Quarterly Investment and Economic Update y p Leo Grohowski
Quarterlyy Investment and Economic Update p July 28, 2011
Hosted by:
Leo Grohowski Chief Investment Officer, BNY Mellon Wealth Management
Historical Market Returns Asset Class
Index
Treasury Bills
Treasury Bills (90 Day)
0.0
0.0
0.1
0.3
1.7
1.9
0.5
Tax-Exempt Bonds
S&P Intermediate Muni
3.7
4.5
4.8
6.5
5.8
5.1
5.4
Taxable Bonds
Barclays Aggregate
2.3
2.7
3.9
6.5
6.5
5.7
3.8
High Yield
Barclays High Yield
2.1
5.0
15.6
12.7
9.3
9.0
11.2
Large Cap Stocks
S&P 500
01 0.1
60 6.0
30 7 30.7
33 3.3
29 2.9
27 2.7
15 8 15.8
Mid Cap Stocks
S&P MidCap 400
(0.7)
8.6
39.4
7.8
6.6
7.9
18.2
Small Cap Stocks
Russell 2000
(1.6)
6.2
37.4
7.8
4.1
6.3
20.9
1.6
5.0
30.4
(1.8)
1.5
5.7
18.3
Emerging Mkts Stks MSCI EMF
(1.0)
1.0
28.2
4.5
11.8
16.5
24.1
Hedge Funds
HFRX Global Hedge
(2.5)
(2.1)
4.2
(3.3)
(0.2)
2.8
6.0
Real Estate
FTSE EPRA/NAREIT
29 2.9
61 6.1
33 4 33.4
23 2.3
15 1.5
10 4 10.4
20 9 20.9
Commodities
S&P GSCI
(7.9)
2.7
26.1
(21.7)
(6.2)
3.7
25.1
Private Equity*
Cambridge Associates U.S. Private Equity
N/A
N/A
21.4
5.2
9.8
10.8
International Stocks MSCI EAFE (Net)
2Q11
Annualized Returns Standard YTD 1 Year 3 Year 5 Year 10 Year Deviation
Returns as of 6/30/11, unless noted otherwise. Standard deviations are calculated based on monthly data for the trailing 10 years. Source: Morningstar. *Returns are for periods through 3/31/11 and represent Cambridge Associates U.S. Private Equity Performance Index; standard deviation is not available. 2
N/A
U.S. Currency Remains under Pressure U.S. Dollar Index 120 110 100 90 80 70 60 2000
2001
2002
2003
2004
2005
As of 6/30/2011. Source: IntercontinentalExchange (ICE) / Bloomberg L.P.
3
2006
2007
2008
2009
2010
2011
2011 Deficit and Debt as Percentage of GDP
NET DEBT, % OF G GDP
Countries with Sovereign Rating of AAA 100% 80% 60%
U.S.
France U.K.
Austria
40% 0%
Netherlands
Germany
Canada
20% Denmark
0%
Australia
Switzerland Sweden
-20%
Luxembourg
-40% Finland
-60% -10%
-8%
-6%
-4%
-2%
0%
DEFICIT, % OF GDP
Source: StrategasRP.
4
Economic Outlook
Richard Hoey Chief Economist, BNY Mellon
Global Currencyy Outlook
Michael Woolfolk Senior Currency Strategist, BNY Mellon Global Markets
Fixed Income Outlook
John Flahive Director, Fixed Income Investments
Treasury Yields Still Near Historic Lows
PERCE ENT
10-Year Constant Maturity Treasury Note Yields 3.8 3.6 3.4 3.2 3.0 2.8 Jan-11
Feb-11
As of 6/30/2011. Source: Bloomberg LP
8
Mar-11
Apr-11
May-11
Jun-11
Fixed Income Sector Returns
PERCENT
Selected Sector Returns 16
15.1
14
12.8
12 10
90 9.0
8 6
6.3
5.9 4.4
4 2
1.7 1.5
5.4
5.0
5.0
3.7
3.2 2.2 2.4
5.8
2.9
2.3
4.4 3.4
3.9
2.4
2.3 1.1
0 Treasury
Agency
2010 Year End As of 6/30/11. Source: Barclays Capital.
9
Corporate
TIPS
2011 Year-to-Date
MBS
High Yield
2nd Quarter
Emerging Municipal Markets Bond Index
Break-Even Inflation Rate RECENT RISE WITH QUANTITATIVE EASING
PERCE ENT
Yield on 10-Year Treasury Note Less 10-Year TIPS 3.0 2.5 2.0 1.5 10 1.0 0.5 0.0 Nov-06
May-07
Nov-07
As of 6/30/11. Source: Bloomberg LP
10
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Corporate Spreads down from Recent Highs
BASIS POIN NTS
U.S. Corporate Bond Yield Spreads 2,000
1,500
1,000
500
0 2008
2009 U.S. Corporate High Yield
As of 6/30/11. Source: Barclays Capital.
11
2010 U.S. Corporate Investment Grade
2011
Municipal Credit Quality Returns OPPORTUNITIES FOR WELL-RESEARCHED ISSUE SELECTION
PERCE ENT
Credit Quality Returns 6.0 52 5.2 5.0
4.6
4.3 4.0
3.8
3.7
3.0 20 2.0
2.2
2.1
2.0
1.0 0.0 AAA 2010 Year End *As of 6/30/11. Source: Barclays Capital
12
AA 2011 Year-to-Date*
A
BAA
$ BILLIO ONS
Mutual Fund Flows
80
62 42
40
19
30
18
10
2
0 -15 -40
-27 -41 41
-29
-80 -85 -120 4th Quarter 2010 Municipal Bonds
1st Quarter 2011 High Grade Taxable Bonds
As of 6/30/11. Source: Lipper FMI- U.S. Mutual Fund Flows (formerly AMG).
13
2nd Quarter 2011 Equities
Money Funds
$ BILLIO ONS
Annual Municipal Fixed Income Supply
500 400 300 200 100 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E ■ Muni Supply ■ Build America Bonds Supply ■ Supply YTD ■ Projected
As of 6/30/11. Source: Bond Buyer.
14
Upgrade to Downgrade Ratios
6
53 5.3 4.7
5
4.5
4 2.9
3
2.8
3.0 2.4
2.3
2
1.3 0.7
1
0.5
0.4
2010
2011E
0 2000
2001
2002
2003
2004
2005
2006
Sources: 2005 – 2010 Moody's Investors Service; 2011 BNY Mellon Wealth Management.
15
2007
2008
2009
Taxable Equivalent Yield Effect of Tax Rate Movements
PERCE ENT
MUNIS MORE ATTRACTIVE IN RISING RATE ENVIRONMENT
6
5.66 5.15
5
4.35
4.72
4 3
3.01
2.83
S&P Intermediate Municipal Bond Index*
Barclays B l Aggregate (Taxable)**
2 1 0 35% Tax Rate
40% Tax Rate
45% Tax Rate
*The Standard & Poor's/Investortools – Intermediate Index yield-to-worst1 as of 6/30/11. Source: Bloomberg LP. **Barclays Capital yield-to-worst as of 6/30/2011. Source: Barclays Capital. Yield-to-worst is computed by using the lower of either the yield to maturity or the yield to call on every possible call date. 16
50% Tax Rate
60 Minutes “Day of Reckoning” Aired December 19, 2010 Meredith Whitney’s Prediction: $200 Billion Bonds Default by 12/19/2011 W k since Weeks i airing ii
29
Weeks until 12/19/2011
23
Number of local government monetary defaults since airing Values of local government monetary defaults since airing Defaults per week required to reach 100 by 12/19/2011 Value of weekly defaults required to reach $200 billion by 12/19/2011
As of 7/8/11. Source: Goldman Sachs.
17
4 $488M 4.2 $8 67B $8.67B
Equity q y Outlook
Irene O’Neill Director, Large Cap U.S. Equities
Earnings Growth Projections S&P 500 Sector
2011
2012
14.5%
16.4%
9.9%
9.8%
36.8%
10.2%
Financials
5.7%
35.1%
Health Care
5.8%
6.1%
Industrials
19.9%
18.5%
Information Technology
13 9% 13.9%
12 3% 12.3%
Materials
39.7%
13.4%
6.5%
14.1%
Utilities
-2.2%
0.3%
S&P 500
14.3%
15.2%
Consumer Discretionary Consumer Staples Energy
Telecommunications
As of 7/15/11. Source: Thomson Reuters.
19
Cash Levels Continue to Build
1,200
12%
1,000
10%
800
8%
600
6%
400
4%
200
2%
0
0% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Cash ($B) (left axis)
As of 7/13/11. Source: Bank of America Merrill Lynch U.S. Equity Strategy.
20
Cash/Market Cap (right axis)
CASH / MAR RKET
$ BILLIO ONS
S&P 500 Non-Financials Cash
Strong Performance from Small Caps
$ DOLLA ARS
Russell 2000 vs. S&P 500 Relative Returns 180 160 140
Dec 1999 = $100
120 100 80 00
01
02
03
04
Ratio: Russell 2000/S&P 500 Source: Bank of America Merrill Lynch U.S. Equity Strategy.
21
05
06
07
08
09
10
11
Wide P/E Discount between Large and Small Caps
FORWARD P/E
S&P 500 vs. Russell 2000 30 25 20 15 10 5 79
83
87
S&P 500 Forward P/E Source: Bank of America Merrill Lynch U.S. Equity Strategy.
22
91
95
99
Russell 2000 Forward P/E
03
07
11
Investment Strategy gy Outlook
Christopher Sheldon Director, Investment Strategy
Asset Class Outlook Asset Class U.S. Large Cap Equities U.S. Small/Mid Cap Equities International Developed Equities E Emerging i M Markets k t Equities E iti High Yield Bonds Treasuries Emerging Markets Debt Municipal Bonds C Commodities diti Real Estate (REITs) Private Equity Hedge Funds (Long/Short)
24
Less Attractive
More Attractive
Investment Outlook and Portfolio Strategy • Default/downgrade fears weighing markets, risks rising, but markets expect resolution • Despite current slowdown, global recovery intact • Earlier shock from spike in oil and gasoline prices diminishing • U.S. Treasury yields remain unattractive longer term as interest rates expected to move higher • Well-researched municipal bonds and active duration management can provide solid returns • Most developed stock markets appear reasonably valued • Maintaining 1400-1450 S&P target by year end based primarily on continued strong earnings • Emerging markets tightening efforts appear to be gaining traction on inflation/growth • Alternative investment strategies increasingly important in portfolio construction • Remember the three Ds: discipline, diversification, diligence The opinions are as of 7/28/11 and are subject to change without notice. Past performance is no indication of future results.
25
Questions?
26
THANK YOU!
27
Hosted by:
Leo Grohowski Chief Investment Officer, BNY Mellon Wealth Management
Historical Market Returns Asset Class
Index
Treasury Bills
Treasury Bills (90 Day)
0.0
0.0
0.1
0.3
1.7
1.9
0.5
Tax-Exempt Bonds
S&P Intermediate Muni
3.7
4.5
4.8
6.5
5.8
5.1
5.4
Taxable Bonds
Barclays Aggregate
2.3
2.7
3.9
6.5
6.5
5.7
3.8
High Yield
Barclays High Yield
2.1
5.0
15.6
12.7
9.3
9.0
11.2
Large Cap Stocks
S&P 500
01 0.1
60 6.0
30 7 30.7
33 3.3
29 2.9
27 2.7
15 8 15.8
Mid Cap Stocks
S&P MidCap 400
(0.7)
8.6
39.4
7.8
6.6
7.9
18.2
Small Cap Stocks
Russell 2000
(1.6)
6.2
37.4
7.8
4.1
6.3
20.9
1.6
5.0
30.4
(1.8)
1.5
5.7
18.3
Emerging Mkts Stks MSCI EMF
(1.0)
1.0
28.2
4.5
11.8
16.5
24.1
Hedge Funds
HFRX Global Hedge
(2.5)
(2.1)
4.2
(3.3)
(0.2)
2.8
6.0
Real Estate
FTSE EPRA/NAREIT
29 2.9
61 6.1
33 4 33.4
23 2.3
15 1.5
10 4 10.4
20 9 20.9
Commodities
S&P GSCI
(7.9)
2.7
26.1
(21.7)
(6.2)
3.7
25.1
Private Equity*
Cambridge Associates U.S. Private Equity
N/A
N/A
21.4
5.2
9.8
10.8
International Stocks MSCI EAFE (Net)
2Q11
Annualized Returns Standard YTD 1 Year 3 Year 5 Year 10 Year Deviation
Returns as of 6/30/11, unless noted otherwise. Standard deviations are calculated based on monthly data for the trailing 10 years. Source: Morningstar. *Returns are for periods through 3/31/11 and represent Cambridge Associates U.S. Private Equity Performance Index; standard deviation is not available. 2
N/A
U.S. Currency Remains under Pressure U.S. Dollar Index 120 110 100 90 80 70 60 2000
2001
2002
2003
2004
2005
As of 6/30/2011. Source: IntercontinentalExchange (ICE) / Bloomberg L.P.
3
2006
2007
2008
2009
2010
2011
2011 Deficit and Debt as Percentage of GDP
NET DEBT, % OF G GDP
Countries with Sovereign Rating of AAA 100% 80% 60%
U.S.
France U.K.
Austria
40% 0%
Netherlands
Germany
Canada
20% Denmark
0%
Australia
Switzerland Sweden
-20%
Luxembourg
-40% Finland
-60% -10%
-8%
-6%
-4%
-2%
0%
DEFICIT, % OF GDP
Source: StrategasRP.
4
Economic Outlook
Richard Hoey Chief Economist, BNY Mellon
Global Currencyy Outlook
Michael Woolfolk Senior Currency Strategist, BNY Mellon Global Markets
Fixed Income Outlook
John Flahive Director, Fixed Income Investments
Treasury Yields Still Near Historic Lows
PERCE ENT
10-Year Constant Maturity Treasury Note Yields 3.8 3.6 3.4 3.2 3.0 2.8 Jan-11
Feb-11
As of 6/30/2011. Source: Bloomberg LP
8
Mar-11
Apr-11
May-11
Jun-11
Fixed Income Sector Returns
PERCENT
Selected Sector Returns 16
15.1
14
12.8
12 10
90 9.0
8 6
6.3
5.9 4.4
4 2
1.7 1.5
5.4
5.0
5.0
3.7
3.2 2.2 2.4
5.8
2.9
2.3
4.4 3.4
3.9
2.4
2.3 1.1
0 Treasury
Agency
2010 Year End As of 6/30/11. Source: Barclays Capital.
9
Corporate
TIPS
2011 Year-to-Date
MBS
High Yield
2nd Quarter
Emerging Municipal Markets Bond Index
Break-Even Inflation Rate RECENT RISE WITH QUANTITATIVE EASING
PERCE ENT
Yield on 10-Year Treasury Note Less 10-Year TIPS 3.0 2.5 2.0 1.5 10 1.0 0.5 0.0 Nov-06
May-07
Nov-07
As of 6/30/11. Source: Bloomberg LP
10
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Corporate Spreads down from Recent Highs
BASIS POIN NTS
U.S. Corporate Bond Yield Spreads 2,000
1,500
1,000
500
0 2008
2009 U.S. Corporate High Yield
As of 6/30/11. Source: Barclays Capital.
11
2010 U.S. Corporate Investment Grade
2011
Municipal Credit Quality Returns OPPORTUNITIES FOR WELL-RESEARCHED ISSUE SELECTION
PERCE ENT
Credit Quality Returns 6.0 52 5.2 5.0
4.6
4.3 4.0
3.8
3.7
3.0 20 2.0
2.2
2.1
2.0
1.0 0.0 AAA 2010 Year End *As of 6/30/11. Source: Barclays Capital
12
AA 2011 Year-to-Date*
A
BAA
$ BILLIO ONS
Mutual Fund Flows
80
62 42
40
19
30
18
10
2
0 -15 -40
-27 -41 41
-29
-80 -85 -120 4th Quarter 2010 Municipal Bonds
1st Quarter 2011 High Grade Taxable Bonds
As of 6/30/11. Source: Lipper FMI- U.S. Mutual Fund Flows (formerly AMG).
13
2nd Quarter 2011 Equities
Money Funds
$ BILLIO ONS
Annual Municipal Fixed Income Supply
500 400 300 200 100 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E ■ Muni Supply ■ Build America Bonds Supply ■ Supply YTD ■ Projected
As of 6/30/11. Source: Bond Buyer.
14
Upgrade to Downgrade Ratios
6
53 5.3 4.7
5
4.5
4 2.9
3
2.8
3.0 2.4
2.3
2
1.3 0.7
1
0.5
0.4
2010
2011E
0 2000
2001
2002
2003
2004
2005
2006
Sources: 2005 – 2010 Moody's Investors Service; 2011 BNY Mellon Wealth Management.
15
2007
2008
2009
Taxable Equivalent Yield Effect of Tax Rate Movements
PERCE ENT
MUNIS MORE ATTRACTIVE IN RISING RATE ENVIRONMENT
6
5.66 5.15
5
4.35
4.72
4 3
3.01
2.83
S&P Intermediate Municipal Bond Index*
Barclays B l Aggregate (Taxable)**
2 1 0 35% Tax Rate
40% Tax Rate
45% Tax Rate
*The Standard & Poor's/Investortools – Intermediate Index yield-to-worst1 as of 6/30/11. Source: Bloomberg LP. **Barclays Capital yield-to-worst as of 6/30/2011. Source: Barclays Capital. Yield-to-worst is computed by using the lower of either the yield to maturity or the yield to call on every possible call date. 16
50% Tax Rate
60 Minutes “Day of Reckoning” Aired December 19, 2010 Meredith Whitney’s Prediction: $200 Billion Bonds Default by 12/19/2011 W k since Weeks i airing ii
29
Weeks until 12/19/2011
23
Number of local government monetary defaults since airing Values of local government monetary defaults since airing Defaults per week required to reach 100 by 12/19/2011 Value of weekly defaults required to reach $200 billion by 12/19/2011
As of 7/8/11. Source: Goldman Sachs.
17
4 $488M 4.2 $8 67B $8.67B
Equity q y Outlook
Irene O’Neill Director, Large Cap U.S. Equities
Earnings Growth Projections S&P 500 Sector
2011
2012
14.5%
16.4%
9.9%
9.8%
36.8%
10.2%
Financials
5.7%
35.1%
Health Care
5.8%
6.1%
Industrials
19.9%
18.5%
Information Technology
13 9% 13.9%
12 3% 12.3%
Materials
39.7%
13.4%
6.5%
14.1%
Utilities
-2.2%
0.3%
S&P 500
14.3%
15.2%
Consumer Discretionary Consumer Staples Energy
Telecommunications
As of 7/15/11. Source: Thomson Reuters.
19
Cash Levels Continue to Build
1,200
12%
1,000
10%
800
8%
600
6%
400
4%
200
2%
0
0% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Cash ($B) (left axis)
As of 7/13/11. Source: Bank of America Merrill Lynch U.S. Equity Strategy.
20
Cash/Market Cap (right axis)
CASH / MAR RKET
$ BILLIO ONS
S&P 500 Non-Financials Cash
Strong Performance from Small Caps
$ DOLLA ARS
Russell 2000 vs. S&P 500 Relative Returns 180 160 140
Dec 1999 = $100
120 100 80 00
01
02
03
04
Ratio: Russell 2000/S&P 500 Source: Bank of America Merrill Lynch U.S. Equity Strategy.
21
05
06
07
08
09
10
11
Wide P/E Discount between Large and Small Caps
FORWARD P/E
S&P 500 vs. Russell 2000 30 25 20 15 10 5 79
83
87
S&P 500 Forward P/E Source: Bank of America Merrill Lynch U.S. Equity Strategy.
22
91
95
99
Russell 2000 Forward P/E
03
07
11
Investment Strategy gy Outlook
Christopher Sheldon Director, Investment Strategy
Asset Class Outlook Asset Class U.S. Large Cap Equities U.S. Small/Mid Cap Equities International Developed Equities E Emerging i M Markets k t Equities E iti High Yield Bonds Treasuries Emerging Markets Debt Municipal Bonds C Commodities diti Real Estate (REITs) Private Equity Hedge Funds (Long/Short)
24
Less Attractive
More Attractive
Investment Outlook and Portfolio Strategy • Default/downgrade fears weighing markets, risks rising, but markets expect resolution • Despite current slowdown, global recovery intact • Earlier shock from spike in oil and gasoline prices diminishing • U.S. Treasury yields remain unattractive longer term as interest rates expected to move higher • Well-researched municipal bonds and active duration management can provide solid returns • Most developed stock markets appear reasonably valued • Maintaining 1400-1450 S&P target by year end based primarily on continued strong earnings • Emerging markets tightening efforts appear to be gaining traction on inflation/growth • Alternative investment strategies increasingly important in portfolio construction • Remember the three Ds: discipline, diversification, diligence The opinions are as of 7/28/11 and are subject to change without notice. Past performance is no indication of future results.
25
Questions?
26
THANK YOU!
27
