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Second Quarter 2003 Market Update. 2 Discussion Topics  Economic Backdrop  Equity Markets  Fixed Income/High Yield  Conclusions.

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Presentation on theme: "Second Quarter 2003 Market Update. 2 Discussion Topics  Economic Backdrop  Equity Markets  Fixed Income/High Yield  Conclusions."— Presentation transcript:

1 Second Quarter 2003 Market Update

2 2 Discussion Topics  Economic Backdrop  Equity Markets  Fixed Income/High Yield  Conclusions

3 3 Major Factors Affecting the U.S. Market Q2 2003 PositiveNegative Monetary policyEconomic activity Fiscal policy Corporate earnings Geopolitics Neutral Energy prices Inflation Another Fed interest rate cut Weak employment numbers and generally tepid data Oil and natural gas prices still high, despite end to war in Iraq Tax cut legislation approved Q1 results better than expected Still low, but Fed cites risk of deflation Iraq war ends more quickly than expected

4 4 Employment Still Weak Source: Haver Analytics as of 5/31/03 Unemployment rate rises to 6.1% -- highest in nine years

5 5 Decelerating Inflation Leads to Deflation Worries Source: Haver Analytics as of 5/31/03 As producers face flattening prices, concerns arise about potential sustained deflation

6 6 Oil and Natural Gas Prices Still High Source: Haver Analytics as of 6/30/03 Above average oil and gas prices raise costs for businesses and households

7 7 Mortgage Refinancing Activity Hits Historic Highs Source: Bloomberg as of 6/27/03 As mortgage rates hit all- time lows, consumers use refi to pay down debt and maintain spending

8 Domestic Equity

9 9 Performance of Domestic Equities Source: FMRCo as of 6/30/03 Strong, broad-based market gains led by small caps Highest quarterly returns since 1998

10 10 Stock Market Performance (YTD as of 6/30/03) Source: FactSet as of 6/30/03 Up 22% from March 11 th low

11 11 Style and Cap Performance Note: The above styles are represented by: LV – Russell 1000 Value, LB – Russell 1000, LG – Russell 1000 Growth, MV – Russell Mid Cap Value, MB – Russell Mid Cap, MG – Russell MC Growth, SV – Russell 2000 Value, SB – Russell 2000, SG – Russell 2000 Growth Source: FMRCo as of 6/30/03 ValueBlendGrowth Large Cap 17.3 (1.0) 15.7 1.0 14.3 2.9 Mid Cap 17.9 (0.6) 18.3 2.6 18.8 7.4 Small Cap 22.7 (3.8) 23.4 (1.6) 24.2 0.7 2Q03 One Year All styles and caps post large gains Several boxes now in positive territory over past year

12 12 Q2 Sector Performance Source: FMRCo as of 6/30/03 First time on record all 10 sectors up more than 5% Beaten down telecom and utilities lead the rebound Economically sensitive sectors post strong returns Less cyclical sectors trail

13 13 Industry Reversal: Beaten-Down Stocks Lead Rally Source: FMR Co. as of 6/30/03 YTD (as of 6/30/03) Previous 3 Years (1/00 - 12/02) Best YTD Industries Internet Software100.0-79.5 Wireless Telecom47.6-86.2 Biotechnology32.8-27.0 Multi-Utilities30.7-88.6 Semiconductor Equipment29.7-66.8 Communications Equipment23.9-87.4 Worst YTD Industries Food & Staples Retail-6.2-14.9 Diversified Telecom-2.3-63.7 Food Products-1.821.8 Container & Packaging-0.3-16.2 Aerospace & Defense0.7-6.8 Chemicals0.8-16.9 S&P 50011.8-37.7 High Beta industries suffered in bear market but rebound in 2003

14 14 Market Breadth Indicates Broad-Based Rally Source: FMR Co. as of 6/27/03 84% of stocks are above their 40-week moving average 470 out of the S&P 500 stocks registered positive gains in Q2

15 15 Uptick in Mutual Fund Flows Source: Simfund as of 5/31/03 Domestic Equity Net Monthly Mutual Fund Flows After lengthy period of outflows, investors move back into stocks

16 16 Earnings Rebound in Q1 Note: First Call earnings estimates Source: FactSet as of 6/30/030 Earnings of S&P 500 Companies 12% earnings growth in Q1 exceeded expectations

17 17 Valuations High, Depend on Strength of Earnings Recovery Note: Trailing earnings are Compustat. Forward earnings are First Call. Source: FactSet as of 5/31/03 Market rally drives PEs back up – well above historical average But valuations more reasonable if earnings growth meets expectations

18 International Equity

19 19 International Equities Performance Note: All returns are gross. The above countries are represented by: Europe – MS Europe, Japan – MS Japan, Emerging Markets – MS EMF. Source: FMRCo as of 6/30/03 Rebound in Latin America and apparent SARS containment in Asia drive emerging markets Higher than the S&P 500 ECB rate cut bolsters broad-based rally

20 20 Falling Dollar Boosts International Stock Returns Trade-Weighted U.S. Dollar Source: Haver Analytics as of 6/30/03 Eurozone Stocks YTD Returns € 1.2% $10.7% Dollar down 19% since early 2002 peak – and 24% versus Euro

21 21 Struggling Global Economy GDP Growth (%) Q1 20032003 Estimate Euro Zone0.70.8 UK0.21.4 Japan0.01.3 Estimated 2003 GDP Growth (%) Emerging AsiaPre-SARSRevised China8.07.0 South Korea3.73.5 Taiwan3.52.7 Malaysia4.43.5 Thailand5.04.3 Source: ABN AMRO,, Lehman Brothers as of 5/31/03 Anemic Q1 growth in largest foreign economies expected to pick up a bit Fastest growing region in world slowed by SARS

22 Fixed Income

23 23 Fixed Income Performance Note: The above styles are represented by the following indexes: Treasury – LB Treasury, Aggregate – LB Aggregate Bond, Agency – LB US Agency, MBS – LB MBS, ABS – LB ABS, Credit – LB Credit Bond, High Yield – ML US High Yield Master II. Source: Lehman Brothers, Merrill Lynch as of 6/30/03 Falling interest rates drive solid bond returns Mortgage backed securities suffer from refi prepayment boom Credit bonds – investment grade and high yield – again lead the market

24 24 Fixed Income Returns Driven by Historically Low Interest Rates Source: Haver Analytics as of 6/30/03 Both short and long-term rates at the lowest levels in half a century

25 25 Shifting Expectations of the Fed Source: Bloomberg as of 6/30/03 Fed cuts short-term rate to 1% -- lowest since 1940s Markets not expecting a Fed rate hike during the next year

26 26 Corporate Bond Yield Spreads Decline Source: Merrill Lynch, Lehman Brothers as of 6/30/03 Driven by investor search for yield and corporate balance sheet clean-up, corporate bond spreads tightened further

27 27 High Yield: Default Rate Down, Fund Flows Up Mutual Fund Flows vs. Default Rate Source: Merrill Lynch High Yield Master II Index as of 6/30/03 1 st half 2003 flows almost equal full year 2002

28 28 Supply of Fallen Angels Falls Dramatically Source: Lehman, Merrill Lynch as of 3/31/03 Number of investment-grade bonds downgraded to high-yield declines

29 29 2Q 2003 Summary  Sharp, broad-based rally in U.S. stocks  Best quarter for S&P 500 Index since 1998  Almost all sectors, industries and stocks participate  Corporate earnings generally better than expected  Still few signs of an economic rebound  International equities also post strong gains  Receive boost from weak dollar  Emerging markets are best performers  Fixed income  Historically low interest rates drive positive returns for bonds  Credit bonds posted biggest gains – particularly high yield 350270

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