T. Rowe Price, Invest With Confidence and the Bighorn Sheep logo is a registered trademark of T. Rowe Price Group, Inc.

Financial Markets Review: First Quarter 2009May 19, 2009

Presented by: Tim Noel, Ph.D., CFA

2

Brief, incomplete history of how we got here

Credit standards are weakened

More leverage, risk taking, and housing bubble

Fed lowers interest rates

Technology bubble bursts

Increased asset securitization

Mortgage security prices fall

Housing bubble bursts

Liquidity dries up

Consumers are forced to de-lever

Companies (particularly financials) are forced to de-lever

Widespread asset write-downs increase fear and uncertainty

2000 2001 2002 2004 20092003 2005 2006 2007 2008

3

What happened this quarter

Sources: Credit Suisse; Barclays Capital; Standard & Poor’s; MSCI; Russell

Investors are exhibiting some risk appetite

5.8

1.0

-1.3-4.1

-19.6

-46.9

3.1

7.5

-34.3-38.1

-46.2

-37.5

-42.4

0.1

-16.8-15.0-13.9

-11.0

-60

-50

-40

-30

-20

-10

0

10

20

HY Bond EM Stock U.S. AggBond

U.S.Treasuries

Grow th S&P 500 EAFE Small Value

Ret

urn

(%)

First Quarter 2009

One Year

Capital Market Returns by Asset Class Ended March 31, 2009

Growth

4

What happened this quarter

2 JanuaryISM Manufacturing index plungesto a 28-year low of 32.4%

S&P 500 Index

Clo

sing

Pric

e (Y

TD

)

10 FebruaryUncertainty over stimulus bill passing the House of Representatives

23 FebruaryReport thatAIG may post massive losses. Citigroup talks with governmentabout increasing stake.

9 JanuaryUnemployment tops 7%, highest in 16 years.

20 JanuaryObama inauguration

10 MarchCitigroupindicates it was profitable in January and February.Barney Frank makes hopeful comments on reinstating the uptick rule

18 MarchFed announces expanded asset purchaseprograms

26 FebruaryHealth care stocks fall after House calls for cuts on payments to private insurance plans

23 MarchTreasury unveils toxic asset plan details

30 MarchU.S. government officially rejects viability plans from GM and Chrysler

Jan: -8.43% Feb: -10.65% Mar: +8.76% 1Q09: -11.01%

Source: Factset

5

Investor Fear

Fears of economic and earnings weakness

Severe Sell Off

Severe high velocity sell off

in risky assets

Forced Liquidations

Indiscriminate selling and forced liquidations

Fundamental Disconnect

Prices become disconnected from fundamentals

Investment Opportunities

Fundamental analysis identifies opportunities

Chain Reaction

What happened this quarter

CBOE Market Volatility Index (VIX)

0

10

20

30

40

50

60

70

80

90

Jul-0

8

Aug-0

8

Sep-0

8

Oct-

08

Nov-0

8

Dec-0

8

Jan-

09

Feb-0

9

Mar

-09Jul-08 Aug-08 Sep-08 Nov-08Oct-08 Dec-08 Jan-09 Feb-09 Mar-09

Panic eases:Fundamentals are important again.Quality rewarded.

Fear and panic:Investors shoot first, ask questions later.Opportunities arise.

Source: Factset

6

• Restructuring in the financial sector will slow down the recovery in late 2009 and into 2010

− Accumulated imbalances need to be corrected before growth returns

− Housing supply overhang will have a long tail

− Correction of business inventories are starting to take hold

• Expecting declining Real GDP until Q309

− Government spending to provide the only positive contribution until 4Q09 when the consumer and business begin slight growth in spending

• Unemployment and savings rate

− Expecting unemployment rate to hit 9.2% by the end of 2009

− Secular rebound in the personal savings rate after 25-year decline (peaked in 1981 at 12.5%) – expecting it to hit 6.3% by 2010

Economics summary

Base case: visibility to gradual recovery by year-end (55%)

7

Signs of stabilization?

Sources: Bureau of Labor Statistics; Haver Analytics

First signs of stabilization bring visibility to gradual recovery by year-end

Real Gross Domestic Product (SAAR, Bil.Chn.2000$) Q1 1989 – Q1 2009

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Q1-89 Q1-91 Q1-93 Q1-95 Q1-97 Q1-99 Q1-01 Q1-03 Q1-05 Q1-07 Q1-09

Per

cent

cha

nge,

ann

ual r

ate

Real GDP (SAAR, Bil.Chn.2000$)

TRP Estimates

8

Signs of stabilization?

Sources: Bureau of Labor Statistics; Haver Analytics

All Employees: Total Nonfarm (SA) Difference – Period to Period January 31, 1985 – March 31, 2009

-1000

-800

-600

-400

-200

0

200

400

600

Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Cha

nge,

thou

sand

s

Pressures on labor markets appear to be stabilizing after intensifying in December and January

9

Signs of stabilization?

Sources: Bureau of Labor Statistics; Haver Analytics

Real Personal Consumption Expenditures January 31, 1990 – February 28, 2009

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

Per

cent

cha

nge

Consumers felt the pressure of the labor market decline; economic fears led to less consumption and more saving

10

Signs of stabilization?

Source: Bloomberg

30-year Mortgage RatesMarch 31, 2000 – March 31, 2009

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

Mortgage rates hit historic lows with the Fed buying Agency MBS

11

The IMF now forecasts total global write-downs to reach $4.1 trillion

The new normal – continued deleveraging and loss recognition

Source: Bloomberg; IMF Global Financial Stability Report - April 2009

Global Financial ServicesQuarterly Write-downs and Recapitalization

Through March 31, 2009

279223

170

258

358

2

1,289

86 88

193

103

432

201

1,104

0

200

400

600

800

1,000

1,200

1,400

1,600

Prior to 1Q08 1Q08 2Q08 3Q08 4Q08 1Q09 Total

Billi

ons

($)

Total w rite-dow ns & credit losses

Total capital injections

12Source: Federal Reserve Board, Haver Analytics

The new normal – massive government intervention to provide liquidity

U.S. government intervention will remain elevated with new programs

The Federal ReserveBalance Sheet Composition

December 31, 2007 – March 31, 2009

13

What’s next?

• Credit conditions must continue to improve. Companies must be able to finance their activity. Watch credit spread trends.

• The pace of deleveraging must slow. Indiscriminate, forced selling of equity and fixed-income securities must continue to diminish.

• Fiscal and monetary stimulus measures must bite. This will give businesses and investors confidence to spend and invest.

• A deflationary mindset must be averted. The velocity of spending will grind to a halt if consumers and businesses believe prices will get continually cheaper.

14

What’s next?

Old Norm

New Norm

Global Real GDP > 5% 0% to negative 2 to 3%

Inflation Modest 3%, but rising Spike then collapse Deflation/Inflation?

Price power Strong Disappeared Return slowly

Profit margins Continuously improving Free fall Improving

Real interest rates @ 0% Rising Resetting higher

ROES All-time highs Collapsing Normalizing

Consumer Excess consumption Deleveraging Moderate consumption

Fixed-asset investment Excessive Falling sharply Recovering slowly

Source of global GDP growth < 50% Emerging mkt > 100% Emerging mkt ~ 66% Emerging mkt

Valuations Modest expansion Rock bottom Normalizing

Risk premiums Historic lows Historic highs Declining

Transition Period