Third Quarter 2003 Market Update

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Third Quarter 2003 Market Update
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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 activity
Geopolitics Monetary policy Energy
prices Fiscal policy Corporate earnings
Inflation

Oil prices still high, hit consumers at the gas
pump
Q2 results continue upward trend
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Economy Recovers, Productivity Surges
Productivity growth output per worker remains
surprisingly strong
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
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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
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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
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Style and Cap Performance
All styles and caps post gains in Q3
Led by small-cap growth, strong positive returns
for all categories over the past year
3Q03 One 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
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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
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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
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International Equities Performance
Higher than the SP 500
Strong economic growth in Asia helps boost EM
stocks
With signs of an economic rebound, Japanese
stocks were Q3s 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
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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.
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Falling Dollar Boosts International Stock Returns
Trade-Weighted U.S. Dollar
U.S. investors are benefiting from the dollars
depreciation
Source Haver Analytics as of 9/30/03
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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
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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
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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
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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
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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