Transcript Financial Markets – Update, Outlook and Challenges

Financial Markets – Update, Outlook
and Challenges
John Augustine, CFA
Chief Investment Strategist
Fifth Third Bank
April, 2010
Fifth Third Overview

$113 billion assets - #13
nationally*
Traverse
City
Grand Rapids

1,309 banking centers
Detroit
Chicago

2,358 ATMs

16 affiliates in 12 states


Fifth Third Bank has been
dedicated to serving the needs
families and businesses for
more than 150 years
Top 10 Superregional Bank for
8 consecutive years**
Toledo
Cleveland
Pittsburgh
Columbus
Indianapolis
Cincinnati
St. Louis
Florence
Evansville Louisville
Lexington
Huntington
Raleigh
Nashville
Charlotte
Raleigh
Atlanta
Augusta
Jacksonville
Orlando
Tampa
Naples
* As of 4Q09
** Fortune magazine, March 16, 2009
Naples
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2
Lines of Business

Commercial Banking

Branch Banking

Consumer Lending

Investment Advisors
3
Focus on Investment Advisors…
*Reflects only Fifth Third Securities managed assets associated with Fifth Third Private Bank, and does not reflect all assets managed through
Fifth Third Securities, a wholly owned subsidiary of Fifth Third Bank.
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I. Surprisingly strong
rebound…
5
Leading economic indicators show strongest
global recovery in 25+ years…
20
20
15
15
US
OECD
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
-20
-20
'59 '61 '63 '65 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09
(% 1YR) Composite Leading indicators, Trend Adjusted - OECD Total
(% 1YR) Leading Index Total, 1996=100, SA - United States
Recession Periods - United States
Source = Factset
6
Unemployment rate topped last October…
12
86
11
84
82
10
Unemployment
Rate (L)
80
9
78
8
76
7
Capacity
Utilization
(R)
6
5
74
72
70
4
68
3
66
'80
'82
'84
'86
'88
'90
'92
'94
'96
'98
'00
'02
'04
'06
'08
Unemployment Rate Total, Percent, SA - United States (Right)
Capacity Utilization Total index, Percent, SA - United States (Left)
Recession Periods - United States
Source = Factset
7
Consumer spending & saving increasing…
10,000
10%
9,500
Spending
($ trillions)
9%
8%
9,000
7%
8,500
6%
8,000
5%
7,500
4%
7,000
Savings
Rate (R)
6,500
3%
2%
6,000
1%
5,500
0%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Personal Saving Rate, Percent, Annual Rate, SA - United States (Left)
Personal Consumption Expenditures (AR, bil. chain 2000 $) (Right)
Recession Periods - United States
Source = Factset
8
US corporate profits recovering…
National Income, Corporate Profits with IVA & CCAdj, Profits After Tax with IVA & CCAdj, Bil. $ - United States
Recession Periods - United States
1,400
1,400
1,200
1,200
Corp.
Profits
1,000
1,000
800
800
600
600
400
400
200
200
0
0
'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
Source = Factset
9
Capital markets rebuilding…
April 23, 2010
Asset Class Returns - Since March 9, 2009
260
260
240
S&P REIT
240
2
Russell
2000
MSCI
Emerg Mkts
220
200
220
200
1
S&P 500
MSCI EAFE
ML High
Yield Bond
180
160
180
160
140
140
CRB Index
Gold
120
120
BC Agg
Bond
100
100
80
80
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
Source = Factset
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II. So what happened?
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Federal Government went all-in…
US Federal Government Debt Outstanding
USD Bil.
9,000
Debt outstanding - Federal government, D.3 - United States
% Change vs Year Ago
9,000
8,000
8,000
7,000
7,000
6,000
6,000
5,000
5,000
4,000
4,000
3,000
3,000
2,000
2,000
1,000
1,000
0
0
'46 '49 '52 '55 '58 '61 '64 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09
Source = Factset
12
Interest rates stayed low…
Government Benchmarks 10 year, Yield, Percent, Close - United States
Government Benchmarks 2 year, Yield, Percent, Close - United States
6
6
5
5
4
10yr
Treasury
4
3
3
2
2
2yr
Treasury
1
0
1
0
7/07
10/07
1/08
4/08
7/08
10/08
1/09
4/09
7/09
10/09
1/10
4/10
Source = Factset
13
Commodity prices dropped…
500
500
450
450
400
400
350
350
Average
300
300
CRB Index
250
250
200
200
150
150
7/07
10/07
1/08
4/08
7/08
10/08
1/09
4/09
7/09
10/09
1/10
4/10
Reuters/CRB RJ/CRB Index, USD, Close - World
(AVG) Reuters/CRB RJ/CRB Index, USD, Close - World
Source = Factset
14
Inflation went below average…
7
7
6
6
5
5
4
4
3
Average
3
CPI
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
'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
(% 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
Source = Factset
15
Exports gained traction…
USA Exports (US$ Bil)
Launch full data release
Current Trade Deficit = , High: , Low:
170
U.S. Exports
160
150
140
130
120
110
100
90
80
70
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
Source = Factset
16
Domestically - things just fell too far…
24
2,000
22
1,800
1,600
20
1,400
18
1,200
16
1,000
14
800
Vehicle
Sales (L)
Housing
Starts (R)
12
10
600
400
8
200
'80
'82
'84
'86
'88
'90
'92
'94
'96
'98
'00
'02
'04
'06
'08
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
Source = Factset
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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:
I.
Regulatory policy – current focus on healthcare & financial
sectors, broader issue of labor vs. capital vs. taxes
II.
Fiscal policy – deficit spending & tax rates rising
III. Monetary policy – Fed methodically removing stimulus:
selling its $1.4 trillion of excess bond holdings, then raising
fed funds rate.
IV. Corporate ownership – unwinding government ownership
in autos, insurance, mortgages and banks
2.
Main Street and S&P 500 companies continue to be at odds.
•
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.
•
2.
Currency volatility increases.
•
3.
Capital flows to lower tax rate countries.
Geopolitical risks rise.
•
7.
Dividends rise, but eventual onslaught of the global trustbusters.
Tax rates rise.
•
6.
Unemployment stays higher, longer.
Big companies get bigger…looking for growth.
•
5.
Currencies are the stock price of countries.
Business formation slows.
•
4.
Commodity markets need to adjust downward.
Gold keeps its bid; Emerging Markets try to manage investment flows.
Sovereign bond-pickers market.
•
Bond-by-bond portfolio review.
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S&P 500 earnings rising sharply…
S&P 500 Index Forward Earnings Estimates
110
1,800
$107.82- 2012
105
1,600
100
95
1,400
$94.69- 2011
90
S&P 500 1,200
85
82.94
80
1,000
75
70
800
65
60
600
'05
'06
'07
'08
'09
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
Source = Factset/Bloomberg
22
S&P 500 dividends rising again…
$32
$32
$30
$30
$28
$28
$26
$26
$24
$24
S&P 500
DPS
$22
$22
$20
$20
$18
$18
$16
$16
$14
$14
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
S&P 500 - Dividends per Share - Indicated Annual Rate
Source = Factset
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Current capital allocation themes…
Invest
Lend
Defend
Large cap domestic
US Government/Agency
Money Markets
SMID domestic
Overseas Government
Bank Deposits
Overseas developed
Municipal
Gold
Overseas emerging
High Grade Corporate
TIPS
Commodities
Low Grade Corporate
REITs
Preferred Stock
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Solving Financial Complexity
Scope of
Investor
Focus
Initial
Accounts
Asset
Allocation
Financial
Management
Trust &
Estate
Planning
International
Equities
Checking
Account
Savings
Account
401k
Plan
IRA
Account
Fixed
Income
Securities
Alternative
Assets
Domestic
Equities
Investment
Strategy
Insurance
Financial
Planning
Tax &
Liability
Management
Cash
Investments
Time
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John Augustine, CFA
Chief Investment Strategist
Fifth Third Private Bank
513-534-3256
[email protected]
www.53.com
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
Are Not Insured By Any Federal Government Agency
May Lose Value
Are Not A Deposit
Insurance products made available through Fifth Third Insurance Agency, Inc.
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