Quarterly Market Update - Fidelity Investments fourth quarter 2015 quarterly market update 1. market

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Transcript of Quarterly Market Update - Fidelity Investments fourth quarter 2015 quarterly market update 1. market

  • Lisa Emsbo-Mattingly Director of Asset Allocation Research

    Dirk Hofschire, CFA SVP, Asset Allocation Research

    Austin Litvak Senior Analyst, Asset Allocation Research

    Jake Weinstein, CFA Senior Analyst, Asset Allocation Research

    Caitlin Dourney Analyst, Asset Allocation Research

    Quarterly Market Update PRIMARY CONTRIBUTORS

    FOURTH QUARTER 2015

  • ECONOMY/MACRO BACKDROP3.

    Table of Contents

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    MARKET SUMMARY1.

    THEME: FED POLICY OUTLOOK—CLARITY NEEDED2.

    U.S. EQUITY MARKETS4.

    INTERNATIONAL EQUITY MARKETS & GLOBAL ASSETS5.

    FIXED-INCOME MARKETS6.

    ASSET ALLOCATION THEMES7.

  • Market Summary

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    Overview: Global Deflation Fears Stoke Market Turbulence Additional evidence of China’s economic slowing, in addition to surprising clumsiness in its management of equity and foreign-exchange market volatility, caused global growth concerns to dominate markets during Q3. The U.S. economy remains in solid shape, but the Federal Reserve’s ambiguous messaging may have impeded confidence about the outlook.

    Fed: Federal Reserve. Past performance is no guarantee of future results.

    • China’s slowing and devaluation pressured global economy and markets – Global trade slumped – Commodity prices and emerging-market

    currencies dropped sharply – Disinflation trends continued

    • U.S. economy remained solid, Europe steady

    • Federal Reserve stood pat, created ambiguity about outlook

    • Global deflation risks have risen; modest improvement led by developed markets – China’s balancing act difficult to sustain – U.S. mid-cycle economy sturdy amid bright

    consumer outlook – Europe cyclical trajectory solid

    • Fed hike soon, but tightening path likely even more gradual − Global monetary policy to remain highly

    accommodative

    Q3 2015 TRENDS OUTLOOK Q4 2015 MACRO

    MARKETS

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    • Risk-off global markets with heightened volatility

    • Government yields fell in flight to quality

    • Elevated volatility likely to continue; expect directionless markets until policy ambiguity removed

    • Favor assets tied to U.S. vs. China growth (and internal vs. external demand)

    • A spike in interest rates remains unlikely • Latter innings of rising dollar and falling

    commodities

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    Global Sell-Off Sends Most Markets into the Red for 2015 Punctuated by a global risk-off downturn during August, riskier asset classes posted their worst quarter since 2011. Emerging-market equities and commodities suffered the greatest losses due to concerns centered on China’s growth, while high-quality bonds served as one of the few places to hide.

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    Q3 2015 (%) Year-to-Date (%) Q3 2015 (%) Year-to-Date (%)

    Long Government & Credit Bonds 2.2% -2.4% U.S. Large-Cap Stocks -6.4% -5.3% Investment-Grade Bonds 1.2% 1.1% Non-U.S. Small-Cap Stocks -6.8% 2.9%

    Real Estate Stocks 1.0% -4.5% U.S. Mid-Cap Stocks -8.0% -5.8% U.S. Corporate Bonds 0.5% -0.3% Non-U.S. Developed-Country Stocks -10.2% -4.9%

    Emerging-Market Bonds -2.0% -0.3% U.S. Small-Cap Stocks -11.9% -7.7%

    Gold -4.9% -7.6% Commodities -14.5% -15.8% High-Yield Bonds -4.9% -2.5% Emerging-Market Stocks -17.8% -15.2%

    Risk Meter: U.S. Large-Cap Stock minus Treasury Bond Returns, 1985–2015 Quarterly Return Difference (%)

    Risk Off

    Risk OnSep-15 -8.2%

    Past performance is no guarantee of future results. It is not possible to invest directly in an index. See appendix for important index information. Assets represented by: Commodities – Bloomberg Commodity Index; Emerging-Market Bonds – JPMorgan 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 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: Bloomberg Finance L.P., Haver Analytics, Fidelity Investments (AART), as of 9/30/15.

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    Commodity Exporters China-Related ex-China China Other EM

    China’s Devaluation Helps Trigger Jump to Higher Volatility Amid slowing growth and capital outflows, China modestly devalued its currency, putting further pressure on the currencies of other emerging markets. While commodity prices and producers have been under pressure for more than a year, the higher level of volatility in the U.S. equity market may persist after a prolonged period of calm.

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    Emerging-Market Currencies vs. USD

    LEFT: China-Related ex-China: Korea, Malaysia, Taiwan, Thailand. Commodity Exporters: Brazil, Chile, Colombia, Indonesia, Peru, Russia, South Africa. Other EM: Czech Republic, Hungary, India, Mexico, Philippines, Poland, Turkey. Source: Bloomberg Finance L.P., Haver Analytics, Fidelity Investments (AART), as of 9/30/15. RIGHT: VIX: Chicago Board Options Exchange (CBOE) Volatility Index. Source: Bloomberg Finance, L.P., Fidelity Investments (AART), as of 9/30/15.

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    Index Level

    U.S. Equity Volatility (VIX)

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    DM: Developed Market. EM: Emerging Market. AA: Asset Allocation. For illustrative purposes only. Past performance is no guarantee of future results. Source: Fidelity Investments (AART).

    Outlook: Mid-Cycle Backdrop but Global Deflation Risk Up We expect the U.S. mid-cycle expansion to ultimately provide support for equity markets, but in the near term, China’s struggles to stabilize its economy pose the biggest risk to this view. With continued uncertainty around China’s policy response and monetary policy in the U.S., smaller asset allocation bets are warranted amid potentially elevated volatility.

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    Risk #2: Deflation

    Base Case: Down the Middle

    Risk #1: Inflation • Low Inflation

    • Cyclical leadership by the U.S. and Europe

    • Fed moves to tighten but at gradual pace

    • U.S. wage growth faster than expected

    • Late-cycle pressures

    • China fails to stabilize growth

    • Global weakness dominates

    Inflation AA Implications

    • Lower absolute returns

    • Cyclical outperformance falters

    • Favor inflation-resistant assets

    Asset Allocation Implications

    • Elevated market volatility

    • Smaller bets