20100831 Market Snapshot With Lizann Sonders 08105555

8/6/2019 20100831 Market Snapshot With Lizann Sonders 08105555

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Market Snapshot

September 2010

Liz Ann Sonders

Senior Vice President, Chief Investment StrategistCharles Schwab & Co., Inc.


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The Bear Case

Debt bubble has shifted from private to public sector globally

Double-dip chatter elevated

Heightened volatility/high-frequency trading/flash crash

Anemic jobs growth

Deflation risk

Faltering real estate recovery

US leading economic indicators likely peaked

Chinas leading economic indicators peaked last fall

Government intervention (rising taxes, protectionism & regulation)

Confidence crisis

Hindenburg Omen


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The Bull Case

Strong growth in emerging (& some developed) economies

Low borrowing costs

Pent-up demand (consumer & business)

Wall of worry is back with a vengeance

Credit markets on the mend; improving bank loans

Steep yield curve

Healthy corporate profits & productivity

Record high corporate cash (nearly $2 trillion)

Record positive spread between corporate cash & capital spending

Sharp rebound in M&A activity

Reasonable valuation

Tame inflation


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Growth Slowdown or Meltdown?

Double-Dip Not Signaled by Leading Indicators

As of 6/10. Green-shaded areas indicate periods of recession. Current recession based on Sonders assumption of June 2009 end date. Seelast slide for definition of recession. Source: FactSet, National Bureau of Economic Research (NBER), Organization for Economic Co-Operation and Development (OECD).

90

92

94

96

98

100

102

104

106

108

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010OECDUSCompositeLeadingIndicator

US

90

92

94

96

98

100

102

104

106

108

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010OECDComposite

LeadingIndicator

OECDArea


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US Leading Indicators Rolling Over

As of 7/10. Green-shaded areas indicate periods of recession. Current recession based on Sonders assumption of June 2009 end date. Seelast slide for definition of recession. Source: The Conference Board, FactSet, National Bureau of Economic Research (NBER).

- new orders-consumer- stocks- interest rate spread

- unemployment claims- building permits- money supply- consumer expectations

- average workweek- vendor performance- new orders-capital goods

Improving Stable Worsening

-15

-10

-5

0

5

10

15

20

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010LeadingEconomicIndex(y/y%c

hange)

But Not Yet Signaling Double-Dip Recession


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GDP Improves Then Falters

Residential Investment & Inventory Pops Unsustainable

Source: Bureau of Economic Analysis.

Inventory Investment: change in inventories added 0.6percentage points to 2Q10 & 2.8 percentage points to 4Q09

vs. subtraction of 2.3 percentage points from 4Q08.

-40

-30

-20

-10

0

1020

30

BusinessInvestment

ConsumerSpending

ResidentialInvestment

Exports FederalGov't

Spending

State/LocalGov't

Spending

Q/Qannualized%c

hange

4Q08 4Q09 2Q10


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As of 7/31/10. Real Monetary, Fiscal & Exchange Rate Policy Index is: Real M2 Money Supply (year-to-year change) plus Real FederalExpenditures (12m total, year-to-year change) less Real Federal Receipts (12m total, year-to-year change) less Real Broad Index of theForeign Exchange Value of the Dollar (year-to-year change). Source: Ned Davis Research, Inc. (NDR).

1/31/1974-7/31/2010

12-Month Changein Policy Index

Dow JonesAnnualized Gain

> 8.8 14.5%

-9.4 8.8 7.5%

< -9.4 1.5%

Monetary/Fiscal Policy Affects Stock Market

Stimulus is WaningFed Halts Exit Strategy

-20

-10

0

10

20

30

40

50

1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

NDRRealMonetary,Fiscal

&ExchangeRate

PolicyIndex NDR Policy Index

-40

-30

-20

-10

0

10

20

30

40

1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

12-MonthChangeinPolicyIndex

Policy Tightening = Bearish

Policy Easing = Bullish


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Inflation Not a Threat With No Velocity of Money

Until Then, Deflations the Bigger Threat

As of 8/10. Source: FactSet, Federal Reserve.

Fed flooded system

But velocity of money

remains depressed

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2007 2008 2009 2010

MonetaryBase

($,billions)

Monetary Base

3

4

5

6

7

8

9

10

2007 2008 2009 2010

M2toMoneta

ryBaseRatio

Money Multiplier


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Positive Yield Spread Predicts No Double-Dip

Fed Trying to Flatten Curve to Stimulate Lending?

As of 7/10. Chart uses the difference between 10-year and 3-month Treasury rates to calculate the probability of a recession in the UnitedStates twelve months ahead. Green-shaded areas indicate periods of recession. Current recession based on Sonders assumption of June2009 end date. Source: Federal Reserve Bank of New York.

0.0

0.2

0.4

0.6

0.8

1.0

1960 1970 1980 1990 2000 2010

ProbabilityofUSRecession

Predictedby

TreasurySpread


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Money Supply Growth Extremely Low

Main Trigger for QE2 Talk

As of 7/10. QE=quantitative easing. Green-shaded areas indicate periods of recession. Current recession based on Sonders assumption ofJune 2009 end date. Source: Ned Davis Research, Inc.

0

2

4

6

8

10

12

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

M2MoneySupply(y/y%c

han

ge)


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Credit Conditions Healthier

But Lending Activity Remains Subdued

As of 8/27/10. Y-axis values are z-scores which represent the number of standard deviations that current financial conditions lie above orbelow the average of the 1992-2008 period. Source: Bloomberg.

The BFCI combines yield spreads and indices from the short-term debtmarkets, equity markets and bond markets into a single normalized index.

-12

-10

-8

-6

-4

-2

0

2

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

Bloomb

ergUSFinancia

l

ConditionsIndex

Lehman

Shock


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Claims Drop Lost Some Momentum

But Still Better Than Two Prior Jobless Recoveries

Current (11/7/08-8/20/10). 1983 (5/14/82-3/30/84). 1991 and 2002 (average of 11/2/90-9/18/92 and 5/25/01-4/11/03). Source: Departmentof Labor, FactSet.

300

350

400450

500

550

600

650

Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10

InitialUnemp

loymentClaims

(4-weekaverage)

Current 1983 1992 & 2002 Average


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Diminishing Returns from Debt-Financing by Decade

Date RangeDecade Change in Debt

($, billions)Decade Change in GDP

($, billions)Debt/GDP

12/31/49-12/31/59 337.6 248.0 1.36

12/31/59-12/31/69 752.1 491.3 1.53

12/31/69-12/31/79 2,785.2 1,654.9 1.68

12/31/79-12/31/89 8,562.8 2,922.3 2.93

12/31/89-12/31/99 12,550.0 4,026.0 3.12

12/31/99-12/31/09 26,939.2 4,846.1 5.56

Source: Ned Davis Research, Inc.

Debts Growth as GDP-Driver

Over $5 of Debt to Produce $1 of GDPNot Sustainable!


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Public Sector Takes Borrowing Lead

While Fed Became Lender of Last Resort

As of 1Q10. Four-quarter moving average applied to data. Source: FactSet, Federal Reserve, MacroMavens.

-1,000

-500

0

500

1,000

1,500

2,000

2,500

1968 1974 1980 1986 1992 1998 2004 2010

TotalUSBorrowing($,billions)

Private Se ctor Public Sector

Borrowing

-500

-250

0

250

500

750

1,000

1,250

1968 1974 1980 1986 1992 1998 2004 2010

TotalLending

($,billions)

Foreign Federal Reserve

Lending


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Real GDP Growth as Level of Government Debt Varies

Select Advanced Economies (1790-2009)

Central (Federal) Government Debt/GDP

Below 30% 30% - 60% 60% - 90% 90% and Above

Average 3.7 3.0 3.4 1.7

Median 3.9 3.1 2.8 1.9

# of Observations 866 654 445 352

Select Emerging Market Economies (1900-2009)

Central (Federal) Government Debt/GDP

Below 30% 30% - 60% 60% - 90% 90% and Above

Average 4.3 4.1 4.2 1.0

Median 4.5 4.4 4.5 2.9

# of Observations 686 450 148 113

As of 1/7/10. Source: Growth in a Time of Debt by Carmen M. Reinhart and Kenneth S. Rogoff.

90% Debt/GDP = Threshold Above Which GDP Suffers

US Federal Debt Presently 93%


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GDPs Strength Has Dissipated

As Debt Growth Has Surged

As of 1Q10. Source: Bureau of Economic Analysis, FactSet, Federal Reserve.

40

60

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100

120

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

NominalGDP(10

-year%c

hg)

GDP

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010TotalCreditMarke

tDebtas%o

fGDP

Credit Market Debt


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Bond Yields & Stock Prices Positively Correlated

Typical of Deflation Risk Eras

As of 7/10. Source: The Leuthold Group.

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-0.1

0.0

0.1

0.2

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1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010Monthly%C

ha

ngesinS&P500and10Y

BondYields(rolling10-yearcorrelation)

Correlation surged at onsetof deflationary 1930s

Correlation moved up in 1950s afterpost-WWII inflation finally broken

Since 1990s: excess supply from emerging marketstips world toward deflation, sending correlation up


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Equity Fund Flows Negative

While Bond Fund Flows Soar

As of 6/10. Data based on 36-month sum. Source: Investment Company Institute (ICI), ISI Group.

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0

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800

1993 1995 1997 1999 2001 2003 2005 2007 2009

USEquityMu

tualFunds

NetNew

CashFlow

($,billions) Equities

-200

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800

1993 1995 1997 1999 2001 2003 2005 2007 2009

USBondMutualFunds

NetNew

Cash

Flow

($,billions)

Bonds


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Record High Bonds (5/10)Cash, 24%

Stocks & Stock

Funds, 51%

Bonds & Bond

Funds, 25%

As of 7/10. For purposes of American Association of Individual Investors' Asset Allocation Survey, cash is defined to include cash products(savings accounts), and cash investments (CDs, money market funds). Source: American Association of Individual Allocation Survey (1987-2010).

Risk-Aversion Up Again as Investors Flee Back to Bonds

Record High Cash (3/09)

Cash, 45%

Stocks & Stock

Funds, 41%

Bonds & Bond

Funds, 14%

Record High Stocks (3/00)

Bonds & Bond

Funds, 8%

Stocks & Stock

Funds, 77%

Cash, 15%

Current Month (7/10)

Cash, 24%

Stocks & StockFunds, 52%

Bonds & Bond

Funds, 24%


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-4%

0%

4%

8%

12%

16%

1926 1935 1944 1953 1962 1971 1980 1989 1998 2007

S&P500vs.10-YearTreasuries

(20-yeartrailingtotalreturn)

Longer-Term, Reversion to Mean for Stocks/Bonds?

Nearly Unprecedented 20-Year Outperformance by Bonds

TR: total return. ACR:: annual compound rate of return. As of 2Q10. Source: Bloomberg, The Leuthold Group.

Five Years LaterS&P 500 TR: +33.8% (ACR)

10-Year Treasury TR: +4.6% (ACR)

Five Years LaterS&P 500 TR: +23.1% (ACR)10-Year Treasury TR: +1.6% (ACR)

1Q09 Low thru 2Q10S&P 500 TR: +25.4% (ACR)10-Year Treasury TR: +7.7% (ACR)


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The information provided here is for general informational purposes only andshould not be considered an individualized recommendation or personalizedinvestment advice. The investment strategies mentioned here may not besuitable for everyone. Each investor needs to review an investment strategy forhis or her own particular situation before making any investment decision.

We believe the information obtained from third-party sources to be reliable, butneither Schwab nor its affiliates guarantee its accuracy, timeliness, orcompleteness. The views, opinions and estimates herein are as of the date ofthe material and are subject to change without notice at any time in reaction to

shifting market conditions. Past performance is no guarantee of future resultsand the opinions presented cannot be viewed as an indicator of futureperformance.

Examples provided are for illustrative purposes only and not intended to be

reflective of results you should expect to attain.

Disclosures

2010 Charles Schwab & Co., Inc. All rights reserved. Member SIPC


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Indexes are unmanaged, do not incur management fees, costs and expenses (or"transaction fees or other related expenses"), and cannot be invested in directly.The Dow Jones Industrial Average(DJIA, The Dow) is a price-weightedaverage of 30 actively traded blue chip stocks, primarily industrials and is theoldest and most widely quoted of all the market indicators.

The S&P 500 Indexis a capitalization-weighted index of 500 stocks from a broadrange of industries. The component stocks are weighted according to the totalmarket value of their outstanding shares.

Definitions



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Asset Allocation- The strategy of spreading your investment funds acrosscategories of assets such as stocks, bonds and cash investments to help offsetrisks and rewards, based on your goals, time horizon and risk tolerance.Ned Davis Research (NDR) Crowd Sentiment Poll- Shows perspective on acomposite sentiment indicator designed to highlight short- to intermediate-term

swings in investor psychology. It's based on seven different individual sentimentindicators in order to represent the psychology of a broad array of investors.Recession- As per National Bureau of Economic Research (NBER), a recessionis a significant decline in economic activity spread across the economy, lastingmore than a few months, normally visible in real GDP, real income, employment,

industrial production, and wholesale-retail sales.

Terms


Documents

20100831 Market Snapshot With Lizann Sonders 08105555