Playing The Bull Market s Final Inning(s) Douglas Ramsey, CFA, CMT Mid-September 2013 FOR PROFESSIONAL USE ONLY. FURTHER DISTRIBUTION OF THE INFORMATION CONTAINED HEREIN IS PROHIBITED WITHOUT PRIOR PERMISSION.
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MTI is mildly bullish Major Trend Index Net Reading Intrinsic Value -215 Economic/Interest Rates/Inflation -7 Attitudinal -146 Supply/Demand 75 Momentum/Breadth/Divergence +435 Ratio of Positive to Negative Points: 1.12 Above 1.05 = Bullish Between 0.95 and 1.05 = Neutral Below 0.95 = Bearish 3
It s not exactly been a global bull market United States (S&P 500) Foreign Developed Markets (MSCI World Ex USA) Emerging Markets (MSCI) 1700 1600 1500 1400 1300 1200 1100 1000 1850 1800 1750 1700 1650 1600 1550 1500 1450 1400 1350 1200 1150 1100 1050 1000 950 900 850 2010 2011 2012 2013 4
The tape is mostly in gear S&P 500 Dow Jones 65 Composite Dow Jones Transports 1500 5000 4500 4000 3500 6000 5000 Dow Jones Utilities Russell 2000 S&P 500 Financials 4000 500 450 400 350 1000 900 800 700 600 250 200 Morgan Stanley Cyclical Index 150 1000 NYSE Advance/Decline Line 2010 2011 2012 2013 40000 35000 30000 x10 5 July 22, 2013 S&P 500 bull market high
Tape is in gear (cont.) Market Early Warning Signals: Prior S&P 500 Tops Vs. Today Subse- Dow 65 Dow Dow Russell S&P 500 MS NYSE Total Date of quent Composite Transports Utilities 2000 Financials Cyclical A/D Line Number of Bull Market High Decline Warning? Warning? Warning? Warning? Warning? Warning? Warning? Warnings* July 16, 1990-19.9 % 1 1 1 1 1 1 1 7 July 17, 1998-19.3 1 1 0 1 0 1 1 5 March 24, 2000-49.1 1 1 1 0 1 1 1 6 October 9, 2007-56.8 1 1 1 1 1 1 1 7 Average: 6.3 Important Highs, March 2009 To Date April 23, 2010-16.0 0 0 1 0 0 0 0 1 April 29, 2011-19.4 0 0 0 0 1 0 0 1 August 2, 2013-4.6 0 0 1 0 0 0 0 1 *A warning is issued when an index fails to "confirm" a new S&P 500 bull market price high during the preceding 21 trading days (one month). Usually most of these internal market measures will deteriorate before the final bull market peak is achieved. But at the August 2nd high, just one of these seven leading measures (DJ Utilities) had raised a warning flag. 6
Two longer-term warning signs S&P 500 NYSE Weekly Advance/Decline Line The NYSE Weekly Advance/Decline Line generally acts stronger than its daily counterpart throughout a bull market. But the weekly version now looks weaker, and hasn't made a new high since mid-may. 2007 2008 2009 2010 2011 2012 2013 1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 4300 4200 4100 4000 3900 3800 3700 3600 S&P 500 NYSE High/Low Logic Index* (10-Wk. Avg.) Above 5% - Tape is "divergent"- BEARISH NYSE new 52- week highs and lows are both at elevated levels, a sign that market strength is not as uniform as indicated by most other measures. Below 1% - Tape is "in gear"- BULLISH 2007 2008 2009 2010 2011 2012 2013 1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 6 5 4 3 2 1 0 Index calculated as the lesser of NYSE Weekly New Highs and New Lows as a percentage of issues traded. 7
A possible sign of distribution? SPDR S&P 500 ETF Trust (SPY) 180 170 160 150 140 130 120 110 100 90 80 70 SPDR Cumulative Opening Price Change (The "Emotional Money") SPDR Cumulative Intraday Price Change (The "Smart Money") 195 190 185 180 175 170 165 160 155-60 -70-80 -90 Morning hype has lately been giving way to afternoon weakness a sign the smart money may be "distributing" stock. 2007 2008 2009 2010 2011 2012 2013-100 -110-120 -130 8
Rates and stocks prices can rise together Stocks & Interest Rates Can Sometimes Go Up Together S&P 500 2400 1900 1500 1200 900 700 500 400 300 200 100 5 6 7 8 9 10 11 12 1 2 3 4 14 12 10 8 U.S. 10-Yr. Treasury Bond Yield (weekly close) 6 4 1950 1960 1970 1980 1990 2000 2010 2 9
Rising rates/ rising stock prices (cont.) S&P 500 10-Yr. P/E on 5-Yr. Bond Stock Market/ Normalized Dates Yield S&P 500 Bond Yield Action EPS 1 May 2, 1958 2.89 43.69 Stock Market Up: 38.5 % 15.1 July 31, 1959 4.41 60.51 Bond Yields Up: 152 Basis Points 2 January 11, 1963 3.80 64.85 Stock Market Up: 44.7 % 21.0 February 11, 1966 4.86 93.81 Bond Yields Up: 106 Basis Points 3 January 27, 1967 4.47 86.16 Stock Market Up: 25.8 % 21.2 November 29, 1968 5.78 108.37 Bond Yields Up: 131 Basis Points 4 November 5, 1971 5.72 94.46 Stock Market Up: 26.8 % 15.2 January 5, 1973 6.42 119.73 Bond Yields Up: 70 Basis Points 5 March 3, 1978 8.04 87.04 Stock Market Up: 60.1 % 11.3 November 28, 1980 12.72 139.33 Bond Yields Up: 468 Basis Points 6 November 5, 1982 10.48 143.02 Stock Market Up: 19.1 % 8.8 July 22, 1983 11.43 170.35 Bond Yields Up: 95 Basis Points 7 April 18, 1986 7.09 242.42 Stock Market Up: 38.9 % 16.5 August 21, 1987 8.77 336.77 Bond Yields Up: 168 Basis Points 8 January 19, 1996 5.54 612.79 Stock Market Up: 8.0 % 24.6 June 7, 1996 6.93 662.06 Bond Yields Up: 139 Basis Points 9 October 2, 1998 4.31 1002.60 Stock Market Up: 46.1 % 27.8 January 14, 2000 6.69 1465.15 Bond Yields Up: 238 Basis Points 10 June 13, 2003 3.13 988.61 Stock Market Up: 34.1 % 23.0 May 5, 2006 5.12 1325.76 Bond Yields Up: 199 Basis Points 11 March 20, 2009 2.65 768.54 Stock Market Up: 53.3 % 11.3 April 2, 2010 3.96 1178.10 Bond Yields Up: 131 Basis Points 12 June 1, 2012 1.47 1278.04 Stock Market Up: 29.5 % 18.6 September 6, 2013 (To 2.94 1655.17 Bond Yields Up: 147 Basis Points Average Stock Market Gain (Excl. 2012-13): 35.4 % 17.9 Median Stock Market Gain (Excl. 2012-13): 36.3 % 17.6 Average Bond Yield Increase (Excl. 2012-13): Median Bond Yield Increase (Excl. 2012-13): 170 Basis Points 143 Basis Points 10
Bull markets have frequently topped near current valuations S&P 500 Normalized P/E At Bull Market Peaks, 1957 To Date S&P 500 Normalized Date Of S&P 500 P/E At Bull Bull Market Peak Market Peak December 31, 1961 22.3 x February 28, 1966 23.0 November 29, 1968 20.6 January 31, 1973 20.8 September 29, 1976 13.6 November 29, 1980 11.3 August 31, 1987 22.3 "Normal" July 31, 1990 18.4 S&P 500 July 31, 1998 27.7 Bull Market March 31, 2000 32.1 High October 31, 2007 20.9 Median At Modern Era Bull Market Peaks (1957 To Date) 20.9 x 1695.ec S&P 500 P/E On 5-Yr. Normalized EPS (1926 To Date - Monthly) 1957-to-Date Median = 18.6x August 30, 2013 = 20.1x (76th percentile since 1926) 35 30 25 20 1926-to-Date Median = 16.6x 15 10 Great Depression earnings wipeout 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 5 11
Profit margins have probably peaked for this business cycle U.S. Corporate Profits As A Percent Of GDP [from National Income and Product Accounts (NIPA); Profits are after tax and Include inventory valuation allowance and capital consumption adjustment] 65-Yr. Median = 6.0% 1947 1950 1951 1954 1957 1960 1961 1964 1967 1970 1974 1977 1980 1983 1987 1990 1993 1996 2000 2003 2006 2009 2010 2013 201 4.7% 8.6% 5.5% 10.3% 10.1% (2Q) 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 12
Implications of high margins 20 18 16 5-Yr. Annualized Growth In NIPA Corporate Profits (scale at left) 4.0 4.5 14 5.0 12 5.5 10 8 6 6.0 6.5 4 7.0 2 7.5 0-2 -4-6 -8-10 -12 Margins Are An Excellent (But Unfortunately Inverse) Predictor Of Future Profit Growth Concept courtesy of Hussman Research & Insight. NIPA Corporate Profits As A Pct.Of GDP - advanced five years and shown on inverted scale (right) 8.0 8.5 9.0 9.5 10.0. 1952 1956 1960 1964 19681970 1972 1976 1980 1984 19881990 1992 1996 2000 2004 20082010 2012 2016 2 Today's profit margins are so inflated that substantially slower profit growth over the next three to five years is almost baked in the cake. 13
The bond bull has been a big driver of margin gains.. 18 16 14 12 1950 1960 1970 1980 1990 2000 2010 How The Bond Bull Boosted Earnings... Net Interest Expense As A Pct Of Earnings Before Interest And Taxes (EBIT) (right scale) 70 65 60 55 50 45 10 40 35 8 likely path 30 25 6 4 Moody's BAA Corporate Bond Yield (quarterly average - left scale) best case 20 15 10 2 47 491950 51 53 55 57 591960 61 63 65 67 691970 71 73 75 77 791980 81 83 85 87 891990 93 95 97 992000 01 03 05 07 01011 2010 13 14 15 5 14
Bookkeepers have also helped boost margins 65 1950 1960 1970 1980 1990 2000 2010 60 55 50 45 40 How Bookkeepers Have Boosted Earnings... Top Marginal Corporate Tax Rate 65 60 55 50 45 40 35 35 30 30 25 20 15 Corporate Income Taxes As A Percent Of Pretax Corporate Profits (Effective Tax Rate) 19.9% (2Q) 25 20 15 200 47 491950 51 53 55 57 591960 61 63 65 67 691970 71 73 75 77 791980 81 83 85 87 891990 93 95 97 992000 01 03 05 07 01011 2010 13 14 15 200 150 Effective Corporate Tax Rate As A Percentage Of Statutory Rate 150 66-Yr. Median = 80% 100 100 50 57% (2Q) 1950 47 49 51 53 551960 57 59 61 63 65 1970 67 69 71 73 75 77 1980 79 81 83 85 871990 89 91 93 95 97 2000 99 01 03 05 07 01011 2010 13 14 15 50 15
Virtually all margin improvement has been below the line From The Late 1990s Profitability Peak To Today NIPA Income Statement 1997:Q3 2013:Q2 Earnings Before Interest & Taxes As Pct. Of "Sales" (i.e., GDP) 15.1% 15.3% Net Interest Payments Pct Sales 4.8% 2.7% Corporate Income Taxes Pct Sales 2.9% 2.5% Net Corporate Profit Margin 7.3% 10.1% Margin Expansion: 16
On the positive side, EBIT margins have room to move higher Earnings Before Interest And Taxes (EBIT) As A Percent Of GDP 16.7% 15.1% 16.4% 15.3% (2Q) 18 17 16 15 14 13 66-Yr. Median = 13.7% 12.2% 11.9% 12 11 10 1947 1950 1951 1954 1957 1960 1961 1964 1967 1970 1974 1977 1980 1983 1987 1990 1993 1996 2000 2003 2006 2009 2010 2013 201 From National Income and Product Accounts (NIPA); Profits include inventory valuation allowance and capital consumption adjustment. 17
Breadth of earnings gains has narrowed dramatically in last year 6 yrs. of strong earnings breadth 4+ yrs. Of strong earnings breadth 2 yrs. of strong earnings breadth 75 70 65 60 55 60% = recession alert 50 Percent Of Companies With Rising Year-Over-Year Earnings* 1990 2000 2010 *Based on tabulation of all earnings reports published in Investor's Business Daily. 45 40 35 18
Earnings breadth & the leadership inversion Earnings Breadth & Stock Market Leadership February 17, 2011: Peak in earnings breadth Percent Of Companies With Rising Year-Over-Year Earnings Ratio, Morgan Stanley Cyclical Index/ Consumer Index Ratio, S&P 500 High Beta/ Low Volatility Index 75 70 65 60 55 50 45 40 140 130 120 110 100 90 80 70 180 160 140 120 100 80 Ratio, Russell 2000 to S&P 500 2008 2009 2010 2011 2012 2013 62 60 58 56 54 52 50 19
Industry groups are enjoying positive feedback Ratio, Strong To Weak Global Industries (Relative price performance of top to bottom quintile of MSCI World Level III industry porfolios formed monthly on trailing 12-mo. price momentum.) 2002 bear market low 2009 bear market low 2011 correction low The stock market is in a "positive feedback" loop in which winning industry themes tend to keep winning over the short- to intermediate-term. This is likely to continue on a relative basis until well into the next bear market. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1050 1000 950 900 850 800 750 700 650 600 550 500 450 400 350 300 250 20
Momentum strategies work best near the end of a bull market Performance Of Price Momentum In Last 12 Months Of Bull Markets Stocks With Stocks With Date Of Monthly High Price Low Price Bull Market High Momentum Momentum August 1929 68.3 20.1 February 1937 34.6 18.6 October 1938 8.1 10.3 May 1946 61.1 31.4 July 1956 24.4 11.2 December 1961 27.3 19.7 January 1966 33.9 4.3 November 1968 22.9 23.8 December 1972 23.7 6.5 September 1976 26.1 26.6 November 1980 76.2 15.9 August 1987 30.0 39.8 June 1990 19.3 1.8 June 1998 35.3 19.5 March 2000 38.7 3.7 October 2007 25.6 8.7 Average 34.7 % 16.4 % Number Of Times With Highest Return 12 4 Monthly total returns for large-cap stocks based on Fama-French Momentum Portfolios, Tuck School of Business. Boxes highlight higher return in last year of bull market. 21
And momentum even wins during bear markets! Performance Of Price Momentum During Cyclical Bear Markets Stocks With Stocks With Bear Market Dates High Price Low Price (Monthly) Momentum Momentum Sep 1929 - Jun 1932-77.3-94.5 Mar 1937 - Mar 1938-51.2-56.3 Nov 1938 - Apr 1942-24.2-28.7 Jun 1946 - Jun 1949-16.0-26.3 Aug 1956 - Oct 1957-12.6-19.1 Jan 1962 - Jun 1962-21.5-30.2 Feb 1966 - Sep 1966-11.4-16.2 Dec 1968 - Jun 1970-31.3-35.3 Jan 1973 - Sep 1974-39.8-64.0 Oct 1976 - Feb 1978 4.2-20.7 Dec 1980 - Jul 1982-21.8-13.2 Sep 1987 - Nov 1987-30.4-19.3 Jul 1990 - Oct 1990-12.1-31.9 Jul 1998 - Aug 1998-14.6-17.8 Apr 2000 - Sep 2002-38.1-56.4 Nov 2007 - Feb 2002-48.3-68.8 Average -27.9 % -37.4 % Median -21.8-28.7 Number Of Times With Highest Return 14 2 Monthly total returns for large-cap stocks based on Fama-French Momentum Portfolios, Tuck School of Business. Boxes highlight better performer during bear market. 22
New bull markets see the Revenge of the Nerds Performance Of Price Momentum In First Year Of New Bull Markets Stocks With Stocks With Date Of High Price Low Price Bear Market Low Momentum Momentum June 1932 100.4 % 287.7 % March 1938 25.1 62.4 April 1942 66.6 61.1 June 1949 40.9 38.3 October 1957 31.9 31.6 June 1962 38.1 26.9 October 1966 39.7 34.2 May 1970 39.6 64.3 October 1974 37.7 52.4 March 1978 27.5 18.5 August 1982 66.3 64.1 December 1987 20.5 32.5 October 1990 37.6 74.0 August 1998 43.4 49.2 October 2002 14.9 51.1 February 2009 35.5 116.7 Average 41.6 % 66.6 % Number Of Times With Highest Return 7 9 Monthly total returns for large-cap stocks based on Fama-French Momentum Portfolios, Tuck School of Business. Boxes highlight higher return in first year of bull market. 23
Investors remain in love with yield, at a time it scarcely exists Total Yield On A 60/40 Portfolio (60% S&P 500/40% 10-Yr. Treasurys) 1878-To-Date Median = 4.15% 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 August 30, 2013 = 2.43% 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2.0 1.5 24
A sober portfolio forecast 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 Total Yield On A 60/40 Portfolio Vs. 10-Yr. Total Portfolio Return Correlation Coefficient (1878 To Date) = 0.66 10-Yr. Trailing Return On 60/40 Portfolio (right scale) 21 20 19 18 17 16 15 14 13 7.5 12 7.0 11 6.5 10 6.0 9 5.5 5.0 4.5 4.0 3.5 3.0 2.5 8 7 6 5 4 3 2 1 2.0 1.5 Total Yield On 60/40 Portfolio (advanced 10 yrs. - left scale) 1870 1880 1880 1890 1890 1900 1910 1900 1910 1920 1920 1930 1930 1940 1940 1950 1950 1960 1960 1970 1970 1980 1990 1980 1990 2000 2000 2010 2010 2020 0-1 25
The bipolar modern history of bonds U.S. 10-Yr. Treasury Bond Real Total Return Index (Cumulative Total Return Deflated By CPI) 1926 To Date 45 40 35 30 Annualized Real Total Return, Jan26 - Jan13 = +2.38% Annualized Real Total Return, Oct81 - Jan13 = +6.67% 25 20 15 10 Annualized Real Total Return, Jan26 - Sep81 = +0.01% September 30, 1981 - the best date in U.S. history to retire 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 5 0 26
A simple way to forecast bond returns Current Bond Yields Have Historically Been An Excellent Estimate Of Bonds' 10-Yr. Future Total Return Potential... Correlation, January 1930 To Date = 0.96 10-Yr. U.S. Treasury Bonds 10-Yr. Annualized Total Return 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 U.S. 10-Yr. Treasury Bond Yield, Advanced 10 Years 2 1 0 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 27
Bond market symmetry! The Bond Bull Market Has Essentially Been The Mirror Image Of The Previous Bear! September 1981 yield peak = 15.32% Correlation Between Actual Yield and "Mirror Image" Forecast, October 1981 To Date = 0.92 Oct81-To-Date Actual U.S. 10-Yr. T-Bond Yield (mo. avg.) 16 15 14 13 12 11 10 9 8 7 6 Sep41-Sep81: U.S. 10-Yr. Treasury Bond Yield (mo. avg.) Oct81-Sep21: "Mirror Image" of 1941-1981 U.S. 10-Yr. T-Bond Yield (mo. avg.) 5 4 3 2 1 940 1950 1960 1970 1980 1990 2000 2010 20 To preserve its near-perfect symmetry with the preceding bear market, the secular bond bull begun in September 1981 would need to last until July 2017. 28
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S&P 500 18 16 14 12 10 8 6 4 2 0 A Simple, Single-Asset Annual Allocation Strategy: Invest Using Last Year's Performance Rank, 1973-2012 Second Best Third Best Fourth Best Fifth Best Sixth Best Worst Performing Asset 30 Best Performing Asset T O T A L R E T U R N (%)
Buy last year s Bridesmaid asset class! 2012 Total Return REITs (NAREIT Index) 20.1 % MSCI EAFE 17.9 Russell 2000 16.4 S&P 500 16.0 Gold 5.9 10-Yr. U.S. Treasury Bonds 2.8 Commodities (GSCI) 0.1 Year Bridesmaid Asset Class Owned During Year 1973-14.7 % Commodities 75.0 % 95.1 1974-26.5 Gold 66.3 47.5 1975 37.2 Commodities -17.2-33.1 1976 23.8 Large Caps 23.8 30.3 1977-7.2 REITs 19.1 6.0 1978 6.6 Gold 37.0 21.7 1979 18.4 EAFE 6.2 25.2 1980 32.4 Small Caps 38.6 17.9 1981-4.9 Large Caps -4.9 8.3 1982 21.4 Govt. Bonds 39.3 22.0 1983 22.5 REITs 25.5 29.9 1984 6.3 REITs 14.8 11.8 1985 32.2 REITs 5.9 18.1 1986 18.5 Large Caps 18.5 5.6 1987 5.2 Govt. Bonds -2.2-10.8 1988 16.8 Commodities 27.9 30.0 1989 31.5 Commodities 38.3 31.6 1990-3.2 Large Caps -3.2 4.7 1991 30.5 Govt. Bonds 18.8 10.8 1992 7.7 REITs 12.2 0.2 1993 10.0 REITs 18.5 20.0 1994 1.3 Small Caps -1.8-6.4 1995 37.4 Commodities 20.3 21.7 1996 23.1 Small Caps 16.5 27.0 1997 33.4 Commodities -14.1 15.9 1998 28.6 Small Caps -2.5 24.0 1999 21.0 EAFE 27.4 19.4 2000-9.1 EAFE -14.0-24.3 2001-11.9 REITs 15.5 13.5 2002-22.1 Govt. Bonds 15.4 26.1 2003 28.7 Gold 20.9 12.4 2004 10.9 EAFE 20.7 22.6 2005 4.9 EAFE 14.0 5.0 2006 15.8 Gold 22.5 26.8 2007 5.5 EAFE 11.6 8.6 2008-37.0 Gold 4.3 14.1 2009 26.5 Gold 26.5 24.0 2010 15.1 REITs 27.6 11.9 2011 2.1 REITs 7.3-15.9 2012 16.0 Gold 5.9 16.3 2013 EAFE 1973-2012, Annualized Total Return: 9.8 % 15.6 % 14.2 % Std. Deviation: 18.1 % 19.0 % 20.2 % No. Yrs Matching Or Exceeding S&P 500: 28/40 23/40 Correlation With S&P 500 (Annual Returns): -0.11-0.09 S&P 500 Total Return Bridesmaid Strategy (Own Previous Year's Runner-Up Asset Class) Total Return Bridesmaid Strategy With Monthly Rebalancing (Using 12-Mo. Momentum) 31
Bridesmaid has been a winning sector strategy, too 2012 Total S&P 500 Sectors Return Financials 28.8 % Consumer Discretionary 24.1 Telecom Services 18.3 Health Care 17.9 Industrials 15.3 Materials 15.0 Information Technology 14.8 Consumer Staples 10.8 Energy 4.6 Utilities 1.3 S&P 500 16.0 % Bridesmaid Sector Strategy With Bridesmaid Monthly S&P 500 Bridesmaid Strategy Rebalancing Total Sector (Last Year's Total (Using 12-Mo. Return Second Best Sector) Return Momentum) 1991 30.5 % Consumer Staples 41.7 % 45.7 1992 7.6 Financials 23.3 13.5 1993 10.1 Consumer Discretionary 14.6 19.2 1994 1.3 Industrials -2.4 1.4 1995 37.6 Health Care 58.0 82.8 1996 23.0 Financials 35.2 22.5 1997 33.4 Financials 48.2 58.1 1998 28.6 Health Care 43.9 35.3 1999 21.0 Telecom Services 19.1 19.1 2000-9.1 Materials -15.7-2.5 2001-11.9 Health Care -11.9-14.0 2002-22.1 Consumer Discretionary -23.8 2.3 2003 28.7 Materials 38.2 20.4 2004 10.9 Materials 13.2 7.6 2005 4.9 Utilities 16.8 16.8 2006 15.8 Utilities 21.0 22.9 2007 5.5 Energy 34.4 7.2 2008-37.0 Materials -45.7-35.8 2009 26.5 Health Care 19.7 24.5 2010 15.1 Materials 22.2 23.8 2011 2.1 Industrials -0.6 3.0 2012 16.0 Consumer Staples 10.8 0.9 2013 Consumer Discretionary 1991-2012 Annaulized: Total Return 9.1 % 13.3 % 14.6 % Std. Deviation 18.7 % 25.3 % 24.5 % No. Yrs. Outperforming S&P 500: 13/22 15/22 Correlation With S&P 500 (Annual Returns): 0.94 0.86 Results assume annual rebalancing of S&P 500 sectors; numbers include dividends, but exclude transactions costs. 32