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Third Quarter 2003 Market Update

Third Quarter 2003 Market Update. Major Factors Affecting the U.S. Market in Q3 2003. Better than expected data show possible signs of recovery. Public doubts about Iraq amid increased casualties. Child tax rebates mailed, government spending strong. Positive Negative

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Third Quarter 2003 Market Update

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  1. Third Quarter 2003 Market Update

  2. Major Factors Affecting the U.S. Market in Q3 2003 Better than expected data show possible signs of recovery Public doubts about Iraq amid increased casualties Child tax rebates mailed, government spending strong Positive Negative Economic activityGeopolitics Monetary policy Energy prices Fiscal policy Corporate earnings Inflation Oil prices still high, hit consumers at the gas pump Q2 results continue upward trend

  3. Productivity growth – output per worker – remains surprisingly strong Economy Recovers, Productivity Surges Economic growth accelerated in Q2 Source: Haver Analytics as of 6/30/03

  4. Business Spending Shows Signs of Recovery After a prolonged post-tech bubble contraction, capital spending is on the rise Source: Haver Analytics as of 6/30/03

  5. The Consumer: Retail Spending Holds Up, But Employment Still Weak Mortgage refinancing activity and tax rebates help boost retail sales In part due to productivity gains, employers have not yet added jobs Source: Haver Analytics as of 8/31/03

  6. Performance of Domestic Equities Positive returns across the board in Q3 Small caps… …and tech stocks continue to lead the rally Source: FMRCo as of 9/30/03

  7. All styles and caps post gains in Q3 Style and Cap Performance Led by small-cap growth, strong positive returns for all categories over the past year 3Q03One 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 9/30/03

  8. Sector Performance With business spending improving, tech continues to lead Less cyclical sectors trail Economically sensitive sectors fare well in Q3 and YTD Source: FMRCo as of 9/30/03

  9. Valuations Fall Due to Strong Earnings Growth Market PE falls as earnings rise, but still higher than historical average But valuations closer to historical average if earnings growth meets expectations Note: Trailing earnings are Compustat. Forward earnings are First Call. Source: FactSet as of 9/30/03

  10. International Equities Performance Higher than the S&P 500 Strong economic growth in Asia helps boost EM stocks With signs of an economic rebound, Japanese stocks were Q3’s star performers 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 9/30/03

  11. RECENT INTERNATIONAL PERFORMANCE Small Cap Stocks Lead Worldwide Across the globe, small caps are outperforming large caps 48.0% 42.1% 37.0% 28.6% 20.4% Region Index (% Return) 16.5% 13.2% 9.1% Russell 2000 MSCI EAFE Small Cap MSCI Europe Small Cap MSCI Pacific Small Cap For Internal Use Only As of 9/30/03. Note: Source: Morgan Stanley and FMR Co. Gross returns were used. All returns $USD. Past performance is no guarantee of future results. You may not invest directly in an index.

  12. Falling Dollar Boosts International Stock Returns Trade-Weighted U.S. Dollar U.S. investors are benefiting from the dollar’s depreciation Source: Haver Analytics as of 9/30/03

  13. Fixed Income Performance Credit bonds – investment grade and high yield – still best YTD performers Rising interest rates in Q3 led to negative returns, but bonds still positive YTD Long-term Treasury bonds had their worst month ever in July 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 9/30/03

  14. After Steep Descent, Interest Rate Reversal Cools Off Bond Markets Improved economic data provokes sharp rise in interest rates Treasury Bond Yields Source: Haver Analytics as of 9/30/03

  15. Corporate Bond Yield Spreads Decline Driven by investor search for yield, corporate balance sheet clean-up and improving economy, corporate bond spreads tightened further Source: Merrill Lynch, Lehman Brothers as of 9/30/03

  16. High Yield Returns & Defaults Default rate on high-yield bonds still falling Total Return vs. Default Rate Source: Merrill Lynch High Yield Master II Index as of 9/30/03

  17. Q3 2003 Summary • Rally continues for U.S. stocks • Corporate profits again show solid growth • Economic data indicate improvement • Small-caps and technology stocks lead the gains • International stocks post strong returns • Japan best large stock market in Q3 • Small-caps lead around the world • Falling dollar and hopes for a global recovery boost returns • Fixed income • Rising interest rates, due to improved economic data, cool off bond markets • 2003 returns still positive for almost all bond categories • Credit bonds – particularly high yield – still the leaders

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