Transcript No Slide Title

Second Quarter 2003 Market Update
Discussion Topics
 Economic Backdrop
 Equity Markets
 Fixed Income/High Yield
 Conclusions
2
Major Factors Affecting the U.S. Market Q2 2003
Another Fed interest
Tax cut legislation
rate cut
approved
Q1 results
Positive
Monetary policy
Fiscal policy
Corporate earnings
Geopolitics
Negative
Economic activity
Weak employment numbers
and generally tepid data
Iraq war ends more quickly
better than
than expected
expected
Still low, but Fed cites
risk of deflation
Neutral
Energy prices
Inflation
Oil and natural gas prices
still high, despite end to
war in Iraq
3
550
8
500
Unemployment rate
7
450
rises to 6.1% -- highest
in nine years
Unemployment Rate (%)
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
250
Jan-97
3
Jan-96
300
Jan-95
4
Jan-94
350
Jan-93
5
Jan-92
400
Jan-91
6
Initital Unempt Claims (1000s)
9
Jan-90
Unemployment Rate (%)
Employment Still Weak
Initial Unempt Claims (1000s)
Source: Haver Analytics as of 5/31/03
4
Decelerating Inflation Leads to Deflation Worries
6%
As producers face flattening
prices, concerns arise about
5%
potential sustained deflation
4%
3%
2%
1%
0%
Producer Price Index (core)
Q1/03
Q1/02
Q1/01
Q1/00
Q1/99
Q1/98
Q1/97
Q1/96
Q1/95
Q1/94
Q1/93
Q1/92
Q1/91
Q1/90
-1%
Consumer Price Index (core)
Source: Haver Analytics as of 5/31/03
5
Oil and Natural Gas Prices Still High
$14
$45
Above average oil and
$12
for businesses and
$35
households
$30
$8
$25
$6
$20
Oil (WTI)
$/barrel
gas prices raise costs
$10
$15
$4
$10
$2
$5
Natural Gas
Dec-02
Jan-02
Mar-01
May-00
Jun-99
Aug-98
Oct-97
Nov-96
Jan-96
Mar-95
Apr-94
Jun-93
Aug-92
Sep-91
$0
Nov-90
$0
Jan-90
Natural Gas
$/mmbtu
$40
Oil
Source: Haver Analytics as of 6/30/03
6
Mortgage Refinancing Activity Hits Historic Highs
12,000
9%
10,000
7%
8,000
6%
As mortgage rates hit all-
5%
6,000
time lows, consumers use
4%
refi to pay down debt and
3%
4,000
maintain spending
2%
2,000
1%
Mortgage Rates
Feb-03
Jun-02
Oct-01
Feb-01
Jun-00
Oct-99
Feb-99
Jun-98
Oct-97
Feb-97
Jun-96
Oct-95
0
Feb-95
0%
Jun-94
Mortgage Rates
8%
Mortgage Bankers' Association
Refinance Index
10%
Mortgage Bankers' Association Refinance Index
Source: Bloomberg as of 6/27/03
7
Domestic Equity
Performance of Domestic Equities
Strong, broad-based
market gains led by
25%
23.4%
small caps
21.1%
20%
17.9%
15.4%
21.8%
17.7%
14.9%
15%
13.5%
11.9%
11.8%
10%
5%
0%
S&P 500
Russell 2000
Highest quarterly
Russell 3000
Growth
2Q 2003
Russell 3000
Value
NASDAQ
YTD
returns since 1998
Source: FMRCo as of 6/30/03
9
Stock Market Performance (YTD as of 6/30/03)
S & P 500 Index
1,050
1,000
950
900
850
800
Up 22% from
March 11th low
Jun-03
May-03
Apr-03
Mar-03
Feb-03
Jan-03
Dec-02
750
Source: FactSet as of 6/30/03
10
Style and Cap Performance
All styles and
caps post large
gains
Large Cap
Mid Cap
Small Cap
Value
Blend
Growth
17.3
15.7
14.3
(1.0)
1.0
2.9
17.9
18.3
18.8
(0.6)
2.6
7.4
22.7
23.4
24.2
(3.8)
(1.6)
0.7
Several boxes now in
positive territory over
2Q03
One Year
past year
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
11
First time on record all 10
Q2 Sector Performance
25%
sectors up more than 5%
Beaten down telecom and utilities
lead the rebound
20.5%
20%
20.1%
18.8% 18.1%
17.8%
Less
15.3%
15%
15.4%
cyclical
13.0%
sectors trail
9.6%
10%
8.5%
6.4%
5%
Economically sensitive sectors post strong returns
S&P 500
Energy
Consumer
Staple
Health Care
Materials
Industrials
Financials
Info
Technology
Consumr
Discretionary
Utilities
Telecom
Services
0%
Source: FMRCo as of 6/30/03
12
Industry Reversal: Beaten-Down Stocks Lead Rally
YTD
(as of 6/30/03)
Previous 3 Years
(1/00 - 12/02)
100.0
47.6
32.8
30.7
29.7
23.9
-79.5
-86.2
-27.0
-88.6
-66.8
-87.4
Worst YTD Industries
Food & Staples Retail
Diversified Telecom
Food Products
Container & Packaging
Aerospace & Defense
Chemicals
-6.2
-2.3
-1.8
-0.3
0.7
0.8
-14.9
-63.7
21.8
-16.2
-6.8
-16.9
S&P 500
11.8
-37.7
High Beta
industries
suffered in
bear market
but rebound
in 2003
Best YTD Industries
Internet Software
Wireless Telecom
Biotechnology
Multi-Utilities
Semiconductor Equipment
Communications Equipment
Source: FMR Co. as of 6/30/03
13
Market Breadth Indicates Broad-Based Rally
100%
84% of stocks are
above their 40-week
moving average
80%
70%
60%
50%
40%
30%
470 out of the S&P 500
20%
stocks registered positive
10%
gains in Q2
May-03
Sep-02
Jan-02
May-01
Sep-00
Jan-00
May-99
Sep-98
Jan-98
May-97
Sep-96
Jan-96
May-95
Sep-94
Jan-94
May-93
Sep-92
0%
Jan-92
% of Stocks Above 40wk MA
90%
Source: FMR Co. as of 6/27/03
14
Uptick in Mutual Fund Flows
Domestic Equity Net Monthly Mutual Fund Flows
After lengthy period of
25
outflows, investors
move back into stocks
15
5
-5
-15
-25
-35
May-03
Mar-03
Jan-03
Nov-02
Sep-02
Jul-02
May-02
Mar-02
Jan-02
Nov-01
Sep-01
Jul-01
May-01
Mar-01
-45
Jan-01
Net Monthly Fund Flows ($B)
35
Source: Simfund as of 5/31/03
15
Earnings Rebound in Q1
Earnings of S&P 500 Companies
16
200
12% earnings growth in
150
Q1 exceeded
expectations
100
10
8
50
6
0
4
-50
2
Quarterly Earnings Per Share
Mar-04
Dec-03
Sep-03
Jun-03
Mar-03
Dec-02
Sep-02
Jun-02
Mar-02
Dec-01
Sep-01
Jun-01
Mar-01
Dec-00
Sep-00
Jun-00
Mar-00
Dec-99
Sep-99
Jun-99
Mar-99
Dec-98
-100
Sep-98
0
Jun-98
EPS ($)
12
EPS Y/Y Growth (%)
14
EPS Growth, Year/Year
Note: First Call earnings estimates
Source: FactSet as of 6/30/030
16
Valuations High, Depend on Strength of Earnings Recovery
Price/Earnings: Traling versus Forward Estimates
50
45.3
Market rally drives PEs back
45
Trailing
up – well above historical
40
Forward
35
Average Trailing
(1962-2002)
average
31.7
30
25
21.9
20
15
Jan-03
Jan-02
Jan-01
Jan-00
But valuations more
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
10
reasonable if earnings growth
meets expectations
Note: Trailing earnings are Compustat.
Forward earnings are First Call.
Source: FactSet as of 5/31/03
17
International Equity
International Equities Performance
Higher than the
Rebound in Latin
25%
22.4%
S&P 500
23.4%
America and apparent
SARS containment in
20%
19.6%
Asia drive emerging
16.1%
markets
15%
11.2%
11.7%
9.9%
10%
5%
3.1%
0%
Europe
Japan
2Q 2003
Emerging Markets
MSCI EAFE
YTD
ECB rate cut bolsters
broad-based rally
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
19
Falling Dollar Boosts International Stock Returns
Trade-Weighted U.S. Dollar
Eurozone
Stocks YTD
Returns
110
105
100
€
1.2%
95
$
10.7%
90
85
Dollar down 19%
80
since early 2002
peak – and 24%
75
versus Euro
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
70
Source: Haver Analytics as of 6/30/03
20
Struggling Global Economy
Anemic Q1 growth in largest foreign
economies expected to pick up a bit
GDP Growth (%)
Q1 2003
2003 Estimate
Euro Zone
0.7
0.8
UK
0.2
1.4
Japan
0.0
1.3
Fastest growing region in world
slowed by SARS
Emerging Asia
Estimated 2003 GDP Growth (%)
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
21
Fixed Income
Fixed Income Performance
18%
Falling interest rates drive
Credit bonds
solid bond returns
– investment
17.9%
grade and
15%
12%
Mortgage backed
high yield –
securities suffer from refi
again lead
prepayment boom
the market
10.0%
9%
7.3%
6%
4.8%
3.4%
3%
1.6%
1.9%
3.9%
3.4%
2.2%
2.5%
3.2%
2.6%
3.8%
2.7%
0.7%
2Q 2003
High Yield
Credit
Treasury
Municipal
Aggregate
Agency
ABS
MBS
0%
YTD
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
23
Fixed Income Returns Driven by Historically Low Interest Rates
18%
16%
Both short and long-term rates at the
14%
lowest levels in half a century
12%
10%
8%
6%
4%
2%
2-Year Treasury
Jun-02
Jun-00
Jun-98
Jun-96
Jun-94
Jun-92
Jun-90
Jun-88
Jun-86
Jun-84
Jun-82
Jun-80
Jun-78
Jun-76
0%
10-Year Treasury
Source: Haver Analytics as of 6/30/03
24
Shifting Expectations of the Fed
Fed Funds: History and Futures
7
6
Markets not expecting a
4
Fed rate hike during the
Historical
3
next year
6/28/02
2
12/31/02
Fed cuts short-term rate to 1% --
1
3/31/03 6/30/03
lowest since 1940s
Jun-04
Mar-04
Jan-04
Nov-03
Sep-03
Jul-03
May-03
Mar-03
Jan-03
Nov-02
Sep-02
Jun-02
Apr-02
Feb-02
Dec-01
Oct-01
Aug-01
Jun-01
Apr-01
Feb-01
0
Dec-00
Rate (%)
5
Source: Bloomberg as of 6/30/03
25
Corporate Bond Yield Spreads Decline
1,000
Driven by investor search
200
for yield and corporate
balance sheet clean-up,
800
150
corporate bond spreads
tightened further
600
100
400
50
200
High Yield
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-93
Jan-92
Jan-91
0
Jan-90
0
Lehman Bros. US Credit Index
Option Adjusted Spread (bp)
250
Jan-94
Merrill Lynch High Yield Master II Index
Spread (bp)
1,200
Investment Grade
Source: Merrill Lynch, Lehman Brothers as of 6/30/03
26
High Yield: Default Rate Down, Fund Flows Up
1st half 2003 flows
Mutual Fund Flows vs. Default Rate
almost equal full
12
Default Rate
2002
YTD - 6/30
Net Flows
2001
0
2000
-5
1999
2
1998
0
1997
4
1996
5
1995
6
1994
10
1993
8
1992
15
1991
10
1990
20
Moody's Default Rate
year 2002
1989
Net Flows ($ B)
25
Source: Merrill Lynch High Yield Master II Index as of 6/30/03
27
Supply of Fallen Angels Falls Dramatically
New Issuance
Fallen Angels
160
140
Supply ($ B)
120
100
80
60
40
20
0
1995
1996
1997
1998
1999
2000
2001
2002
Q1
2003
Number of investment-grade bonds
downgraded to high-yield declines
Source: Lehman, Merrill Lynch as of 3/31/03
28
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
29