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Economics/ Capital Market Outlook Business Finance 824 4/30/02 Chris Bushman Karl Forster Dave Mayrer Mark Neustadt Eric

Economics/ Capital Market Outlook Business Finance 824 4/30/02 Chris Bushman Karl Forster Dave Mayrer Mark Neustadt Eric Plamper Manoj Patil Agenda Economic Overview Actual GDP GDP Gap Monetary/Fiscal Policy Stock Market Outlook Key Drivers Predictions Economic Overview

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Economics/ Capital Market Outlook Business Finance 824 4/30/02 Chris Bushman Karl Forster Dave Mayrer Mark Neustadt Eric

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  1. Economics/ Capital Market Outlook Business Finance 824 4/30/02 Chris Bushman Karl Forster Dave Mayrer Mark Neustadt Eric Plamper Manoj Patil

  2. Agenda • Economic Overview • Actual GDP • GDP Gap • Monetary/Fiscal Policy • Stock Market Outlook • Key Drivers • Predictions

  3. Economic Overview Natural Resources Physical Capital Labor Force Technology Potential Output Consumer Demand Embedded Inflation Business Demand Output Gap Output (GDP) Unemployment Rate Government Demand Net Foreign Demand Inflation Change in Inventories Demand for Liquidity Inflation Premium Federal Reserve Policy Interest Rates

  4. Economic Overview Natural Resources Physical Capital Labor Force Technology Potential Output Consumer Demand Embedded Inflation Business Demand Output Gap Output (GDP) Unemployment Rate Government Demand Net Foreign Demand Inflation Change in Inventories Demand for Liquidity Inflation Premium Federal Reserve Policy Interest Rates

  5. Actual GDP

  6. Consumption Quarterly % Change Actual GDP University of Michigan Consumer Sentiment

  7. Investment Quarterly % Change Actual GDP Government Quarterly % Change

  8. Actual GDP Change in Inventory Quarterly % Change Inventory to Sales Ratio • Absolute Inventories at Low Levels • Inventory to Sales Ratio at low Level • Change in inventory trend could be reversing

  9. Economic Overview Natural Resources Physical Capital Labor Force Technology Potential Output Consumer Demand Embedded Inflation Business Demand Output Gap Output (GDP) Unemployment Rate Government Demand Net Foreign Demand Inflation Change in Inventories Demand for Liquidity Inflation Premium Federal Reserve Policy Interest Rates

  10. Economic Overview Natural Resources Physical Capital Labor Force Technology Potential Output Consumer Demand Embedded Inflation Business Demand Output Gap Output (GDP) Unemployment Rate Government Demand Net Foreign Demand Inflation Change in Inventories Demand for Liquidity Inflation Premium Federal Reserve Policy Interest Rates

  11. Unemployment • Output gap • slack • March: 5.7% • Claims • Extended • benefits cloud • data • Consumer • impacts

  12. CPI Inflation • Productivity • impacts • Imports • Includes food • & energy % Change Q4 2001 GDP Deflator • Broader • measure • Similar drivers

  13. Economic Overview Natural Resources Physical Capital Labor Force Technology Potential Output Consumer Demand Embedded Inflation Business Demand Output Gap Output (GDP) Unemployment Rate Government Demand Net Foreign Demand Inflation Change in Inventories Demand for Liquidity Inflation Premium Federal Reserve Policy Interest Rates

  14. Monetary Policy Fed Funds Rate • 40-yr. Low • 2-4 months more • on hold • Consumer • borrowing • Business • borrowing Money Supply Growth • 9/11 change • Recent tightening • (inflation)

  15. Economic Outlook • Below long term average growth • Above long term average unemployment

  16. Stock Market Outlook Predictions • 5-7% stock market returns for 2002 • 3-4% bond market returns for 2002 • No interest rate increases in the near term • Still an attractive alternative for risk averse investors • We expect stable returns for 2002 • Both of these projections are lower than past returns

  17. Stock Market Outlook Value or Growth? • Value outperforms when: • Expansive Monetary Policy • Economic Recoveries • High Valuations for Growth • We expect Value stocks to outperform Growth stocks in the near term • Since Value has been outperforming Growth for some time now, the questions is how long this trend will continue. We predict at least for the coming year.

  18. Stock Market Outlook

  19. Stock Market Outlook Asset Class • Small-cap and Mid-cap stocks will be the top performers • Small and Mid-cap stocks perform worst during corrections and best during recoveries

  20. Stock Market Outlook

  21. Stock Market Outlook Corporate Earnings • Earnings will begin growing especially later in the year • Earnings will be stronger than in the past two years • Expansionary Monetary Policy should begin taking effect • Expansionary Fiscal Policy – Reduced Tax Rates (personal and corporate level)

  22. Stock Market Outlook Sectors • Cyclical Sectors will outperform Defensive and Growth Sectors • The best performing sectors will be • Consumer Discretionary • Energy • Industrials • Materials

  23. Stock Market Outlook Valuation • Valuations are still on the high side relative to historic averages • We expect valuations to contract • High P/E ratios relative to the past will generally revert back to the mean • Earnings will increase faster than stock prices causing P/E ratios to fall

  24. Stock Market Outlook

  25. Stock Market Outlook The Best Place to be in 2002 • Small-cap Value stocks • Cyclical stocks

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