P., BMO Global Asset Management
U.S. Treasury Yields In 2012, yields have decreased modestly across the yield curve, reaching historical lows. Fed Funds rate expectations have fallen further, as the Fed expects to maintain low rates “at least through mid-2015.” Bonds
Economy and Markets • October 1, 2012 28
U.S. Credit OAS(month-end)
0
100
200
300
400
500
600
Jan
97
Jan
98
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Avg (147 bps)Avg + 1 Stdev (231 bps)Avg + 2 Stdev (315 bps)
Source: Barclays Capital, BMO Global Asset Management
U.S. Investment Grade Corporates OAS(month-end)
0
100
200
300
400
500
600
700
Jan
97
Jan
98
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Avg (158 bps)Avg + 1 Stdev (254 bps)Avg + 2 Stdev (350 bps)
Source: Barclays Capital, BMO Global Asset Management
The average and standard deviation are calculated using monthly data starting January 1997.
Bond SpreadsCorporate spreads have been on a declining path since end of May through mid-September, as investors searched for yields. Even though spreads have widened in the past two weeks as Eurozone fear moved investors away from risk, they landed below the August 31 level.
Bonds
Corporate Bonds OAS Level(daily)
100
150
200
250
300
350
400
Jan
10
Mar
10
May
10
Jul 1
0
Sep
10
Nov
10
Jan
11
Mar
11
May
11
Jul 1
1
Sep
11
Nov
11
Jan
12
Mar
12
May
12
Jul 1
2
Sep
12
Inve
stm
ent G
rade
OAS
(bps
)
400
450
500
550
600
650
700
750
800
850
900
Hig
h Yi
eld
OAS
(bps
)
CorporatesFinancialsHY
Sources: Barclays Capital, BMO Global Asset Management
Economy and Markets • October 1, 2012 29
BBB-Rated U.S. Corporates OAS
0
100
200
300
400
500
600
700
800
Jan
97
Jan
98
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Avg (203 bps)Avg + 1 Stdev (320 bps)Avg + 2 Stdev (437 bps)
Source: Barclays Capital, BMO Global Asset Management
Emerging Markets OAS
0
100
200
300
400
500
600
700
800
900
1,000
Aug
00
Aug
01
Aug
02
Aug
03
Aug
04
Aug
05
Aug
06
Aug
07
Aug
08
Aug
09
Aug
10
Aug
11
Aug
12
Avg (421 bps)Avg + 1 Stdev (624 bps)Avg + 2 Stdev (828 bps)
Source: Barclays Capital, BMO Global Asset Management
Emerging Markets Corporates OAS
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Aug
00
Aug
01
Aug
02
Aug
03
Aug
04
Aug
05
Aug
06
Aug
07
Aug
08
Aug
09
Aug
10
Aug
11
Aug
12
Avg (528 bps)Avg + 1 Stdev (846 bps)Avg + 2 Stdev (1165 bps)
Source: Barclays Capital, BMO Global Asset Management
The average and standard deviation are calculated using monthly data starting in January 1997 for the U.S. series, and starting in August 2000 for the Emerging Markets series.
Bond Spreads Emerging market spreads on government and corporate debt tightened in September.
Bonds
U.S. High Yield Corporates OAS
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan
97
Jan
98
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Avg (567 bps)Avg + 1 Stdev (840 bps)Avg + 2 Stdev (1113 bps)
Source: Barclays Capital, BMO Global Asset Management
Economy and Markets • October 1, 2012 30
AAA Municipals and Treasury Yield Curves
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
3 m
o6
mo
2 yr
5 yr
10 y
r
20 y
r
30 y
r
Yiel
d (%
)
Municipals Curve on 09/30/2012
Treasury Curve on 09/30/2012
Sources: Bloomberg L.P., BMO Global Asset Management
AAA Municipals vs. Treasury Yields
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Dec
05
Jun
06
Dec
06
Jun
07
Dec
07
Jun
08
Dec
08
Jun
09
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Ratio of 10-Yr AAA Muni Yield to 10-Yr Treasury YieldRatio of 30-Yr AAA Muni Yield to 30-Yr Treasury YieldRatio of 1
Sources: Bloomberg, L.P., BMO Global Asset Management
Yield Spread vs. 10-year AAA Municipal Bond
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
A SpreadBBB Spread
Sources: Bloomberg, L.P., BMO Global Asset Management
AAA Municipals Bond Yields
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
10-Yr AAA Muni30-Yr AAA Muni
Sources: Bloomberg, L.P., BMO Global Asset Management
Municipal Bonds Longer-maturity AAA-rated Municipals bonds carry a higher yield than Treasury securities with similar maturities. In addition, investors get a healthy yield pick-up by moving down the quality spectrum. Bonds
Economy and Markets • October 1, 2012 31
* The average OAS and standard deviation of OAS for Emerging Markets indices are based on monthly data starting in August 2000.Sources: Barclays Capital, BMO Global Asset Management
Bond Market SnapshotBonds
09/28/2012 U.S. Aggregate
U.S. Treasury
1-10 yr Municipals
Inv. Grade Corporates
Finance Industrial MBS High Yield
Emerging Markets
(EM)
EM Corporates
MTD Total Return 0.14 -0.31 0.50 0.70 1.31 0.47 0.21 1.39 1.59 1.59
3-Mo Total Return 1.58 0.57 1.41 3.83 5.05 3.26 1.13 4.53 6.77 5.71
YTD Total Return 3.99 2.08 3.25 8.66 12.51 6.82 2.80 12.13 14.19 13.63
12-Mo Total Return 5.16 2.99 5.14 10.76 13.89 9.26 3.71 19.37 19.82 19.10
MTD Excess Return 0.40 NA NA 1.17 1.58 1.00 0.30 1.47 1.92 1.79
3-Mo Excess Return 1.07 NA NA 3.24 4.45 2.67 0.71 3.94 6.06 4.97
YTD Excess Return 1.98 NA NA 6.04 10.32 4.02 1.15 10.25 11.17 10.89
12-Mo Excess Return 2.30 NA NA 6.99 10.74 5.26 1.41 16.71 15.53 15.16
Yield to Maturity 1.61 0.82 NA 2.80 2.77 2.76 1.77 7.19 4.69 5.10
OAS 49 NA NA 156 179 143 24 551 330 387
Average* OAS (since Jan 1997) 66 NA NA 158 168 153 61 567 421 528
Stdev* of OAS (since Jan 1997) 36 NA NA 96 133 76 31 273 203 318
Duration (Mod. Adj.) 4.85 5.59 4.20 7.20 5.71 7.67 2.34 4.04 6.78 5.93
Maturity (years) 6.73 6.82 6.12 10.65 7.91 11.52 3.80 6.65 11.13 8.73
Coupon 3.67 2.28 4.83 5.11 5.08 5.05 4.44 8.04 6.83 6.38
Price 109.94 108.45 113.23 114.48 111.53 115.43 108.62 103.29 113.26 107.02
Market Value ($ millions) 16,815,236 6,067,598 656,423 3,551,384 1,147,492 2,006,601 5,051,508 1,081,790 798,335 170,994
Quality AA1/AA2 AAA/AAA AA2/AA3 A3/BAA1 A2/A3 A3/BAA1 AAA/AAA B1/B2 BAA3/BA1 BAA3/BA1
Economy and Markets • October 1, 2012 32
Commodities Commodities have seen increased correlation to equity prices since the onset of the last credit crisis, but a short-lived decoupling can be observed at the beginning of 2012.
Alternative Assets
Commodities and Stocks
0
50
100
150
200
250
Dec
91
Dec
92
Dec
93
Dec
94
Dec
95
Dec
96
Dec
97
Dec
98
Dec
99
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Com
mod
ities
Inde
x Le
ve
0
500
1,000
1,500
2,000
Stoc
k In
dex
Leve
l
DJ UBS Commodity Index
S&P 500 Index
Sources: Bloomberg L.P., BMO Global Asset Management
As of 09/30/2012
DJ UBS Agriculture
Index
DJ UBS Livestock
Index
DJ UBS Grains Index
DJ UBS Energy Index
DJ UBS Precious
Metals Index
DJ UBS Industrial
Metals Index
DJ UBS Commodity
IndexS&P 500 Index
MTD -4.4 -2.1 -4.9 2.3 10.2 11.0 1.7 2.6
YTD 15.8 -7.9 33.7 -4.4 -0.4 4.4 5.6 16.4
2011 -14.4 -2.4 -14.5 -16.0 -18.5 -24.3 -13.3 2.1
Sources: Bloomberg L.P., BMO Global Asset Management
Economy and Markets • October 1, 2012 33
Crude Oil and Natural Gas Prices
0
20
40
60
80
100
120
140
160
Dec
90
Dec
92
Dec
94
Dec
96
Dec
98
Dec
00
Dec
02
Dec
04
Dec
06
Dec
08
Dec
10
Cru
de O
il ($/
barb
ell
0
2
4
6
8
10
12
14
16
Nat
ural
Gas
($/B
tu)
Crude Oil
Natural Gas
Sources: Bloomberg L.P., BMO Global Asset Management
CommoditiesMost major commodity groups have posted positive returns year to date. Oil prices are the exception.The effect of the drought is evident in grain returns.
Alternative Assets
Price of Gold
0
250
500
750
1,000
1,250
1,500
1,750
2,000
Dec
90
Dec
92
Dec
94
Dec
96
Dec
98
Dec
00
Dec
02
Dec
04
Dec
06
Dec
08
Dec
10
Gol
d ($
/troy
oz)
Gold
Sources: Bloomberg L.P., BMO Global Asset Management
Commodities Total Return
-15.2
2.810.1
-18.5
5.7
-32.1
-13.3
28.6
17.013.3
-7.0
11.15.6
1.5 4.78.7
-4.4
18.6
1.78.6
-5.8
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
Wheat Corn Gold Copper West Texas Oil Natural Gas DJ UBS CommodityIndex
(%)
2011 YTD (09/30/12) MTD (09/30/12)
Sources: Bloomberg L.P., BMO Global Asset Management
Economy and Markets • October 1, 2012 34
REITS and Stocks
0
50
100
150
200
250
300
Dec
99
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
REI
T In
dex
Leve
0
500
1,000
1,500
2,000
Stoc
k In
dex
Leve
l
Wilshire U.S. REIT IndexS&P 500 Index
Sources: Bloomberg L.P., BMO Global Asset Management
Global Infrastructure and Stocks
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Dec
99
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Infra
stru
ctur
e In
dex
Leve
l
0
500
1,000
1,500
2,000
Stoc
k In
dex
Leve
l
S&P Global Infrastructure IndexS&P 500 Index
Sources: Bloomberg L.P., BMO Global Asset Management
Other Alternative AssetsREITs have underperformed the large cap equities year to date. Alternative
Assets
Alternatives Total Return
82.268.2
116.1
-13.0-25.1 -19.3
5.45.4
-2.7
2.111.9 15.0 9.2
16.4
143.3
-0.2
-50.0
-25.0
0.0
25.0
50.0
75.0
100.0
125.0
Wilshire U.S. REIT Index S&P Global REIT Index S&P Global Infrastructure Index S&P 500 Index
(%) 10-Yr (09/30/12)5-Yr (09/30/12)2011YTD (09/30/12)
Sources: Bloomberg L.P., BMO Global Asset Management
Economy and Markets • October 1, 2012 35
Dan Sido Chief Investment Strategist
Sandy Lincoln Chief Market Strategist
Bob Decker, CFA Director, Quantitative Strategies
Irina Pacheco, CFA Vice President, Quantitative Strategies
Investment Strategy Group
Economy and Markets • October 1, 2012 36
Index Definitions
Equity IndicesS&P 500 IndexS&P 500® Index is an unmanaged index of large-cap common stocks. Dow Jones Industrial AverageThe Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.Russell 1000 IndexRussell 1000® Index consists of approximately 1,000 of the largest companies in the U.S. equity markets.Russell 1000 Growth IndexRussell 1000® Growth Index measures the performance of those Russell 1000 Companies with higher price-to-book ratios and higher forecasted growth values.Russell 1000 Value IndexRussell 1000® Value Index measures the performance of those Russell 1000 Companies with lower price-to-book ratios and lower forecasted growth values.Russell Midcap IndexRussell Midcap® Index measures the performance of the smallest 800 U.S. companies in the Russell 1000 Index. Russell Midcap Growth IndexRussell Midcap® Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values.Russell Midcap Value IndexRussell Midcap® Value Index measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values.Russell 2500 IndexThe Russell 2500TM Index measures the performance of the small to mid-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index.Russell 2000 IndexRussell 2000® Index is an unmanaged index that measures the performance of the smallest 2000 U.S. companies in the Russell 3000® Index.Russell 2000 Growth IndexRussell 2000® Growth Index measures the performance of those Russell 2000 Companies with higher price-to-book ratios and higher forecasted growth values.Investments cannot be made in an index.
Russell 2000 Value IndexRussell 2000® Value Index measures the performance of those Russell 2000 Companies with lower price-to-book ratios and lower forecasted growth values.MSCI ACWI ex USA IndexThe MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.MSCI EAFE Index (Developed Markets)The MSCI EAFE Index Europe, Australasia, and Far East Index (EAFE) is a standard unmanaged foreign securities index representing major non-U.S. stock markets, as monitored by Morgan Stanley Capital International.MSCI European Monetary Union IndexThe MSCI EMU (European Economic and Monetary Union) Index is a free float- adjusted market capitalization weighted index that is designed to measure the equity market performance of countries within EMU.MSCI AC Asia Pacific IndexThe MSCI AC Asia Pacific Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia and Pacific region.MSCI Emerging Markets IndexThe MSCI Emerging Markets Index is a market capitalization weighted index comprised of over 800 companies representative of the market structure of the emerging countries in Europe, Latin America, Africa, Middle East and Asia. Prior to January 1, 2002, the returns of the MSCI Emerging Markets Index were presented before application of withholding taxes.NASDAQ Composite IndexThe NASDAQ Composite Index is a market-cap weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange.STOXX Europe 600 IndexThe STOXX Europe Index represents 600 large, mid, and small capitalization companies across 18 countries of the European Region.
Economy and Markets • October 1, 2012 37
Fixed Income IndicesBarclays U.S. Aggregate IndexBarclays Capital U.S. Aggregate Bond Index is an unmanaged index that covers the U.S. investment-grade fixed-rate bond market, including government and credit securities, agency mortgage pass-through securities, asset-backed securities and commercial mortgage-based securities.Barclays U.S. Interm. Gov/Crd IndexBarclays Capital Intermediate U.S. Government/Credit Index (Barclays Capital Int Gov’t/Credit) is an unmanaged index comprised of government and corporate bonds rated BBB or higher with maturities between 1-10 years.Barclays U.S. Corporate IndexThe Barclays Capital U.S. Corporate Bond Index is designed to measure the performance of the U.S. corporate bond market.Barclays U.S. Treasury IndexThe Barclays Capital U.S. Treasury Index is an unmanaged index that includes a broad range of U.S. Treasury obligations and is considered representative of U.S. Treasury bond performance overall.Barclays Securitized IndexThe Barclays Capital U.S. Securitized Bond Index is an unmanaged index of asset- backed securities, collateralized mortgage-backed securities (ERISA-eligible), and fixed-rate mortgage-backed securities.Barclays High Yield IndexThe Barclays Capital U.S. Corporate High-Yield Bond Index is an unmanaged index that covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market.BofA Merrill Lynch High Yield BB/B Constr. IndexThe BofA Merrill Lynch BB-B Global High Yield Index is a subset of The BofA Merrill Lynch Global High Yield Index including all securities rated BB1 through B3, inclusive.
Barclays 1-10 yr Municipals IndexThe Barclays Capital 1-10 Year Municipal Blend Index is a market value-weighted index which covers the short and intermediate components of the Barclays Capital Municipal Bond Index—an unmanaged, market value-weighted index which covers the U.S. investment-grade tax-exempt bond market.
Investments cannot be made in an index.
Barclays Global Aggregate Bond IndexThe Barclays Capital Global Aggregate Bond Index is an index of global government, government-related agencies, corporate and securitized fixed-income investments.Barclays Global Credit IndexThe Barclays Global Credit Index is the credit component of the Barclays Global Aggregate Index, an index of global government, government-related agencies, corporate and securitized fixed-income investments.
Index Definitions
Economy and Markets • October 1, 2012 38
Index Definitions
Alternative Investments IndicesDJ UBS Commodity IndexThe Dow Jones-UBS Commodity Index is composed of commodities traded on U.S. exchanges.MSCI ACWI Commodity Producers IndexThe MSCI ACWI Commodity Producers Index is a component of the broader MSCI Commodity Producers Indices and covers large, mid and small cap companies across 45 Developed and Emerging Markets.Wilshire US REIT IndexThe Wilshire US REIT Index measures U.S. publicly traded Real Estate Investment Trusts. It is a subset of the Wilshire US Real Estate Securities Index.S&P Global REIT IndexThe S&P Global REIT Index measures the performance of real estate investment trusts in both developed and emerging markets.S&P Global Infrastructure IndexThe S&P Global Infrastructure Index provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe including utilities, transportation and energy.
Other IndicesS&P/Case-Shiller 20-City IndexThe S&P/Case-Shiller 20-City Index is a composite index of the home price index for 20 major metropolitan statistical areas in the U.S.VIX IndexThe Chicago Board Options Exchange Market Volatility Index is a measure of implied volatility of S&P 500 index options, often referred to as the “fear” index.CPI IndexThe Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.
Investments cannot be made in an index.
Economic Cycle Research Institute (ECRI) Weekly Leading IndexECRI Index is released each Friday by the Economic Cycle Research Institute, and identifies turning points in the economic cycle that are indicated by pronounced changes in the index. The index contains money supply data, stock prices, an industrial markets price index developed by the organization, mortgage applications, bond quality spread, bond yields, and initial jobless claims. An advantage of the index is that it is very timely. ECRI is a New York-based independent forecasting group.Conference Board Leading Economic Index® (LEI) for the U.S.The leading economic index is composite average of several individual leading indicators. It is constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component – primarily because it smoothes out some of the volatility of individual components.Chicago Fed National Activity (CFNAI) IndexThe Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure and it is a weighted average of 85 existing monthly indicators. A zero value indicates that the economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth. When the 3-month moving average moves below -0.7 following a period of economic expansion, there is an increased likelihood that a recession has begun. When the 3-month moving average moves above +0.7 more than two years into an economic expansion, there is an increased likelihood that a period of sustained increasing inflation has begun (source: www.chicagofed.org).Citigroup Economic Surprise IndexThe Citigroup Economic Surprise Index is a weighted historical standard deviations of data surprises (actual releases vs. Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have, on balance, been beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The index also employs a time decay function to replicate the limited memory of markets.
Economy and Markets • October 1, 2012 39
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This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested. Investments cannot be made in an index. Past performance is not necessarily a guide to future performance.
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