First Quarter 2012 QUARTERLY MARKET UPDATE ... QUARTERLY MARKET UPDATE This report is a product of...

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  • First Quarter 2012 QUARTERLY MARKET UPDATE

  • Table of Contents

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    This report is a product of Fidelity Asset Allocation Research with contributions from Lisa Emsbo-Mattingly (Director of Asset Allocation Research), Dirk Hofschire (SVP, Asset Allocation Research), Miles Betro (Analyst, Asset Allocation Research), and Craig Blackwell (Analyst, Asset Allocation Research).

    MARKET SUMMARY 1.

    ECONOMY/MACRO BACKDROP 2.

    QUARTERLY THEME: U.S. REGAINING ITS LUSTER? 3.

    U.S. EQUITY MARKETS 4.

    INTERNATIONAL EQUITY MARKETS & GLOBAL ASSETS 5.

    FIXED-INCOME MARKETS 6.

    ASSET ALLOCATION THEMES 7.

  • Market Summary

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    Q1 2012 Market Summary

    • Systemic risk eased, better backdrop for security selection

    • Supportive monetary policies, but several risks

    • Fiscal policy drag in Europe, looming risk in U.S.

    • Profit growth decelerating, but corporate fundamentals solid

    • Riskier assets now more fully valued, though still attractive relative to government bonds

    • U.S. still in better stage of economic cycle, more risk in China and abroad

    • More economically sensitive asset categories outperformed, with less risky fixed income trailing

    • Biggest quarterly U.S. equity rally in nearly three years

    • Broad rally in risk assets • Global monetary easing

    boosted liquidity • Incremental economic

    improvement, stability • Macro concerns eased,

    asset correlations fell, volatility dropped

    • U.S. in self-sustaining mid-cycle expansion – Labor market improvement – Some early-cycle arriving late

    • Rest of world weak but data beat expectations – Subdued growth in China – Europe weak but less

    distressed

    • Inflation moderated, but oil pressures rose

    • Long-term yields rose, curve slightly wider

    Global monetary policy actions and stabilizing economic data combined to ease systemic risk, improve investor sentiment, and boost stocks and riskier asset categories. The U.S. enjoys an increasingly self-sustaining mid-cycle expansion bolstered by solid corporate fundamentals, though global risks and monetary and fiscal policy challenges remain significant.

    TRENDS

    THEMES

    PERFORMANCE

    Past performance is no guarantee of future results.

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    Risk Meter: U.S. Stock Minus Treasury Bond Returns, 1982–2012

    Asset Market Performance

    Q1 2012 (%) 1-Year (%) Q1 2012 (%) 1-Year (%)

    Foreign Small-Cap Stocks 14.9 -5.9 Gold 5.6 15.5

    Emerging-Market Stocks 14.1 -8.5 High-Yield Bonds 5.2 5.6

    U.S. Mid-Cap Stocks 12.9 3.3 Emerging-Market Bonds 4.9 12.6

    U.S. Large-Cap Stocks 12.6 8.5 U.S. Corporate Bonds 2.0 9.6

    U.S. Small-Cap Stocks 12.4 -0.2 Commodities 0.9 -16.3

    Foreign Developed-Country Stocks 11.0 -5.3 Investment-Grade Bonds 0.3 7.7

    Real Estate Stocks 10.5 11.3 U.S. Treasury Bonds -1.3 8.6

    Quarterly Return Difference (%)

    Economically sensitive foreign stocks led the broad-based rally that produced double-digit returns across most global equity markets. Riskier credit securities also performed well, while Treasury bonds and other more defensive assets trailed. The risk meter was in the top third of most positive quarters during the past 30 years.

    Past performance is no guarantee of future results. You cannot invest directly in an index. See appendix for important index information. Assets represented by: Gold – Gold Bullion, London PM Fix; U.S. Treasury Bonds – BC Treasury Index; U.S. Corporate Bonds – BC Credit Index; High -Yield Bonds – Bank of America Merrill Lynch (BofA ML) High Yield Master II Index; Small Cap U.S. Stocks – Russell 2000 Index; U.S. (Large Cap) Stocks – S&P 500; Real Estate Stocks – NAREIT Equity Only Index; Foreign Developed-Country Stocks – MSCI EAFE Index; Emerging Markets Stocks – MSCI EM Index; Foreign Small-Cap stocks – MSCI EAFE Small Cap; Commodities – DJ-UBS Commodity Index; U.S. Mid-Cap Stocks – Russell Midcap Index; Emerging-Market Bonds – JPMorgan EMBIG+ Index; Investment-Grade Bonds – BC Aggregate Bond Index. Source: FactSet, Wall Street Journal, Haver Analytics, FAM (AART) as of 3/31/12. 5

    Risk Off

    Risk On

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    Economy/Macro Backdrop

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    1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

    U.S. Global

    Global Data Stabilized, U.S. Economy Still in Front

    Leading Economic Indicators Economic Surprise Indices

    After a steep decline in 2011, global leading economic indicators stabilized during the first quarter, with roughly one-third of the world’s 37 largest economies showing improvement over the past six months. Despite continued weakness, more data releases surprised positively in Europe and China. U.S. leading indicators and positive surprises remained relatively solid.

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    U.S. Europe China

    % Increasing over 6 Months Index Level

    LEFT: Shading denotes U.S. recession as defined by National Bureau of Economic Research (NBER). Global LEI = percent of world’s 37 largest economies with rising Leading Economic Indicators. See appendix for list of countries. U.S. LEI = percent of 10 indicators included in the Conference Board Leading Economic Indicators Index rising on a 6-month basis. Source: The Conference Board, OECD, Foundation for International Business and Economic Research (FIBER), FAM (AART) as of 2/29/12. RIGHT: See appendix for index definitions. Source: Citigroup, Haver Analytics, FAM (AART) as of 3/31/12. 7

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    Global Monetary Stimulus Boosted Liquidity, Sentiment

    Size of Central Bank Balance Sheets

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    Major central banks’ extraordinary policy actions—including the ECB’s second long-term refinancing operation (LTRO)—have doubled their balance sheets since late 2008. Bolstered by easing from several developing economies, monetary policy remains a supportive factor for global asset markets, though the pace of additional accommodation may moderate.

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    Bank of Japan European Central Bank Bank of England Federal Reserve

    Assets (Billions)

    LEFT: Total assets of each central bank shown. Source: Bank of Japan (BoJ), Bank of England (BoE), European Central Bank (ECB), Federal Reserve Board (