Eye on the Market I August 13, 2012 J.P.Morgan A brief note on US equity markets, which are up 13% despite lackluster economic news this year It's not unheard of for stocks to rally when economic conditions are weak (see page 2), particularly when corporate profits are doing well; Q2 marked a new all-time high run rate of • profits. As a result, the 13% gain in the this year is not a complete anomaly. But in prior cycles, "weak economy" stock market rallies were predicated more on the view that a private sector recovery was just around the corner, rather than the current view that more Central Bank stimulus is just around the corner (1m chart). The other notable aspect of the rally is that it took place as earnings forecasts for 2012 and 2013 have been falling, and as Q2 revenue growth slowed. To paraphrase what's going on, say that Bronze is the new Gold: expectations are so low', that anything better than recessionary data can be well-received al narkets. Here's one example: on August 3a, the US payroll report was released. Around 160,000 jobs were created, and the 500 rallied by more than 2%. In this instance, markets awarded a gold medal to a bronze medal performance. That payrolls beat low expectations explains pan of it, but in the p % rallies on payroll day only happened when payrolls really took off. The 2nd chart shows each time since 1966 that the 500 rallied more than 2% on payroll day2. As you can see, 160,000 jobs is at the low end of historical catalysts3. Global economy very reliant on monetary stimulus Global PMI survey, a measure of manufacturing activityand sentiment 60 55 50 45 40 35 2007 2008 2009 2010 2011 2012 Sou cell Morgan Asset Management, Markt Morgan Securities LLC. 1 Shaded area monetary actions 1:Fed QE1 and BoE OE1 2: Fed GE2 and BoE OE2 3: Fed Twist. BoE OE3+4 and ECB LTR O 4:Fed Twist 2, BoE OE5 and ECB rate cut, SM P hints Instances when payroll gains resulted in same-day la 500 gains of