Economic Outlook January 2009

Stock Markets and the Economy Markets are one of the best leading indicators of the economy Severe market reactions tend to foreshadow periods of severe economic stress Public sentiment may be effectively reflected in market valuations Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. “Stock markets offer a very useful forecast of the economy.”

Perspectives on the Stock Markets The “Rational” Side  Objective situational characteristics: supply and demand The “Irrational” Side  Emotional reactions: investor hopes and fears Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. “To understand the economy, we need to understand all the forces driving the markets.”

Stages of Market Cycles I. Topping Out II. The Decline III. A Bottoming Process IV. A New Rally Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. “Shorter term: likely on the verge of a rally. Longer term: probably just starting a bottoming process.”

Market Crashes: Lessons from the 1930s and 1970s Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. Source: Ned Davis Research “The next few years: painful but profitable!” Public Pessimism Public Optimism Tops “bottoming” process

Global Themes Effects of a global “savings glut”  Cheap rates and investment “bubbles”  Development of the emerging world  Increased competition – Facing existing businesses – For energy and natural resources – For jobs Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. “The United States is becoming a much smaller piece of the overall global economy.”

Deleveraging Reversing the excesses  More restrictive lending standards  Higher rates to compensate for borrower risk Will there be voluntary debt reduction as well? Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. “Addressing the toxic effects of too much debt.”

The Immediate Economic Situation Few positives shorter term  Panicked consumers  Extremely cautious domestic businesses  Contracting exports  State and local governments  The Federal government will try to take up the slack Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. “Most segments of the economy are struggling.”

The Coming Months Recession through the first half of 2009  Consumers will continue to retrench  Layoffs will likely accelerate  Capital spending will deteriorate  Business bankruptcies will mount Improvement in the second half of 2009  The financial system should stabilize  Public confidence will begin to improve Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. “Laying the foundation for improvement.”

The Next Few Years Longer-term issues:  Consumers: tight budgets and deleveraging  Businesses: coping with margin pressure Can we avoid both depression and high inflation?  Federal deleveraging?  Social Security and other retirement obligations  Retiree health care Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. “As with recovery from a massive heart attack, it will take time for the economy to fully recover.”

Bruce McCain, Ph.D., CFA Chief Investment Strategist Key Private Bank (216) David Reavis Public Relations Manager Key Private Bank (216) Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. Contacts

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