Economic outlook and market
expectations | Fourth quarter 2012
Perspective on prospects for the U.S. economy
OCTOBER 2012
Mike Dueker, Ph.D.,
Chief Economist
ECONOMIC
ENVIRONMENT
Pros:
 Stable growth is
the baseline
forecast
 U.S. economic
expansion is
expected to
withstand low
global growth
 Ongoing QE3
should boost firms’
revenue forecasts
Cons:
 Europe could still
have financial
conflagration
 “Fiscal cliff” still
on 2013 horizon
 Federal government not on sound
fiscal footing for
the long run
The Business Cycle Index presented here is a key component of
Russell’s preparation of forecasts in contribution to the Blue Chip
forecasting panel. Blue Chip is a group of 50 top economic forecasters
who produce two monthly publications: Blue Chip Financial Forecasts and
Blue Chip Economic Indicators.
The fiscal cliff looms large; Fed policy pales in comparison
Perhaps Federal Reserve Chairman Ben Bernanke’s most important role right now is that of
chief economist to the nation, as he urges lawmakers (in an entreaty that falls somewhere
between admonishing and begging) to do something about the impending “fiscal cliff” – the
full expiration of the Bush-era tax cuts, the expiration of the temporary payroll tax cut and the
draconian government spending cuts scheduled to take effect January 1, 2013. It is important
to remember that the fiscal cliff was a self-imposed trip-wire set in place by Congress and
President Obama in 2011 to force them to settle on a more palatable budget agreement prior
to 2013. In other words, its provisions were never meant to be implemented; the fiscal cliff
was designed to be harmful, and thus to be avoided. First, though, let’s review the
momentum that the economy is carrying in the fourth quarter of 2012, prior to the potential
2013 fiscal cliff.
According to September 2012 data, the economy created an average 96,000 nonfarm payroll
jobs per month in the last six months, whereas the average was 196,000 jobs per month in
the previous seven months. Nevertheless, the economy seems to be bouncing back from this
year’s second-quarter stumble, with an average gain of 146,000 jobs per month in thirdquarter 2012 and Russell’s projections for an average 168,000 jobs per month across 2013
(see Figure 1). These 2013 projections, however, are based on the current market data, in
which financial early-warning signals of market concern about the fiscal cliff are not really
sounding an alarm. Thus, the potential for downside surprise from the fiscal cliff certainly
exists.
Accordingly, the Business Cycle Index (BCI) that I post every month on Russell.com shows
projections of the BCI above 1.0 standard deviations through the first quarter of 2014 (see
Figure 2). Combined with the projections for 168,000 jobs per month in 2012, the forecasted
path of business cycle conditions suggests a decent but not great performance that would
chip away slowly at the unemployment rate, which according to September 2012 data stands
at 7.8%.
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
Long-term investor concerns scorecard
Last quarter I noted three medium- to long-term matters of investor concern that, if
addressed, would likely lower the equity risk premium and help boost stock prices.
1.
Long-run fiscal concerns about the U.S. federal government. Our political
leaders need to walk a fine line between announcing long-term budget cuts
(especially to Medicare) and harming the fragile recovery by cutting spending too
quickly, as they look at the fiscal cliff. In this vein, Ben Bernanke has suggested to
lawmakers a medium-term target of a 5% deficit-to-GDP ratio by 2017.
2.
The Eurozone crisis. Investor reluctance to hold peripheral European bonds
probably represents the first shot across the bow by bond-market vigilantes
concerned about unaffordable social welfare states. The common currency, and its
inherently fixed exchange rates, made the peripheral European Monetary Union
(EMU) countries vulnerable to being the vigilantes’ first points of attack.
3.
China’s precariously high investment-to-GDP ratio. The ratio is elevated to nearrecord levels to sustain China’s high growth rates now, but could be leading to
investments that fail to generate satisfactory rates of return in the future.
Among these three focal points of concern, the Eurozone crisis seemed to become less
acute in the eyes of investors in the third quarter of 2012. The key words in late July came
from European Central Bank (ECB) Chair Mario Draghi, who said, “Within our mandate, the
ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be
enough."1 At the ECB policy meeting on September 5, 2012, the ECB laid out concrete
meaning behind Draghi’s words by pledging to buy peripheral-country debt of up to three
years’ maturity, as needed, to restore orderly markets and monetary policy transmission
across the Eurozone. Importantly, the ECB announced that it would not make itself a senior
debt holder via these purchases; it would place itself in line with private bond buyers as a
confidence-building measure. These reassurances halted an upward spiral in long-term
interest rates in Spain and Italy that posed a real threat to each country’s finances.
In the United States, the third round of quantitative easing (QE3), announced by the Federal
Reserve on September 12, 2012 (see “Focus on the Fed,” below), signified a lower likelihood
that the United States would languish through a Japan-style Lost Decade marked by
episodes of deflation and economic stagnation. This reassurance naturally helps investors
lower their deficit projections for the federal government, but long-run fiscal concerns remain,
because the economy cannot entirely grow its way out of fiscal challenges.
These two sources of partial relief of investor concerns helped lead to increases in the
Russell 1000® Index from a value of 756.0 on August 1, 2012, to 804.88 on October 5, 2012,
an increase of almost 6.5%. In the next two to three months, the concern with the greatest
potential for partial alleviation is the fiscal cliff uncertainty, but, in my view, there is an equal
probability that the level of investor concern will increase prior to year-end 2012.
A telling indication of the extent to which investors are expressing their long-run concerns
about the future is that the real yield on U.S. Treasury 20-year inflation-indexed bonds
remains below zero and the corresponding real yield on 5-year indexed bonds stands at 1.62% as of October 4, 2012. These dismally low figures suggest that investors believe
locking in a unit of future consumption now costs more than one unit of foregone
consumption today – and the present is not exactly a time of plenty.
1
Dunkley, J. (2012, July 26). “Debt crisis: Mario Draghi pledges to do 'whatever it takes' to save euro”. Retrieved on
July 30, 2012, from The Telegraph. available at: http://www.telegraph.co.uk/finance/financialcrisis/9428894/Debtcrisis-Mario-Draghi-pledges-to-do-whatever-it-takes-to-save-euro.html
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
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Here are the details of Russell’s current U.S. economic outlook for the remainder of 2012 and
for 2013:
 Real GDP growth is expected to be only 2.1% on a year-on-year basis in 2012 and 2.0%
in 2013. Nevertheless, even this muted growth outlook is based on central-tendency
forecasts predicated on there not being a fiscal-cliff calamity in the U.S. or a financial
meltdown in Europe.
 We project nonfarm payroll employment gains to average less than 168,000 jobs in 2013
as a central-tendency forecast, absent draconian fiscal tightening in 2013.
 Russell projects that the benchmark 10-year Treasury yield will be 2.3% to 2.4% at the
end of 2013. This forecast assumes that the economy will move toward relatively stable
4.5% nominal GDP growth, and thus neither overheats nor undershoots toward
recession.
 In Russell’s inflation outlook, the projection is that the All-Items CPI will increase by 2.0%
on a year-on-year basis in 2012 and 2.3% in 2013. Inflation fighting does not appear on
the Fed’s radar screen until 2014 at the earliest, because the Federal Reserve has
indicated that it is not going to balk at 2.3% CPI inflation, provided that nominal GDP
growth does not significantly exceed 4.5% on an ongoing basis (see “Focus on the Fed,”
below).
 Russell’s long-term real growth expectations versus the Blue Chip consensus, derived
from responses to a semiannual survey conducted in October 2012, appear in Figure 5.
In general, Russell’s projection is that real GDP growth will remain between 2% and
2.5% for most of this decade, whereas the Blue Chip consensus sees more years with
real growth between 2.5% and 3%. The difference in forecasts for 2019–2023 owes
largely to Russell’s view that at least a mild recession at some point in that five-year
period is likely. Fed Chair Ben Bernanke has stressed the importance of trying to avoid
recession through at least 2017.
Focus on the Fed
The primary motivation, in my view, for the Federal Reserve to undertake QE3 is that nominal
GDP growth has not made the grade in the current economic expansion. That is, the
economy has not seen nominal GDP growth of at least 4.5% on a rolling four-quarter basis
since 2008, and probably will not until the end of 2013 at the earliest. With the Fed’s
establishment in January 2012 of a 2% inflation target and allowance for at least 2.5% real
growth, the implied trend rate of nominal GDP growth is at least 4.5%. Nevertheless, when
we look at its actions prior to the announcement of QE3 we see that the Federal Reserve
conducted quantitative easing in only eight months – November 2010 through June 2011, a
long period of nominal GDP shortfall. (The central bank can deploy the quantitative easing
policy option once it has driven the short-term interest rate to near-zero: it can either inject
just enough reserves into the banking system to enforce the zero short-term rate, or it can
inject more than the minimum by an amount of its choosing.) Viewed this way, additional (and
open-ended) quantitative easing was to address this consistent shortfall in nominal GDP
growth.
One thing QE3 cannot do, however, is negate the contraction the fiscal cliff would bring. As
Ben Bernanke himself has made clear to lawmakers, monetary policy tools would be no
match for the fiscal cliff if its provisions were imposed full force, in which case the economy
would go into recession in 2013. Knowledge of this fact, however, makes the likelihood of
such an adverse outcome significantly lower.
Nevertheless, some observers claim that quantitative easing has been a tried-and-failed
strategy. I would claim that the two rounds prior to QE3 simply proved to be not enough.
Think of a tree-chopping analogy: one takes a swing of the axe at the tree and then steps
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
/ p3
back to see if the tree falls. If two swings fail to knock over the tree, we do not conclude that
the axe cannot do the job. We just reaffirm our determination to take as many swings as
necessary, which is precisely what the Fed is doing with open-ended QE3.
The beauty of nominal GDP targeting, which appears to be the Fed’s implicit policy under
QE3, is that relatively big mistakes in judging the economy’s potential real growth only lead to
small changes in inflation. For example, if the economy’s trend real GDP growth rate were
only 1.5%, instead of 2.5%, such a misjudgment would represent a large discrepancy as far
as trend real growth predictions go. The inflationary consequences of this large prediction
error, however, would be that the economy, under a 4.5% nominal GDP growth target, would
move toward 3% inflation, rather than 2%. In the big scheme of things, a 3% inflation rate
does not pose a serious problem, at least not relative to all of the problems that a lower real
trend rate of growth would bring.
Figure 1: U.S. Business Cycle Index
Standard deviations from zero
3
Out of sample
forecasts
2
1
0
-1
-2
-3
Gray Bars
Indicate Periods
of Recession
-4
Data as of September 2012
Out of sample forecasts were calculated by simulating the time-series model into the future.
The value shown is the median of the simulated value for the month.
Source: Recession data from National Bureau of Economic Research
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data.
There is no guarantee that the stated results will occur.
Indexes are unmanaged and cannot be invested in directly.
Historical data is not indicative of future results.
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
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Figure 2: Forecasts for nonfarm payroll employment changes
Jobs (in thousands)
300
0
-300
-600
-900
Actuals
Forecast
Data as of September 2012
Source: Actual employment data from St. Louis Fed's FRED database
Figure 3: Forecasts for GDP growth: Blue Chip consensus and Russell's
forecast
3.0
Annualized growth (%)
2.5
2.0
1.5
1.0
0.5
2012Q3
2012Q4
Russell
2013Q1
2013Q2
2013Q3
2013Q4
Blue Chip
Source: Blue Chip Financial Forecasts, September 2012 issue
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data.
There is no guarantee that the stated results will occur.
Indexes are unmanaged and cannot be invested in directly.
Historical data is not indicative of future results.
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
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Figure 4: Forecasts for CPI Inflation: Blue Chip consensus and Russell's
forecast
3.5
Annualized growth (%)
3.0
2.5
2.0
1.5
1.0
0.5
2012Q3
2012Q4
Russell
2013Q1
2013Q2
2013Q3
2013Q4
Blue Chip
Source: Blue Chip Financial Forecasts, September 2012 issue
Figure 5: Forecasts of long-term GDP growth: Blue Chip consensus and
Russell's forecast
3.5
3.0
growth (%)
2.5
2.0
1.5
1.0
0.5
2014
Russell
2015
2016
2017
2018
2019-2023
Blue Chip
Source: Blue Chip Financial Forecasts, September 2012 issue
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data.
There is no guarantee that the stated results will occur.
Historical data is not indicative of future results.
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
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Perspectives on the prospects for the global economy
The European Central Bank stands ready to buy peripheral-country
bonds to keep interest rates at a moderate level.
The Corvair of Europe
GLOBAL ECONOMIC
ENVIRONMENT
Pros:
 Can policymakers
be counted on to
avert the worst
outcomes?
 Emerging markets
look comparatively
young and stable
 Risks in China are
not near-term risks
Cons:
 RE: Europe. Can
anyone give an
example of an
overvalued real
exchange rate being
reduced through
deflation with a fixed
exchange rate?
 Asian economies
must adapt to
slow-growing
developed world
 How high will food
prices go?
For those too young to remember, consumer activist Ralph Nader made his name in the
1960s with a book about the Chevy Corvair, entitled “Unsafe at Any Speed.” Among
peripheral European countries beset by debt problems, Greece is now the Corvair of Europe:
“Insolvent at any interest rate.” For this reason, Spain’s reluctance to enter a bailout
agreement – as Greece did in May 2010 – with the European Union (EU) seems
understandable. Spain is reluctant to lump itself with the peripheral countries that are under
bailout agreements because, given its comparatively low debt-to-GDP ratio, Spain considers
itself “Solvent at any reasonable interest rate.” Nevertheless, Mario Draghi, the European
Central Bank (ECB) chairman, has been very clear in that the ECB will purchase shortmaturity (one- to three-year) debt in its Outright Market Transactions (OMT) program only
from countries that have signed memoranda of understanding with the EU. The ECB does
not want to offer what is effectively an interest-rate subsidy without any preconditions,
because countries such as Spain need to enact a broad range of economic reforms and
government spending restraints in order to move out of the current crisis. At its core, the ECB
monetary policy, with long-term lending to banks without quotas and the purchases of
peripheral-country debt, will closely resemble the Fed’s QE3 policy, in that both central banks
are implicitly aiming to get nominal GDP growth up to about 5%. Absent nominal GDP growth
at this level, it is hard to see how the Eurozone debt crisis can be resolved amicably. Mario
Draghi’s way of justifying the bond-purchase program is with the claim that the common
currency was never meant to operate with such disparate interest rates across member
countries. Thus, in the face of this breakdown in the monetary policy transmission
mechanism, the ECB is intervening to restore transmission of the desired degree of policy
accommodation across the Eurozone.
The currently unsustainable status quo impairs the growth outlook for the entire Eurozone.
Figure 6 shows the results of comparing a Eurozone Business Cycle Index with the U.S.
Business Cycle Index discussed earlier. Whereas the projected path of business cycle
conditions in the United States looks relatively mediocre, the projected path for Europe is
dismal. While the current recession is not expected to last long, the lack of a recovery
suggests that the Eurozone is poised to have a Japan-style “lost decade” of economic
stagnation, right at the border between recession and expansion, in the next three years.
The figures below illustrate the current Eurozone recession and highlight why the relevant
question in Europe is when decent growth will take place after the current recession ends, as
opposed to how long or deep the current recession will be. The graphs show a counterpart
Eurozone Business Cycle Index (with out-of-sample forecasts) relative to the U.S. Business
Cycle Index that is posted each month on Russell.com.
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
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United Kingdom (UK) struggles with recession due to austerity and Eurozone
vortex
We also estimated (with forecasts) a UK Business Cycle Index, using data through Q3 2012
(including an imputed real GDP number for Q3, which is not yet available). The projected
path suggests that the UK’s recent double-dip recession has likely ended, although the
anticipated recovery is expected to be mediocre, somewhere between U.S. business cycle
conditions and Europe’s anemic economic state. It remains to be seen whether the Cameron
government will relax to a significant degree the fiscal tightening taking place in Britain.
China’s soft landing
China’s 7.4% real GDP growth rate in the third quarter of 2012 (versus one year earlier) was
announced on October 18, 2012. This figure was right in line with consensus expectations.
China’s government has vowed to maintain near-term growth through increases in the
investment-to-GDP ratio if necessary. Thus, in my view the biggest threat to the Chinese
economy is the medium-term risk that the current flurry of investment spending will not yield
satisfactory rates of return in the future.
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
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Figure 6: Eurozone and U.S. business cycle indices (1970-2012)
Sample standard deviations
4
3
2
1
0
-1
Enlarged below
-2
-3
Euro
U.S.
In-sample estimates | Out-of-sample forecast
Figure 7: Eurozone and U.S. business cycle indices (2007-2012)
Sample standard deviations
3
2
1
0
-1
-2
-3
Euro
U.S.
In-sample estimates | Out-of-sample forecast
Values shown for the in-sample estimates and out-of-sample forecasts are the median of the simulated
values for the quarter. Out-of-sample forecasts were calculated by simulating the time-series model into the
future.
Source: U.S. recession data from National Bureau of Economic Research. Europe recession data from the
Centre for Economic Policy Research. Recession for Europe in 2002 is based on research completed by
Mike Dueker, Ph.D., Russell Investments: http://research.stlouisfed.org/wp/more/2008-001
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data.
There is no guarantee that the stated results will occur.
Index performance is not indicative of the performance of any specific investment.
Indexes are not managed and may not be invested in directly.
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
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Figure 8: UK and U.S. business cycle indices (1970-2012)
Sample standard deviations
3
1
-1
Enlarged below
-3
UK
U.S.
In-sample estimates | Out-of-sample forecast
Source: Factset: European data as of September 30, 2012, Russell calculations: forecasts through September
30, 2015
Figure 9: UK and U.S. business cycle indices (2007-2012)
Sample standard deviations
2
1
0
-1
-2
-3
UK
U.S.
In-sample estimates | Out-of-sample forecast
Source: Factset: European data as of September 30, 2012, Russell calculations: forecasts through
September 30, 2015
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data.
There is no guarantee that the stated results will occur.
Historical data is not indicative of future results.
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
/ p 10
Russell’s Market Expectations for Q4 2012
Signal date: October 1, 2012
WHERE ARE THE MARKETS GOING?
Russell believes central bank resolve in Europe and the U.S. has effectively minimized the extreme downside
risks to the market that had led Russell Strategists to revert to a neutral policy weight last quarter. The
European Central Bank announced in July that it would back the risk of sovereign funding in at-risk European
countries to keep bond yields there from rising too high. In addition, the Federal Reserve’s open-ended funding
commitments, starting in September to bolster growth and employment in the U.S., was also well received by
markets. However, uncertainties remain: the outcome of the U.S. election and its impact on solutions to the
“fiscal cliff” policy issue and continuing concerns regarding Chinese growth creates worries. Consensus growth
forecasts for China still wane although leading indicators suggest the forecasts may be nearing a bottom.
Overall, these policy risks cause Russell Strategists to keep the neutral policy weight for the asset class pairs
below. The Strategists are constantly reassessing market valuations and will update recommendations as
appropriate.
Please remember that even in more normal market environments, the high level, simplified overview of our
market forecasts presented in this document does not reflect the fully nuanced asset allocation capability at
Russell and is not intended to be used as the basis for a trading strategy or asset class timing. Among other
things, a client’s individual risk tolerance and objectives, and more extensive details about the power and
alignment of the various model signals, would need to be taken into account to form a robust trading strategy.
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
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Frequently Asked Questions
What is Russell’s Market Expectations?

This quarterly report provides Russell’s viewpoint on the direction of the market based on which asset
classes and currencies we think are undervalued as indicated by our proprietary models.

The information is used to estimate the relative performance of the two asset classes shown in the
pair. It does not provide insight into the absolute returns that an investor could expect. A model may
suggest that asset A will offer a higher return than asset B if the relative valuation between the two returns
to a historical level. However, the models do not suggest that asset A will provide a high return, simply a
return that may surpass that provided by asset B. The returns of both asset A and B could be negative.

The asset class and currency views are pair-wise comparisons, based on the relative value of each
asset class or currency, and reflect the valuation of asset classes or currencies that may be most
attractive compared to one another.

Russell’s proprietary models use financial theory, historical data and forecasts to measure relative
valuation.

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor
an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general
information contained in this publication should not be acted upon without obtaining specific legal, tax, and
investment advice from a licensed professional.
Why is it important?

Russell’s Market Expectations can be used as a reference point for providing context and perspective
on the direction of the market and as a viewpoint on the attractiveness of different asset classes and
currencies.
Can I use Russell’s Market Expectations as an asset class-timing tool?

No. This report is not intended to be used as the basis for a trading strategy or as an asset classtiming tool.

The signals displayed in Russell’s Market Expectations are a high level overview of a limited subset of the
insights from Russell’s Enhanced Asset Allocation (EAA) Strategies and do not reflect the risk and
conviction controls that are part of the EAA portfolio customization.
How should I interpret it?

In simple terms, the chart shows you the relative valuation of asset classes for this quarter.

Each pair-wise expectation contains two important data points: the asset class we believe will outperform –
or a neutral expectation if we believe they will have similar performance – and, if applicable, the strength of
the outperformance. Moderate outperformance potential is indicated by a single plus sign (+), while
strong outperformance potential is indicated by two plus signs (++).

The boxes shown to the right gives you a view on which major currencies we believe will be stronger, or
weaker, than the U.S. dollar.

No model or group of models can offer a precise estimate of future returns available from capital markets.
We remain cautious that rational analytical techniques cannot predict extremes in financial behavior, such
as periods of financial euphoria or investor panic. Our models rest on the assumptions of normal and
rational financial behavior. Forecasting models are inherently uncertain, subject to change at any time
based on a variety of factors and can be inaccurate.
How often is it updated?

Russell’s Market Expectations is typically updated during the first month of each quarter. In the first quarter
of 2012 this communication will be updated in a timely manner if our strategists’ views on using the model
signals change, even if it does not fall in line with our normal quarterly reporting schedule.
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
/ p 12
FOR MORE INFORMATION, CONTACT YOUR RUSSELL REPRESENTATIVE.
Important information
Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the
appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be
acted upon without obtaining specific legal, tax and investment advice from a licensed professional.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the beginning of
the document. The opinions expressed in this material are not necessarily those held by Russell Investments, its affiliates or subsidiaries.
While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. The information, analysis and opinions
expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual
or entity. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not
representative of a projection of the stock market, or of any specific investment.
Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow
at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and
increase return could, at certain times, unintentionally reduce returns.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a
projection of the stock market, or of any specific investment.
Indexes are unmanaged and cannot be invested in directly.
Large capitalization (large cap) investments involve stocks of companies generally having a market capitalization between $10 billion and
$200 billion. The value of securities will rise and fall in response to the activities of the company that issued them, general market
conditions and/or economic conditions.
Small capitalization (small cap) investments involve stocks of companies with smaller levels of market capitalization (generally less than
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volatile than large company stocks. Investors should consider the additional risks involved in small cap investments.
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consistently over the long term. Such investments may provide minimal dividends which could otherwise cushion stock prices in a market
decline. Stock value may rise and fall significantly base, in part, on investors’ perceptions of the company, rather than on fundamental
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earnings or book value. Such investments are subject to risks that their intrinsic values may never be realized by the market, or, such
stock may turn out not to have been undervalued. Investors should carefully consider the additional risks involved in value investments.
Dynamic style emphasizes investments in equity securities of companies that are believed to be currently undergoing or are expected to
undergo positive change that will lead to stock price appreciation. Dynamic stocks typically have higher than average stock price volatility,
characteristics indicating lower financial quality, (which may include greater financial leverage) and/or less business stability.
Defensive style emphasizes investments in equity securities of companies that are believed to have lower than average stock price
volatility, characteristics indicating high financial quality, (which may include lower financial leverage) and/or stable business
fundamentals.
Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in
the value of real estate, economic conditions, property taxes and tax laws and interest rates all present potential risks to real estate
investments.
Treasury Bills (T-bills) are short-term debt securities issued by the U.S. government with maturities of usually one year or less. Fixed
income investors should carefully consider risks such as interest rate risk, credit risk, securities lending, repurchase and reverse
repurchase transaction risk.
Bond investors should carefully consider risks such as interest rate, credit, repurchase and reverse repurchase transaction risks. Greater
risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest
in high yield (“junk”) bonds or mortgage backed securities, especially mortgage backed securities with exposure to sub-prime mortgages.
Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider
their ability to invest during volatile periods in the market.
Non-U.S. markets entail different risks than those typically associated with the U.S. markets, including currency fluctuations, political and
economic instability, accounting changes, and foreign taxation. Securities may be less liquid and more volatile.
Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and
to political systems which can be expected to have less stability than those of more developed countries. Securities may be less liquid
and more volatile than U.S. and longer-established non-U.S. markets.Historical data is not indicative of future results.
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First used: October 2012
USI-14854-10-13
Russell Investments // Economic outlook and market expectations | Fourth quarter 2012
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