MARKET

INSIGHTS

Economic Update
With Dr. David Kelly, CFA | Chief Global Strategist for J.P. Morgan Funds

January 7, 2013

This weekly update provides a snapshot of changes in the economy and markets and their implications for investors.

Growth
The BEAs final estimate of 3Q12 real GDP was revised higher to 3.1% annualized growth. Manufacturing strengthened in December, with the ISM manufacturing index and the Markit PMI both coming in above 50, indicating that the sector is expanding. Vehicle sales weakened marginally in December, but still came in better than consensus expected. Although the economic numbers have been mixed, the cyclical sectors appear to be improving, which coupled with a continued improvement in sentiment, should support moderate economic growth.

Jobs
Denotes updated information The unemployment rate was unchanged at 7.7% in December, with 155,000 jobs added overall and 168,000 jobs added in the private sector. Jobless claims rose to 372,000, and the 4-week moving average rose to 360,000, but it is important to keep in mind that claims are not always a reliable indicator during the holidays due to issues seasonally adjusting the data.

Profits
Looking ahead to the beginning of 4Q12 earnings season next week, Standard & Poor's projects S&P 500 operating earnings will be $25.34 for the fourth quarter. Future earnings growth will be dependent on revenue growth, as companies have drastically cut costs and can no longer rely on margins to drive earnings.

Inflation
Consumer prices fell 0.3% in November (up 1.8% year-over-year), which is the first monthly decline for headline inflation since May. Energy prices fell 4.2% in November after last month's decrease, which helped send headline inflation lower. Core inflation rose 1.9% year-over-year due in part to weakness in apparel, used vehicles, and rents. Overall, the inflation picture remains benign.

Rates
The FOMC will begin purchasing longer-dated U.S. Treasuries next year at the pace of $45bn per month to offset the end of Operation Twist, while continuing purchases of $40bn in mortgagebacked securities per month. Additionally, the FOMC has identified target levels for unemployment and inflation rates, namely 6.5% and 2.5% respectively, which will dictate the level of the Fed Funds Rate going forward. The minutes from their December meeting showed that most Committee members see the Fed's open-ended asset purchase program ending later this year, but this forecast is conditional on economic conditions.

Risks
Financial turmoil caused by ongoing European sovereign debt crisis. Higher oil prices due to turmoil in the Middle East. An over-easy Fed may pose a longer-term threat to bond investors. Credit conditions for individuals and small businesses remain challenging.

Investment Themes
Continued strength in earnings have made stocks look cheap by conventional valuation measures. Large-cap and growth stocks look cheapest. High-yield bonds look cheaper than Treasuries, but a diversified approach to fixed income investing seems appropriate given economic uncertainty. Residential real estate continues to look attractive as a long-term investment.

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Economic Update | January 7, 2013

Data are as of January 4, 2013. Contact JPMorgan Distribution Services, Inc. at 1-800-480-4111 for a fund prospectus. You can also visit us at www.jpmorganfunds.com. Investors should carefully consider the investment objectives and risks as well as charges and expenses of the mutual fund before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing. Past performance does not guarantee future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This worldrenowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. Indexes are unmanaged. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The views expressed are those of J.P. Morgan Asset Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. J.P. Morgan Funds are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. JPMorgan Distribution Services, Inc. is a member of FINRA/SIPC. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. JPMorgan Distribution Services, Inc., member FINRA/SIPC JPMorgan Chase & Co., January 2013

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