financial markets – update, outlook and challenges
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Financial Markets – Update, Outlook and Challenges. John Augustine, CFA Chief Investment Strategist Fifth Third Bank April, 2010. Traverse City. Grand Rapids. Detroit. Chicago. Toledo. Cleveland. Pittsburgh. Columbus. Indianapolis. Cincinnati. Huntington. Florence. St. Louis. - PowerPoint PPT PresentationTRANSCRIPT
Financial Markets – Update, Outlook and Challenges
John Augustine, CFAChief Investment Strategist
Fifth Third Bank
April, 2010
2
2
Fifth Third Overview
* As of 4Q09** Fortune magazine, March 16, 2009
$113 billion assets - #13 nationally*
1,309 banking centers
2,358 ATMs
16 affiliates in 12 states
Fifth Third Bank has been dedicated to serving the needs families and businesses for more than 150 years
Top 10 Superregional Bank for 8 consecutive years**
Naples
Raleigh
Cincinnati
FlorenceLouisville
Lexington
Nashville
Atlanta
Augusta
Orlando
Tampa
Naples
Raleigh
Charlotte
Huntington
PittsburghCleveland
Columbus
Toledo
Detroit
Grand Rapids
Traverse City
Chicago
Evansville
Jacksonville
Indianapolis
St. Louis
3
Lines of Business
Commercial Banking
Branch Banking
Consumer Lending
Investment Advisors
4
*Reflects only Fifth Third Securities managed assets associated with Fifth Third Private Bank, and does not reflect all assets managed through Fifth Third Securities, a wholly owned subsidiary of Fifth Third Bank.
Focus on Investment Advisors…
5
I. Surprisingly strong rebound…
6
'59 '61 '63 '65 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09-20-20
-15-15
-10-10
-5-5
00
55
1010
1515
2020
OECD
US
(% 1YR) Composite Leading indicators, Trend Adjusted - OECD Total (% 1YR) Leading Index Total, 1996=100, SA - United States Recession Periods - United States
Leading economic indicators show strongest global recovery in 25+ years…
Source = Factset
7
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '0866
68
70
72
74
76
78
80
82
84
86
3
4
5
6
7
8
9
10
11
12
Capacity Utilization (R)
UnemploymentRate (L)
Unemployment Rate Total, Percent, SA - United States (Right)Capacity Utilization Total index, Percent, SA - United States (Left)Recession Periods - United States
Unemployment rate topped last October…
Source = Factset
8
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '090%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
10,000
Savings Rate (R)
Spending ($ trillions)
Personal Saving Rate, Percent, Annual Rate, SA - United States (Left)Personal Consumption Expenditures (AR, bil. chain 2000 $) (Right)Recession Periods - United States
Consumer spending & saving increasing…
Source = Factset
9
'85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '0900
200200
400400
600600
800800
1,0001,000
1,2001,200
1,4001,400
Corp. Profits
National Income, Corporate Profits with IVA & CCAdj, Profits After Tax with IVA & CCAdj, Bil. $ - United States Recession Periods - United States
US corporate profits recovering…
Source = Factset
10
Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr8080
100100
120120
140140
160160
180180
200200
220220
240240
260260
BC Agg Bond
Gold
CRB Index
ML High Yield Bond
MSCI EAFES&P 500
MSCI Emerg Mkts
Russell 2000
S&P REIT
Asset Class Returns - Since March 9, 2009
Capital markets rebuilding…April 23, 2010
Source = Factset
1
2
11
II. So what happened?
12
'46 '49 '52 '55 '58 '61 '64 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '0900
1,0001,000
2,0002,000
3,0003,000
4,0004,000
5,0005,000
6,0006,000
7,0007,000
8,0008,000
9,0009,000
US Federal Government Debt Outstanding
USD Bil. % Change vs Year Ago
Debt outstanding - Federal government, D.3 - United States
Federal Government went all-in…
Source = Factset
13
7/07 10/07 1/08 4/08 7/08 10/08 1/09 4/09 7/09 10/09 1/10 4/1000
11
22
33
44
55
66
2yr Treasury
10yr Treasury
Government Benchmarks 10 year, Yield, Percent, Close - United States Government Benchmarks 2 year, Yield, Percent, Close - United States
Interest rates stayed low…
Source = Factset
14
Commodity prices dropped…
7/07 10/07 1/08 4/08 7/08 10/08 1/09 4/09 7/09 10/09 1/10 4/10150150
200200
250250
300300
350350
400400
450450
500500
CRB Index
Average
Reuters/CRB RJ/CRB Index, USD, Close - World (AVG) Reuters/CRB RJ/CRB Index, USD, Close - World
Source = Factset
15
Inflation went below average…
Source = Factset
'85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09-3-3
-2-2
-1-1
00
11
22
33
44
55
66
77
CPI
Average
(% 1YR) CPI All items, 1982-84=100, SA - United States (AVG , % 1YR) CPI All items, 1982-84=100, SA - United States Recession Periods - United States
16
'00 '01 '02 '03 '04 '05 '06 '07 '08 '0970
80
90
100
110
120
130
140
150
160
170
USA Exports (US$ Bil) Launch full data release
Current Trade Deficit = , High: , Low:
U.S. Exports
Exports gained traction…
Source = Factset
17
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '088
10
12
14
16
18
20
22
24
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Housing Starts (R)
Vehicle Sales (L)
Motor Vehicles Total vehicle sales, Number of, Annual Rate, SA - United States (Left)Housing Starts 1 unit, Number of, Annual Rate, SA - United States (Right)Recession Periods - United States
Domestically - things just fell too far…
Source = Factset
18
II. What’s on our mind now?
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Themes we see developing this year…
1. Economic growth could surprise to the upside.
2. Private sector risks falling, public sector risks rising.
3. US recovery is now leading in the developed world, but lagging the emerging world.
4. Stocks and corporate bonds should handily outperform Treasuries and cash.
5. Policymakers need to keep their focus on the 10’s.
I. Keeping the Dow above 10,000.
II. Keeping the unemployment rate below 10%.
III. Moving the federal budget deficit back below 10% of GDP.
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Challenges – Tensions are still very prevalent…
1. Government relationship with business & financial markets remains tense:
1. Regulatory policy – current focus on healthcare & financial sectors, broader issue of labor vs. capital vs. taxes
2. Fiscal policy – deficit spending & tax rates rising
3. Monetary policy – Fed methodically removing stimulus: selling its $1.4 trillion of excess bond holdings, then raising fed funds rate.
4. Corporate ownership – unwinding government ownership in autos, insurance, mortgages and banks
2. Main Street and S&P 500 companies continue to be at odds.
I. The latter benefits from global recovery and the former struggles with the high US unemployment rate.
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Potential outcomes of government debt rising???1. Economic growth slows.
• Commodity markets need to adjust downward.
2. Currency volatility increases.
• Currencies are the stock price of countries.
3. Business formation slows.
• Unemployment stays higher, longer.
4. Big companies get bigger…looking for growth.
• Dividends rise, but eventual onslaught of the global trustbusters.
5. Tax rates rise.
• Capital flows to lower tax rate countries.
6. Geopolitical risks rise.
• Gold keeps its bid; Emerging Markets try to manage investment flows.
7. Sovereign bond-pickers market.
• Bond-by-bond portfolio review.
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'05 '06 '07 '08 '09600
800
1,000
1,200
1,400
1,600
1,800
60
65
70
75
80
85
90
95
100
105
110
82.94
S&P 500
S&P 500 Index Forward Earnings Estimates
Standard & Poors 500 Composite Index, Price Return, USD, Close - United States (Left)Standard & Poors 500 Index, 12 Months Forward Index EPS, USD, End of Period - United States Top_Down
$94.69- 2011
$107.82- 2012
S&P 500 earnings rising sharply…
Source = Factset/Bloomberg
23
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09$14$14
$16$16
$18$18
$20$20
$22$22
$24$24
$26$26
$28$28
$30$30
$32$32
S&P 500 DPS
S&P 500 - Dividends per Share - Indicated Annual Rate
S&P 500 dividends rising again…
Source = Factset
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Invest Lend Defend
Large cap domestic
SMID domestic
Overseas developed
Overseas emerging
Commodities
REITs
US Government/Agency
Overseas Government
Municipal
High Grade Corporate
Low Grade Corporate
Preferred Stock
Current capital allocation themes…
Money Markets
Bank Deposits
Gold
TIPS
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Solving Financial Complexity
Scope of Investor Focus
Time
Initial Accounts
Initial Accounts
Asset Allocation
Asset Allocation
Financial Manageme
nt
Financial Manageme
nt
Fixed Income Securiti
es
International
Equities
Domestic
Equities
Cash
Alternative Assets
Insuran
ce
Trust & Estate
Planning
Investment Strategy
Tax & Liability
Management
Financial
Planning
Checking Account
401k Plan
IRA Accoun
t
Savings Account
Investments
John Augustine, CFAChief Investment Strategist
Fifth Third Private Bank513-534-3256
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Important Information
Dow Jones Industrial Average: The most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials. S&P 500: Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. U.S. Treasury Bills: Direct debt obligations issued and backed by the “full faith and credit” of the United States government (i.e. timely payment of principal and interest is guaranteed) and are issued with maturities of three months to six months in denominations beginning at $1,000. GDP (Gross Domestic Product): The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. Treasury Bonds: Treasury bonds are debt instruments of the U.S. government issued in minimum denominations of $1000. Considered to be long term investments, Treasury bonds have maturities of 10 years or longer. Treasury bonds carry the lowest degree of risk and are the benchmark against which all other types of bonds are measured. Although their market value fluctuates, they are considered to be the safest of bonds due to the fact that they are secured by the full faith and credit of the U.S. government. MSCI Emerging Markets Index Fund (EEM): The iShares MSCI Emerging Markets Index Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in emerging markets, as represented by the MSCI Emerging Markets Index. Russell 2000: The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. MSCI EAFE (Europe, Australia and Far East): The MSCI EAFE index is a market-capitalization-weighted index of 21 non-U.S., industrialized country indexes, and is widely accepted as a benchmark for international stock performance.
The S&P REIT: Tracks the performance of U.S. Real Estate Investment Trusts. The REIT Composite consists of 100 REIT’s chosen their liquidity and importance in representing a diversified real estate portfolio.
Gold: Quoted as U.S. Dollars per Troy Ounce.
The CRB/Reuters Futures Price Index: An equal-weighted geometric average of commodity price levels relative to the base year average price.
Fifth Third Private Bank is a division of Fifth Third Bank offering banking, investment and insurance products and services. Fifth Third Bancorp provides access to investments and investment services through various subsidiaries. Investments and Investment Services:
Are Not FDIC Insured Offer No Bank Guarantee May Lose Value
Are Not Insured By Any Federal Government Agency Are Not A Deposit
Insurance products made available through Fifth Third Insurance Agency, Inc.