second quarter 2003 market update. 2 discussion topics economic backdrop equity markets fixed...
TRANSCRIPT
Second Quarter 2003 Market Update
2
Discussion Topics
Economic Backdrop
Equity Markets
Fixed Income/High Yield
Conclusions
3
Major Factors Affecting the U.S. Market Q2 2003
Positive NegativeMonetary policy Economic activityFiscal policyCorporate earnings Geopolitics
NeutralEnergy 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
Employment Still Weak
3
4
5
6
7
8
9
Ja
n-9
0
Ja
n-9
1
Ja
n-9
2
Ja
n-9
3
Ja
n-9
4
Ja
n-9
5
Ja
n-9
6
Ja
n-9
7
Ja
n-9
8
Ja
n-9
9
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Un
em
plo
ym
en
t R
ate
(%
)
250
300
350
400
450
500
550
Init
ita
l Un
em
pt
Cla
ims
(1
00
0s
)
Unemployment Rate (%) Initial Unempt Claims (1000s)
Source: Haver Analytics as of 5/31/03
Unemployment rate
rises to 6.1% -- highest
in nine years
5
Decelerating Inflation Leads to Deflation Worries
-1%
0%
1%
2%
3%
4%
5%
6%Q
1/9
0
Q1
/91
Q1
/92
Q1
/93
Q1
/94
Q1
/95
Q1
/96
Q1
/97
Q1
/98
Q1
/99
Q1
/00
Q1
/01
Q1
/02
Q1
/03
Producer Price Index (core) Consumer Price Index (core)
Source: Haver Analytics as of 5/31/03
As producers face flattening
prices, concerns arise about
potential sustained deflation
6
Oil and Natural Gas Prices Still High
$0
$2
$4
$6
$8
$10
$12
$14J
an
-90
No
v-9
0
Se
p-9
1
Au
g-9
2
Ju
n-9
3
Ap
r-9
4
Ma
r-9
5
Ja
n-9
6
No
v-9
6
Oc
t-9
7
Au
g-9
8
Ju
n-9
9
Ma
y-0
0
Ma
r-0
1
Ja
n-0
2
De
c-0
2
Na
tura
l Ga
s$
/mm
btu
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Oil
(WT
I)
$/b
arr
el
Natural Gas Oil
Source: Haver Analytics as of 6/30/03
Above average oil and
gas prices raise costs
for businesses and
households
7
Mortgage Refinancing Activity Hits Historic Highs
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%J
un
-94
Fe
b-9
5
Oc
t-9
5
Ju
n-9
6
Fe
b-9
7
Oc
t-9
7
Ju
n-9
8
Fe
b-9
9
Oc
t-9
9
Ju
n-0
0
Fe
b-0
1
Oc
t-0
1
Ju
n-0
2
Fe
b-0
3
Mo
rtg
ag
e R
ate
s
0
2,000
4,000
6,000
8,000
10,000
12,000
Mo
rtg
ag
e B
an
ke
rs' A
ss
oc
iati
on
R
efi
na
nc
e In
de
x
Mortgage Rates Mortgage Bankers' Association Refinance Index
Source: Bloomberg as of 6/27/03
As mortgage rates hit all-
time lows, consumers use
refi to pay down debt and
maintain spending
Domestic Equity
9
21.1%
15.4%
23.4%
14.9%
17.7%
21.8%
11.9%13.5%
11.8%
17.9%
0%
5%
10%
15%
20%
25%
S&P 500 Russell 2000 Russell 3000Growth
Russell 3000Value
NASDAQ
2Q 2003 YTD
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
Stock Market Performance (YTD as of 6/30/03)
S & P 500 Index
750
800
850
900
950
1,000
1,050
De
c-0
2
Ja
n-0
3
Fe
b-0
3
Ma
r-0
3
Ap
r-0
3
Ma
y-0
3
Ju
n-0
3
Source: FactSet as of 6/30/03
Up 22% from
March 11th low
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
Value Blend Growth
Large Cap17.3(1.0)
15.71.0
14.32.9
Mid Cap17.9(0.6)
18.32.6
18.87.4
Small Cap22.7(3.8)
23.4(1.6)
24.20.7
2Q03 One Year
All styles and
caps post large
gains
Several boxes now in
positive territory over
past year
12
Q2 Sector Performance
20.1%18.8% 18.1% 17.8%
15.3%13.0%
6.4%
8.5%
15.4%
20.5%
9.6%
0%
5%
10%
15%
20%
25% T
ele
co
mS
erv
ice
s
Uti
litie
s
Co
ns
um
rD
isc
reti
on
ary
Info
Te
ch
no
log
y
Fin
an
cia
ls
Ind
us
tria
ls
Ma
teri
als
He
alt
h C
are
Co
ns
um
er
Sta
ple
En
erg
y
S&
P 5
00
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
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 IndustriesInternet Software 100.0 -79.5Wireless Telecom 47.6 -86.2Biotechnology 32.8 -27.0Multi-Utilities 30.7 -88.6Semiconductor Equipment 29.7 -66.8Communications Equipment 23.9 -87.4
Worst YTD IndustriesFood & Staples Retail -6.2 -14.9Diversified Telecom -2.3 -63.7Food Products -1.8 21.8Container & Packaging -0.3 -16.2Aerospace & Defense 0.7 -6.8Chemicals 0.8 -16.9
S&P 500 11.8 -37.7
High Beta
industries
suffered in
bear market
but rebound
in 2003
14
Market Breadth Indicates Broad-Based Rally
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%Ja
n-9
2
Sep
-92
May
-93
Jan
-94
Sep
-94
May
-95
Jan
-96
Sep
-96
May
-97
Jan
-98
Sep
-98
May
-99
Jan
-00
Sep
-00
May
-01
Jan
-02
Sep
-02
May
-03
% o
f S
tock
s A
bo
ve 4
0wk
MA
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
Uptick in Mutual Fund Flows
-45
-35
-25
-15
-5
5
15
25
35J
an
-01
Ma
r-0
1
Ma
y-0
1
Ju
l-0
1
Se
p-0
1
No
v-0
1
Ja
n-0
2
Ma
r-0
2
Ma
y-0
2
Ju
l-0
2
Se
p-0
2
No
v-0
2
Ja
n-0
3
Ma
r-0
3
Ma
y-0
3
Ne
t M
on
thly
Fu
nd
Flo
ws
($
B)
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
Earnings Rebound in Q1
Note: First Call earnings estimates Source: FactSet as of 6/30/030
0
2
4
6
8
10
12
14
16
Ju
n-9
8
Se
p-9
8
De
c-9
8
Ma
r-9
9
Ju
n-9
9
Se
p-9
9
De
c-9
9
Ma
r-0
0
Ju
n-0
0
Se
p-0
0
De
c-0
0
Ma
r-0
1
Ju
n-0
1
Se
p-0
1
De
c-0
1
Ma
r-0
2
Ju
n-0
2
Se
p-0
2
De
c-0
2
Ma
r-0
3
Ju
n-0
3
Se
p-0
3
De
c-0
3
Ma
r-0
4
EP
S (
$)
-100
-50
0
50
100
150
200
EP
S Y
/Y G
row
th (
%)
Quarterly Earnings Per Share EPS Growth, Year/Year
Earnings of S&P 500 Companies
12% earnings growth in
Q1 exceeded
expectations
17
Valuations High, Depend on Strength of Earnings Recovery
Price/Earnings: Traling versus Forward Estimates
31.7
45.3
21.9
10
15
20
25
30
35
40
45
50
Ja
n-9
0
Ja
n-9
1
Ja
n-9
2
Ja
n-9
3
Ja
n-9
4
Ja
n-9
5
Ja
n-9
6
Ja
n-9
7
Ja
n-9
8
Ja
n-9
9
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Trailing
Forward
Average Trailing(1962-2002)
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
International Equity
19
11.2% 11.7%
23.4%22.4%
19.6%
3.1%
9.9%
16.1%
0%
5%
10%
15%
20%
25%
Europe Japan Emerging Markets MSCI EAFE
2Q 2003 YTD
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
Falling Dollar Boosts International Stock Returns
70
75
80
85
90
95
100
105
110
Ja
n-9
0
Ja
n-9
1
Ja
n-9
2
Ja
n-9
3
Ja
n-9
4
Ja
n-9
5
Ja
n-9
6
Ja
n-9
7
Ja
n-9
8
Ja
n-9
9
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
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
Struggling Global Economy
GDP Growth (%)
Q1 2003 2003 Estimate
Euro Zone 0.7 0.8
UK 0.2 1.4
Japan 0.0 1.3
Estimated 2003 GDP Growth (%)
Emerging Asia Pre-SARS Revised
China 8.0 7.0
South Korea 3.7 3.5
Taiwan 3.5 2.7
Malaysia 4.4 3.5
Thailand 5.0 4.3
Source: ABN AMRO, Economy.com, 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
Fixed Income
23
1.6%
3.4% 3.4%3.9%
3.2%3.8%
17.9%
10.0%
4.8%
2.7%2.6%2.5%2.2%1.9%0.7%
7.3%
0%
3%
6%
9%
12%
15%
18%
MB
S
AB
S
Ag
ency
Ag
gre
gat
e
Mu
nic
ipal
Tre
asu
ry
Cre
dit
Hig
h Y
ield
2Q 2003 YTD
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
Fixed Income Returns Driven by Historically Low Interest Rates
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Ju
n-7
6
Ju
n-7
8
Ju
n-8
0
Ju
n-8
2
Ju
n-8
4
Ju
n-8
6
Ju
n-8
8
Ju
n-9
0
Ju
n-9
2
Ju
n-9
4
Ju
n-9
6
Ju
n-9
8
Ju
n-0
0
Ju
n-0
2
2-Year Treasury 10-Year Treasury
Source: Haver Analytics as of 6/30/03
Both short and long-term rates at
the lowest levels in half a century
25
Shifting Expectations of the Fed
Source: Bloomberg as of 6/30/03
Fed Funds: History and Futures
0
1
2
3
4
5
6
7
Dec
-00
Feb
-01
Ap
r-01
Jun
-01
Au
g-0
1
Oct
-01
Dec
-01
Feb
-02
Ap
r-02
Jun
-02
Sep
-02
No
v-02
Jan
-03
Mar
-03
May
-03
Jul-0
3
Sep
-03
No
v-03
Jan
-04
Mar
-04
Jun
-04
Rat
e (%
)
Historical
6/30/0312/31/023/31/03
6/28/02
Fed cuts short-term rate to 1%
-- lowest since 1940s
Markets not expecting
a Fed rate hike during
the next year
26
Corporate Bond Yield Spreads Decline
0
200
400
600
800
1,000
1,200J
an
-90
Ja
n-9
1
Ja
n-9
2
Ja
n-9
3
Ja
n-9
4
Ja
n-9
5
Ja
n-9
6
Ja
n-9
7
Ja
n-9
8
Ja
n-9
9
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Me
rrill
Ly
nc
h H
igh
Yie
ld M
as
ter
II In
de
x
Sp
rea
d (
bp
)
0
50
100
150
200
250
Le
hm
an
Bro
s. U
S C
red
it In
de
x
Op
tio
n A
dju
ste
d S
pre
ad
(b
p)
High Yield Investment Grade
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
High Yield: Default Rate Down, Fund Flows Up
-5
0
5
10
15
20
25
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
YT
D -
6/3
0
Ne
t F
low
s (
$ B
)
0
2
4
6
8
10
12
Mo
od
y's
De
fau
lt R
ate
Net Flows Default Rate
Mutual Fund Flows vs. Default Rate
Source: Merrill Lynch High Yield Master II Index as of 6/30/03
1st half 2003 flows
almost equal full
year 2002
28
Supply of Fallen Angels Falls Dramatically
0
20
40
60
80
100
120
140
160
1995 1996 1997 1998 1999 2000 2001 2002 Q12003
Su
pp
ly (
$ B
)
New Issuance Fallen Angels
Source: Lehman, Merrill Lynch as of 3/31/03
Number of investment-grade bonds
downgraded to high-yield declines
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