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September 26, 2013

Brian Rogers Brian Rogers, T. Rowe Price chairman and chief investment officer

Five years after the eruption of the financial crisis, the U.S. stock market has fully recovered, hitting a record high this spring. Brian Rogers, a 31-year veteran with T. Rowe Price and the firm's chairman and chief investment officer, reflects on this historic period with Steve Norwitz.

Norwitz:

So, it has been about five years since the financial crisis and collapse of Lehman Brothers. And this bull market since the financial crisis ranks as one of the best-performing and longest bull markets, actually, over the past century.

What have been the key drivers of equity returns in recent years?

Rogers:

Yep. Well, Steve, when you think about the magnitude of the rebound, you tend to get big bull market rebounds after really bad bear markets, and 2008, 2009 really was the granddaddy of them all, as they say.

Thinking back to the financial crisis, prices declined very sharply, reflecting uncertainty globally, and then coming out of the downturn—so post-2009, or even the beginning of the second half of 2009—stock prices began to appreciate.

So why did this happen? The Fed and other central banks were focused on reinvigorating economic activity, so investors began to feel somewhat confident that earnings growth would come back. You came off of a base of lower valuations because in the 2008, 2009 time frame, so many companies' specific stock prices were down 30, 40, 50%.

So it's always easy to perform well off of a lower base, and people looked at the value of their houses declining, they looked at their neighbors losing jobs, and both of those things have changed and improved dramatically over the course of the last five years.

So unemployment has declined sharply and continues to, all of the housing indices are better. So prices are up, sales are up, inventories are down. So, if you're the individual investor and you think about your job and your house, and both of those make you feel better, you will naturally be a more intrepid investor.

So, not surprisingly, as the economies have recovered, and as corporate earnings have recovered and as investor sentiment has improved, we've had this big rebound over the last five years.

Norwitz:

So what would you say, at this point, are the primary reasons for optimism that this bull market has not yet run its full course?

Rogers:

I think the economic underpinnings continue to be good.

The global financial system is much stronger, much more liquid. The banks are much more thoroughly capitalized.

Everybody is stronger today than they were four or five or six years ago, and we don't see any of the systemic risks that we saw going back in 2006, '07, '08 with an overlevered banking system, a crazed housing sector, very aggressive investor behavior.

None of those activities are really apparent, and so I think most of the conditions are in place for decent market activity over the intermediate term. The risk of a huge bear market to us at this point appears somewhat unlikely. But could there be a cyclical downturn, a 12-month period when equity returns are down 5 or 10%? Absolutely. It happens all the time.

I think the one caveat is that investors have become a little more complacent perhaps about valuations and valuation risk. That takes away some of the future potential upside.

So I think it would be wrong for investors to expect five years like the last five. And the other thing investors have to be cognizant of is when you have four, five, six years of a good market, which we've had, something always comes up. And if I reflect back over my career, there can always be some unexpected developments, or sometimes the markets just run out of steam of their own momentum; the momentum dies off.

And I think investors ought to take that return over the last five years and probably cut it in half for the next five, and you can still be successful and still can earn good returns in the equity market. But they will not be the returns the investor experienced coming out of the teeth of the downturn in 2009.

Norwitz:

Well, Brian, it's always interesting and helpful to get your perspective on the markets, and we appreciate you taking the time to share those thoughts with us. Thank you.

Rogers:

Steve, my pleasure.

This podcast is provided for informational purposes only and is not intended to reflect a current or past recommendation or investment advice of any kind. Opinions and commentary do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision. The views are as of September 11, 2013, and may have changed since that time.

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