First Quarter 2014 QUARTERLY MARKET UPDATE First Quarter 2014 QUARTERLY MARKET UPDATE 1. MARKET...

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Transcript of First Quarter 2014 QUARTERLY MARKET UPDATE First Quarter 2014 QUARTERLY MARKET UPDATE 1. MARKET...

  • First Quarter 2014 QUARTERLY MARKET UPDATE

  • Table of Contents

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    MARKET SUMMARY 1.

    THEME: SHIFT IN LIQUIDITY AND RISK BACKDROP 2.

    ECONOMY/MACRO BACKDROP 3.

    U.S. EQUITY MARKETS 4.

    INTERNATIONAL EQUITY MARKETS & GLOBAL ASSETS 5.

    FIXED INCOME MARKETS 6.

    ASSET ALLOCATION THEMES 7.

    This report is a product of Fidelity’s Asset Allocation Research Team (AART) with contributions from throughout Fidelity’s asset management organization. AART conducts economic, fundamental, and quantitative research to develop asset allocation recommendations for Fidelity’s portfolio managers and investment teams. AART is responsible for analyzing and synthesizing investment perspectives across Fidelity’s asset management unit to generate insights on macroeconomic and financial market trends and their implications for asset allocation.

    Lisa Emsbo-Mattingly Director of Asset Allocation Research

    Dirk Hofschire, CFA SVP, Asset Allocation Research

    Craig Blackwell, CFA Analyst, Asset Allocation Research

    PRIMARY CONTRIBUTORS

    Austin Litvak Senior Analyst, Asset Allocation Research

    Jake Weinstein, CFA Senior Analyst, Asset Allocation Research

  • Market Summary

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    Overview: Solid Trends Start 2014 but More Volatility Ahead During Q4 2013, the U.S. and global economies gained strength, while the Federal Reserve (Fed) announced a paring of its extraordinary quantitative easing program. The markets begin 2014 with solid cyclical momentum, but prospective slowing of liquidity growth, fuller valuations on risky assets, and country-specific risks raise the odds of higher market volatility.

    Past performance is no guarantee of future results.

    • Improvement in the global economy – Better cyclical trends in developed

    markets (Europe early-cycle; U.S. mid) – Stabilization in China and many

    emerging markets (EM), though more mixed trajectories

    • Stimulative monetary policies, though shift to less accommodation

    • Global disinflation • Upward pressure on interest rates

    • Strong rally in U.S. and developed- market equities; fuller valuations

    • Bonds struggled amid rising rates • Emerging-market assets and

    commodities lagged

    • U.S. and global cyclical momentum – Steady U.S. backdrop and consumer sector

    • Slower liquidity growth – Risks shift to fast credit growers

    • Risks in Asia: – Japan (sustainability) – China (liquidity)

    • Low global inflation and commodity disinflation

    • Expect more modest returns after

    extended rally in risky assets • Higher volatility may reward tactical moves • Dramatic interest-rate spike unlikely • Equities still more favorable • Favor countries and entities with steadier

    outlooks

    2013 TRENDS OUTLOOK MACRO

    MARKETS

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    Risk Meter: U.S. Large-Cap Stock minus Treasury Bond Returns, 1983–2013

    Asset Markets: Stocks Thrive, Bonds Lag in 2013 U.S. stocks led the Q4 and full-year global equity-market rallies, with non-U.S. developed-country markets also posting strong returns. Many bond categories struggled as interest rates rose modestly in Q4, and U.S. investment-grade bonds posted their worst calendar-year return since 1994. The U.S. risk meter in 2013 was at its highest for the past 30 years.

    Calendar Year Return Difference (%)

    Past performance is no guarantee of future results. You cannot invest directly in an index. See appendix for important index information. Assets represented by: Commodities – DJ-UBS Commodity Index; Emerging-Market Bonds – JP Morgan EMBI Global Index; Emerging-Market Stocks – MSCI EM Index; Gold – Gold Bullion, LBMA PM Fix; High Yield Bonds – Bank of America Merrill Lynch (BofA ML) High Yield Bond Index; Investment-Grade Bonds – Barclays U.S. Aggregate Bond Index; Non-U.S. Developed-Country Stocks – MSCI EAFE Index; Non-U.S. Small-Cap Stocks – MSCI EAFE Small Cap Index; Real Estate Stocks – FTSE NAREIT Equity Only Index; U.S. Corporate Bonds – Barclays U.S. Credit Index; U.S. Large-Cap Stocks – S&P 500 Index; U.S. Mid-Cap Stocks – Russell Midcap Index; U.S. Small-Cap Stocks – Russell 2000 Index; U.S. Treasury Bonds – Barclays U.S. Treasury Index. Source: FactSet, Wall Street Journal, Haver Analytics, Fidelity Investments (AART) as of 12/31/13.

    2013 (%) Q4 2013 (%) 2013 (%) Q4 2013 (%)

    U.S. Small-Cap Stocks 38.8 8.7 U.S. Corporate Bonds -2.0 0.9

    U.S. Large-Cap Stocks 32.4 10.5 Investment-Grade Bonds -2.0 -0.1

    U.S. Mid-Cap Stocks 34.8 8.4 Emerging-Market Stocks -2.3 1.9

    Non-U.S. Small-Cap Stocks 29.7 5.9 U.S. Treasury Bonds -2.7 -0.8

    Non-U.S. Developed-Country Stocks 23.3 5.7 Emerging-Market Bonds -6.6 0.9

    High-Yield Bonds 7.4 3.5 Commodities -9.5 -1.1

    Real Estate Stocks 2.9 -0.2 Gold -27.8 -9.4

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    Risk On

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    Shift in Equity Performance toward Developed Markets The relative outperformance of developed markets over emerging markets continued to accelerate in 2013. Emerging economies in general have transitioned to a slower pace of growth, while a broad trend of incremental cyclical improvement in advanced economies helped stocks generate more favorable returns.

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    Developed Markets Outperformed

    Emerging Markets Outperformed

    Developed vs. Emerging Markets: Three-Year Relative Performance Rolling 36-month Annualized Relative Returns

    Past performance is no guarantee of future results. Developed Markets represented by the MSCI World Index. Emerging Markets represented by the MSCI EM Index. Source: FactSet, Fidelity Investments (AART) through 12/31/13. 6

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    2013: Low Volatility and Wider Dispersion of Returns Stock market volatility remained historically low in 2013, and although the bond market experienced a turbulent summer, volatility remained relatively low. The dispersion of returns across different asset classes widened in 2013 from the extremely narrow spreads in 2012, creating a more favorable market environment for active management.

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    Equity Sectors Asset Classes Country Equity Markets

    2012 2013 1988-2013 Calendar Year Avg.

    Dispersion of Returns

    Dispersion between Best Performer and Worst Performer

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    MOVE VIX

    Stock and Bond Volatility

    Bond Implied Volatility Index (MOVE)

    Stock Implied Volatility Index (VIX)

    Past performance is no guarantee of future results. You cannot invest directly in an index. See appendix for important index information. LEFT: Source: Wall Street Journal, Bank of America Merrill Lynch (BofA ML), Haver Analytics, Fidelity Investments (AART) through 12/31/13. RIGHT: Dispersion is the difference between the best and worst performing category. Sectors represented by S&P 500 sectors as defined by GICS. Country equity markets represented by the country sub-indices of the MSCI AC World Index. Asset classes returns composed of the following indices: Barclays U.S. Aggregate Bond Index, Russell 2000, S&P 500 Index, MSCI EAFE Index, MSCI EM Index, BofA ML High Yield Bond Index, FTSE NAREIT Equity Only Index. Source: FactSet, Fidelity Investments (AART) through 12/31/13. 7

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    Falling Correlations May Create Active Opportunities After the 2008 financial crisis, correlations spiked across asset classes, global equity markets, and among individual stocks, as asset prices became more macro-driven. Correlations fell near year-end as systemic risks subsided and regional cyclical dynamics continued to diver