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
Transcript of First Quarter 2012 QUARTERLY MARKET UPDATE...QUARTERLY MARKET UPDATE This report is a product of...
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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4
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.
SU
MM
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13.9
-60 -40 -20
0 20 40 60
Dec
-08
Sep-
01
Dec
-02
Jun-
09
Sep-
08
Jun-
82
Sep-
88
Jun-
08
Sep-
82
Mar
-08
Jun-
88
Mar
-88
Jun-
03
Dec
-11
Dec
-82
Sep-
98
Sep-
84
Mar
-02
Sep-
92
Jun-
05
Jun-
92
Dec
-92
Mar
-93
Jun-
00
Dec
-05
Jun-
94
Dec
-86
Mar
-84
Dec
-94
Sep-
00
Dec
-04
Sep-
06
Jun-
10
Mar
-86
Jun-
90
Sep-
05
Jun-
06
Sep-
07
Dec
-85
Sep-
04
Dec
-06
Mar
-12
Jun-
86
Mar
-00
Dec
-83
Sep-
91
Sep-
95
Mar
-83
Mar
-87
Dec
-95
Dec
-96
Sep-
03
Mar
-96
Sep-
89
Dec
-97
Jun-
97
Sep-
99
Mar
-04
Sep-
97
Jun-
83
Mar
-10
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
QU
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Economy/Macro Backdrop
EC
ON
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Y 2.
0
10
20
30
40
50
60
70
80
90
100
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.
-150
-100
-50
0
50
100
150
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12
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
EC
ON
OM
Y 2.
Global Monetary Stimulus Boosted Liquidity, Sentiment
Size of Central Bank Balance Sheets
8
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.
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
May
-06
Sep-
06
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
Sep-
10
Jan-
11
May
-11
Sep-
11
Jan-
12
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 (Fed), Haver Analytics, FAM (AART) as of 1/31/12.
Q1 Central Bank Actions
ECB 2nd Round of LTRO
Brazil Policy Rate Cut
Indonesia Policy Rate Cut
China Bank Reserve Requirement Ratio Cut
Japan Additional Quantitative Easing
U.K. Additional Quantitative Easing
EC
ON
OM
Y 2.
China’s Slowdown Continued Amid Modest Signs of Easing
Bank Sentiment and Money Supply
9
China displayed broad-based weakness across exports, industrial production, and autos. Soft property sales and slowing in construction industries such as cement reflected the weak state of the real estate sector. Authorities eased some monetary policy measures, but lending and money supply growth remained tepid, underscoring continued risks to the outlook.
Net Positive Sentiment Money Supply, M1 (Year-over-Year Change)
Auto and Cement Production
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
Feb-
07
Jun-
07
Oct
-07
Feb-
08
Jun-
08
Oct
-08
Feb-
09
Jun-
09
Oct
-09
Feb-
10
Jun-
10
Oct
-10
Feb-
11
Jun-
11
Oct
-11
Feb-
12
Autos Cement
Autos (Year-over-Year Change of 3-Month Sum)
Cement (Year-over-Year Change of 3-Month Sum)
LEFT: Source: China National Bureau of Statistics, China Association of Automobile Manufacturers, Haver Analytics, FAM (AART) through 3/31/12. Cement data through 12/31/11. RIGHT: Source: China National Bureau of Statistics, People’s Bank of China, Haver Analytics, FAM (AART) through 2/29/12. Bank sentiment data through 12/31/11.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
30%
32%
34%
36%
38%
40%
42%
44%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Lending Attitude of Banks Money Supply
EC
ON
OM
Y 2.
China’s Growth Critical to Global Trade
Exports to China as % of Total Exports
10
Many economies have benefited from the rapid growth in Chinese imports in recent years, particularly commodity exporters and Asian industrials. The possibility that China may not resume the same level of growth as in recent years presents a risk to the exports, economies, and industries that have been more dependent on Chinese demand.
28% 27%
24%
20%
17%
11% 10%
8% 7% 7% 7%
0%
5%
10%
15%
20%
25%
30%
Australia Taiwan Korea Japan Brazil Indonesia Singapore India United States
Russia Euro Area
China Exports as % of GDP
5% 18% 11% 3% 2% 3% 16% 1% 1% 2% 1%
12-month sum of exports through 10/31/11. Gross Domestic Product (GDP) for 2011. Source: International Monetary Fund; Taiwan Directorate General of Budget, Accounting and Statistics; Haver Analytics; FAM (AART) as of 12/31/11.
EC
ON
OM
Y 2.
The U.S. economy remains in a mid-cycle expansion. Employment and housing trends have picked up steam in recent months, while manufacturing and credit activity have also improved. Consumption trends have firmed on the back of strengthening labor markets and other developments. Global economic conditions remain weak.
11
U.S. Economic Indicators: Broad-Based Improvement
Source: Fidelity Asset Management (Asset Allocation Research Team) as of 3/31/12.
EC
ON
OM
Y 2.
Slower Productivity Gains Lead Firms to Expand Payrolls
12
Recent job gains are consistent with prior mid-cycle expansions. Typically, firms cut back jobs during a recession to create a boost to productivity (output per hour worked), leading to higher profitability. As economic growth becomes more entrenched and productivity gains slow, higher sales must be met with more workers, leading to accelerating payroll growth.
-6%
-4%
-2%
0%
2%
4%
6%
8%
Dec
-72
Dec
-75
Dec
-78
Dec
-81
Dec
-84
Dec
-87
Dec
-90
Dec
-93
Dec
-96
Dec
-99
Dec
-02
Dec
-05
Dec
-08
Dec
-11
Productivity U.S. Recessions Private Payrolls
Productivity vs. Payroll Growth
Year-over-Year Change
Shading denotes U.S. recession as defined by National Bureau of Economic Research (NBER). Productivity represented by nonfarm business sector real output per hour of all persons. Source: Bureau of Labor Statistics, Haver Analytics, FAM (AART) as of 12/31/11.
EC
ON
OM
Y 2.
Labor Markets Showed Progress on Wages, Structural Issues
Beveridge Curve
1.5
2.0
2.5
3.0
3.5
4.0
3 5 7 9 11
Small Business Sentiment
13
Job market repair has been slowed by structural problems such as limited labor mobility, skill mismatches, and other factors. However, the normal relationship between rising job openings and lower unemployment has begun to reassert itself, and income growth has perked up. Small business sentiment rose to post-recession highs for hiring and planned compensation.
Firms with Job Openings (%) Plans to Raise Compensation (Net %)
Job Openings Rate (%)
Unemployment Rate (%)
Jan-12
-5
0
5
10
15
20
25
30
35
40
-5
0
5
10
15
20
25
30
35
40
Feb-
86
Feb-
88
Feb-
90
Feb-
92
Feb-
94
Feb-
96
Feb-
98
Feb-
00
Feb-
02
Feb-
04
Feb-
06
Feb-
08
Feb-
10
Feb-
12
Hiring Compensation
LEFT: Percent of firms with one or more job openings that are hard to fill. Source: National Federation of Independent Business, Haver Analytics, FAM (AART) through 2/29/12. RIGHT: Job openings rate = job openings level as a percent of total employment plus job openings level . Monthly data for 12/2000–1/2012. Source: Bureau of Labor Statistics, Haver Analytics, FAM (AART) through 1/31/12.
Apr-10
Sep-11
EC
ON
OM
Y 2.
Early Cycle Arriving Late: Consumer Credit, Spending Power
14
Consumer spending has continued to improve, partly due to the ongoing relief of financial pressures that had impeded consumption activity. Thanks to low interest rates and some deleveraging, consumers generally have lower levels of financial obligations. Bolstered by easing credit standards, households have begun to borrow more, boosting their spending power.
Financial Obligations vs. Non-Mortgage Consumer Credit Growth
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
19.5
-200
-150
-100
-50
0
50
100
150
200
250
Q4-
1990
Q
2-19
91
Q4-
1991
Q
2-19
92
Q4-
1992
Q
2-19
93
Q4-
1993
Q
2-19
94
Q4-
1994
Q
2-19
95
Q4-
1995
Q
2-19
96
Q4-
1996
Q
2-19
97
Q4-
1997
Q
2-19
98
Q4-
1998
Q
2-19
99
Q4-
1999
Q
2-20
00
Q4-
2000
Q
2-20
01
Q4-
2001
Q
2-20
02
Q4-
2002
Q
2-20
03
Q4-
2003
Q
2-20
04
Q4-
2004
Q
2-20
05
Q4-
2005
Q
2-20
06
Q4-
2006
Q
2-20
07
Q4-
2007
Q
2-20
08
Q4-
2008
Q
2-20
09
Q4-
2009
Q
2-20
10
Q4-
2010
Q
2-20
11
Q4-
2011
Non-Mortgage Consumer Borrowing Household Financial Obligations Ratio
Borrowing (SAAR, $Billion) Financial Obligations Ratio (%)
Consumer borrowing excludes debt secured by real estate. SAAR = Seasonally adjusted at an annualized rate. Financial obligations ratio = ratio of household financial obligations to disposable personal income. Source: Federal Reserve Board, Haver Analytics, FAM (AART) as of 12/31/11.
EC
ON
OM
Y 2.
Early Cycle Arriving Late: Housing
15
Underlying fundamentals in housing have improved. Home prices have been weak but continue to stabilize, particularly for non-distressed properties. Despite still-low levels of building activity, housing starts have risen, and increasing demand for construction labor signals that this typically early-cycle sector may return as a positive to GDP growth.
0
500
1000
1500
2000
2500
37.0
37.5
38.0
38.5
39.0
39.5
40.0
Feb-
99
Feb-
00
Feb-
01
Feb-
02
Feb-
03
Feb-
04
Feb-
05
Feb-
06
Feb-
07
Feb-
08
Feb-
09
Feb-
10
Feb-
11
Feb-
12
Avg. Weekly Construction Hours Housing Starts
Home Prices Construction Activity
3-Month Moving Average Thousands (SAAR)
LEFT: CoreLogic home price indices shown. See appendix for definition of distressed sales. Source: CoreLogic, Haver Analytics, FAM (AART) through 2/29/12. RIGHT: SAAR = Seasonally adjusted annualized rate. Hours worked smoothed using 3-month moving average. Source: Bureau of Labor Statistics, Census Bureau, FAM (AART) through 2/29/12.
65
70
75
80
85
90
95
100
105
Apr-
06
Sep-
06
Feb-
07
Jul-0
7
Dec
-07
May
-08
Oct
-08
Mar
-09
Aug-
09
Jan-
10
Jun-
10
Nov
-10
Apr-
11
Sep-
11
Feb-
12
Distressed Excluded Distressed Included
Index Level (Apr-06 = 100)
EC
ON
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Y 2.
Corporate Profitability Solid, Inventories In Check
U.S. Corporate Profits Manufacturing New Orders and Inventories
16
Despite a slower pace of earnings growth, the corporate sector continues to be robust, with profit margins near all-time highs. In a positive signal for sustained corporate strength, the purchasing managers’ new orders-to-inventories ratio—a leading indicator of manufacturing activity—remained high and compared favorably with other major economies around the world.
3%
4%
5%
6%
7%
8%
9%
10%
11%
1947
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
Corporate Profits as % of GDP
0.8 0.9 1 1.1 1.2 1.3
Spain
Australia
Eurozone
Germany
China
Japan
Brazil
Canada
India
U.S.
PMI New Orders-to-Inventories Ratio
LEFT: Source: Bureau of Economic Analysis, FAM (AART) through 12/31/11. RIGHT: PMI = Purchasing Managers Index. Source: Institute for Supply Management, Markit, Haver Analytics, FAM (AART) through 3/31/12.
EC
ON
OM
Y 2.
The U.S. economy remains in a relatively slow but increasingly self-sustaining mid-cycle expansion. Increasing consumer spending, expanding payrolls, stabilizing home prices, and positive credit growth have reinforced one another. With inventories well contained, corporate profitability solid, and the Fed on hold, traditional late-cycle signals are absent.
17
Business Cycle Update: Mid-Cycle Expansion
Source: Fidelity Asset Management (Asset Allocation Research Team) as of 3/31/12.
EC
ON
OM
Y 2.
Inflation Pressures Have Receded, Though Oil Still a Risk
18
Developing economies that faced rising inflationary pressures during mid-2011 saw inflation rates drop significantly during the first quarter, providing a more favorable backdrop for monetary easing. However, oil prices jumped as conflict curbed output in several countries. Limited supply growth and geopolitical concerns remain major risks for oil.
Change in Inflation Rates, 2012 vs. 2011
-6% -5% -4% -3% -2% -1% 0%
Russia
India
Indonesia
Asia Emerging Total
Philippines
China
Emerging Total
Brazil
South Korea (0.02)
(0.06) (0.07)
(0.09)
(0.14)
(0.19) (0.21)
(0.36) -0.40
-0.35
-0.30
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
Iraq
Nig
eria
Vene
zuel
a
Liby
a
Yem
en
Syria
Iran
Suda
n
Oil Production Declines
LEFT: Percentage-point difference in inflation rates between 2012 and 2011. India and Russia compare inflation rates in 1/2012 and 1/2011. All other countries compare inflation rates in 2/2012 and 2/2011. Source: FactSet, FAM (AART) as of 2/29/12. RIGHT: bpd = barrels per day. Year-over-year change of 3-month average production for each country. Source: International Energy Administration, FAM (AART) as of 2/29/12.
Year-over-Year Change in 3-Month Avg, Million bpd
Total: -1.14 million bpd
Difference in 1-Year Inflation Rates
EC
ON
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Y 2.
Gasoline Prices a Headwind, But Some Mitigating Factors
$-
$1
$2
$3
$4
$5
$6
0%
5%
10%
15%
20%
25%
30%
35%
40%
Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012
Year-over-Year Change Avg Gasoline Price
870
880
890
900
910
920
930
215
220
225
230
235
240
245
250
255
260
Jan-
00
Sep-
00
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
Jan-
08
Sep-
08
May
-09
Jan-
10
Sep-
10
May
-11
Jan-
12
U.S. Vehicle Miles of Travel Gasoline Efficiency (miles/barrel)
19
Gasoline prices rose to nearly $4 per gallon during the first quarter, but would have to rise to $5 to match the year-over-year increase that weighed on consumers during the second quarter of 2011. Inflationary pressures in other areas have been abating, and with miles traveled falling and fuel efficiency rising, gas matters less to consumer budgets now than before.
Gasoline Prices Gasoline Efficiency vs. Miles Driven
LEFT: Source: Energy Information Administration, Bloomberg, FAM (AART) through 3/31/12. RIGHT: Source: Federal Highway Administration, Energy Information Administration, Haver Analytics, FAM (AART) through 1/31/12.
Miles Driven (12-Month Moving Avg, Billions)
Efficiency (12-Month Moving Avg, Miles/Barrel)
EC
ON
OM
Y 2.
Monetary Policy Risk Amid Higher Inflation Expectations
20
Expecting the inflation rate to fall below 2% and the unemployment rate to stall without stronger economic growth, the Federal Reserve extended its zero-rate guidance through 2014 and hinted that further action was possible. However, labor markets continue to heal, and the Fed’s prior actions occurred after a period of falling—not rising—inflation expectations.
Inflation History & Expectations vs. Fed Projections
Year-over-Year Rate of Change
QE1 and QE2 = 2 rounds of quantitative easing by Fed to increase money supply and hence liquidity. Twist = Fed operation to sell medium-term bonds and buy long-term bonds, attempting to drive down long-term interest rates. Source: Bureau of Economic Analysis, Federal Reserve Board, Haver Analytics, FAM (AART) as of 3/31/12.
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
-1%
0%
1%
2%
3%
4%
5%
Jan-
07
Mar
-07
May
-07
Jul-0
7 Se
p-07
N
ov-0
7 Ja
n-08
M
ar-0
8 M
ay-0
8 Ju
l-08
Sep-
08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9 Se
p-09
N
ov-0
9 Ja
n-10
M
ar-1
0 M
ay-1
0 Ju
l-10
Sep-
10
Nov
-10
Jan-
11
Mar
-11
May
-11
Jul-1
1 Se
p-11
N
ov-1
1 Ja
n-12
M
ar-1
2 M
ay-1
2 Ju
l-12
Sep-
12
Nov
-12
Jan-
13
Mar
-13
PCE Chain Price Index Fed Inflation Projections 5-Year Forward Inflation Rate
2012–14 Avg 1.7% Twist
QE1
QE2
EC
ON
OM
Y 2.
Fiscal Austerity a Risk to U.S. and European Outlook
Size of Projected Fiscal Consolidation
21
Political risk amid fiscal consolidation efforts remains high, with the U.S. facing a severe fiscal drag in 2013 under current law. Automatic spending reductions and the expiration of tax cuts next year would cause the fiscal deficit to narrow by nearly 3.8% of GDP, similar to the annual magnitude that several European countries have attempted or begun to undertake.
-4.3 -3.9 -3.8 -3.2
-1.5 -1.3
-6
-4
-2
0
2
4
6
8
10
Greece Portugal U.S. Spain U.K. France
Budget Deficit Fiscal Consolidation
2010
2011
2012
2010
2011
2012
2013
2012
2013
2011
2012
2011
2012
% of GDP
Fiscal consolidation shows the 1-year change in the budget deficit as a % of GDP for the years shown in blue bars. Source: International Monetary Fund, Congressional Budget Office, Haver Analytics, FAM (AART) as of 3/31/12.
EC
ON
OM
Y 2.
Risks: • Policy – Managing excess government debt and
fiscal austerity in developed economies – Sustainability of extraordinary monetary
measures and potential for unintended consequences
• Oil prices – Potential for geopolitical or other supply
shocks to push up inflation
Potential Asset Allocation Implications: • Relatively neutral outlook warranting
high degree of selectivity • Potential risk-reward less favorable for some
riskier asset categories after strong market results during last two quarters
• Many riskier asset prices more fully valued, but still attractive relative to “safe-haven” assets
• Favor investments and industries that are more U.S.-centric than China-centric and global
22
U.S. economy in mid-cycle expansion, China and
Europe in late cycle/recession
Systemic risk eased, but still elevated Strong corporate fundamentals
The global economy remains divergent, with the U.S. mid-cycle dynamics providing a more favorable investing environment than many foreign economies. The rally in risk assets has left them generally more fully valued and offering less favorable risk-reward profiles than previously, underscoring the need for selectivity and attention to a wide array of significant risks.
Outlook: Market Assessment
Source: Market Assessment Statement of Global Asset Allocation’s Business Cycle Board, FAM as of 3/31/12.
QU
ARTE
RLY
MAR
KET
UPD
ATE
Firs
t Qua
rter 2
012
Quarterly Theme: U.S. Regaining Its Luster?
QTR
LY T
HE
ME
3.
U.S. as Low-Cost Energy Producer
Natural Gas Prices U.S. Crude Oil Production
More productive technologies, including horizontal drilling and hydraulic fracturing, have led to a turnaround in the U.S. energy sector. Natural gas prices are much lower than abroad, and oil production is rising rapidly for the first time in two decades. These trends have positive implications for domestic industries, consumers, the trade balance, and the U.S. dollar.
0
2
4
6
8
10
12
14
16
18
1992
19
93
1994
19
95
1996
19
97
1998
19
99
2000
20
01
2002
20
03
2004
20
05
2006
20
07
2008
20
09
2010
20
11
2012
Europe U.S. Japan
4.5
5.5
6.5
7.5
8.5
9.5
10.5
1970
19
72
1974
19
76
1978
19
80
1982
19
84
1986
19
88
1990
19
92
1994
19
96
1998
20
00
2002
20
04
2006
20
08
2010
20
12
Million Barrels per Day
LEFT: BTU = British Thermal Units. Source: World Bank, Haver Analytics, FAM (AART) through 2/29/12. RIGHT: Source: Energy Information Administration, Haver Analytics, FAM (AART) through 1/31/12. 24
U.S. Dollar per Million BTU 12-Month Average
QTR
LY T
HE
ME
3.
Greatly Improved U.S. Manufacturing Competitiveness
U.S. Manufacturing Costs Global Manufacturing Labor Costs
25
Over the past decade, the cost structure of U.S. manufacturing companies relative to many trading partners has improved through access to cheaper energy sources and more limited wage pressures. The weaker U.S. dollar has also helped to dramatically lower U.S. unit labor costs, making the manufacturing sector more competitive versus many other economies.
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Can
ada
Italy
Spai
n
Fran
ce
U.K
.
Ger
man
y
Kore
a
Irela
nd
Japa
n
Mex
ico
U.S
.
LEFT: Source: Census Bureau, Haver Analytics, FAM (AART) through 2010. RIGHT: Manufacturing labor costs adjusted by the change in the real effective exchange rates. Source: Organization for Economic Cooperation and Development (OECD), Bank for International Settlements, Haver Analytics, FAM (AART) through 12/31/11.
0.2%
-0.1%
-2.1%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
Energy Materials Wages
Costs as % of Shipment Values
Change Since 2000 Change in Real Effective Unit Labor Costs Since Q1 2002
QTR
LY T
HE
ME
3.
Economic Flexibility Still a U.S. Strength
Corporate Profits Construction Activity
26
Although the aftermath of the 2008 financial crisis impaired the U.S. cyclical recovery, a comparison with post-bubble Japan demonstrates that market-driven flexibility is still inherent in the U.S. economy. A swift adjustment occurred in housing, where construction plummeted but has since found a floor, while U.S. corporations quickly returned to record profitability.
1996
19
97
1998
19
99
2000
20
01
2002
20
03
2004
20
05
2006
20
07
2008
20
09
2010
20
11
2012
20
13
2014
30
40
50
60
70
80
90
100
110
1979
19
80
1981
19
82
1983
19
84
1985
19
86
1987
19
88
1989
19
90
1991
19
92
1993
19
94
1995
19
96
1997
U.S.
Prof
it Pe
aks,
Dec
-198
9 an
d D
ec-2
006
= 10
0
Japan
Japan U.S.
Peak = 100 19
96
1997
19
98
1999
20
00
2001
20
02
2003
20
04
2005
20
06
2007
20
08
2009
20
10
2011
20
12
2013
20
14
2015
0
10
20
30
40
50
60
70
80
90
100
1980
19
81
1982
19
83
1984
19
85
1986
19
87
1988
19
89
1990
19
91
1992
19
93
1994
19
95
1996
19
97
1998
19
99
U.S.
Con
stru
ctio
n Pe
aks,
Nov
-199
0 an
d M
ar-2
006
= 10
0
Japan
Japan Building Starts U.S. Housing Starts
Peak = 100
LEFT: Source: Bureau of Economic Analysis, Japan Ministry of Finance, Haver Analytics, FAM (AART) through 12/31/11. RIGHT: Source: Census Bureau; Japan Ministry of Land, Infrastructure and Transport; Haver Analytics; FAM (AART) through 2/29/12.
QTR
LY T
HE
ME
3.
The U.S. is expected to face slower growth of its working-age population—a key factor for economic growth—over the next several decades relative to its post-WWII experience, but the growth rate will remain positive. In contrast, working-age populations are already declining in Japan and Germany, and will begin to fall in China during the next several years.
27
Demographics Favorable Relative to Many Other Economies
-2.0%
-1.0%
0.0%
1.0%
2.0%
1980
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
-2.0%
-1.0%
0.0%
1.0%
2.0%
0.0%
0.5%
1.0%
1.5%
2.0%
1980
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
LEFT: Projections through 2099. Source: United Nations, Haver Analytics, FAM (AART) through 2099. RIGHT: Projections through 2099. Source: United Nations, Haver Analytics, FAM (AART) through 2099.
Germany
Japan
China
U.S.
Working-Age Population Growth
2099
2099
QTR
LY T
HE
ME
3.
Fiscal Risk Remains Major Challenge
Fiscal Balance Government Debt
28
With the need to reduce deficits created by stimulative policies, and put the government budget on a more sustainable path in the medium term, looming fiscal problems present perhaps the greatest challenge to the U.S. economy. The government debt-to-GDP ratio is rising at a much faster clip in the U.S. than in Japan during its post-crisis environment.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
-12
-10
-8
-6
-4
-2
0
2
4
6
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
U.S.
Fisc
al D
efic
it as
% o
f GD
P
Japan
U.S. Japan
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
40
60
80
100
120
140
160
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
U.S.
Gro
ss G
over
nmen
t Deb
t as
% o
f GD
P
Japan
U.S. Japan
LEFT: Source: OECD, Haver Analytics, FAM (AART) through 12/31/11. RIGHT: Source: OECD, Haver Analytics, FAM (AART) through 12/31/11.
QU
ARTE
RLY
MAR
KET
UPD
ATE
Firs
t Qua
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012
U.S. Equity Markets
U.S
. EQ
UIT
Y 4.
Investors in the U.S. equity market enjoyed the best first quarter since 1998. All market capitalization categories posted robust returns, while growth stocks outperformed value stocks. With the financial and economic environment favoring riskier assets, REITs lagged the broad market for the quarter, but fared better for the trailing year.
30
Broad Rally in U.S. Equities
Q1 2012 Total Return
1-Year 10.1% 3.3% 8.5% -0.2% 4.3% 11.3%
14.6%
12.9% 12.6% 12.4%
11.2% 10.5%
Growth Mid Caps Large Caps Small Caps Value REITs
Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. Equity market returns represented by: Large Caps – S&P 500 Index; Mid Caps – Russell Midcap Index; Small Caps – Russell 2000 Index; Growth – Russell 3000 Growth Index; Value – Russell 3000 Value Index; REITs – NAREIT Equity Only Index. Source: FAM (AART) as of 3/31/12.
U.S
. EQ
UIT
Y 4.
Financial stocks rebounded as global monetary accommodation helped to ease credit distress, particularly in the eurozone. Information technology, consumer discretionary, and other economically sensitive sectors outperformed more defensive sectors, especially utilities, which was the only sector to post a first-quarter loss.
31
Economically Sensitive Sectors Outpaced Defensive Sectors
Q1 2012 Total Return
1-Year -1.8% 20.2% 17.5% 1.7% -4.0% 16.4% 17.3% -6.9% 3.5% 14.8% 8.5%
22.0% 21.5%
16.0%
11.3% 11.2% 9.1%
5.5% 3.9%
2.1%
-1.6%
12.6%
Financials Info Tech Consumer Discretionary
Industrials Materials Health Care Consumer Staples
Energy Telecom Services
Utilities S&P 500
Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. Sector investing involves risk. Because of its narrow focus, sector investing may be more volatile than investing in a more diversified basket of securities. Sector returns represented by S&P 500 sectors. Source: FAM (AART) as of 3/31/12.
U.S
. EQ
UIT
Y 4.
Valuations Less Attractive After Multiple Expansion
S&P 500 Valuations
32
Earnings multiples have been on an uptrend since late last year, reflecting better-than-expected U.S. economic data and increasingly positive investor sentiment. After two years of compression, including last summer’s rapid descent, the price-to-earnings ratio measured by trailing and forward 12-month earnings is still below the long-term average near 17.
Price-to-Earnings Ratio
Source: FactSet, FAM (AART) as of 3/31/12.
14.6
13.0
10
11
12
13
14
15
16
17
18
Dec
-09
Jan-
10
Feb-
10
Mar
-10
Apr-
10
May
-10
Jun-
10
Jul-1
0
Aug-
10
Sep-
10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb-
11
Mar
-11
Apr-
11
May
-11
Jun-
11
Jul-1
1
Aug-
11
Sep-
11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Feb-
12
Mar
-12
Trailing Forward Avg Trailing Since 1926
U.S
. EQ
UIT
Y 4.
What if the Market is Revaluing Dividends?
S&P 500 Valuations
10
11
12
13
14
15
16
Payout Ratio > 70%
Payout Ratio > 50%
Payout Ratio > 30%
S&P 500
Forward Price-to-Earnings Ratios
S&P 500 Payout Ratio
33
Though high dividend payers trailed in the first quarter, there may be a long-term shift in investor preferences for dividends. With interest rates low, stocks with higher payout ratios have enjoyed higher valuations as the market has paid a premium for the stability of distributed earnings. Many stocks still have low payout ratios and may benefit from raising their dividends.
20%
30%
40%
50%
60%
70%
1947
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
Payout Ratio Median for Period
Past performance is no guarantee of future results. LEFT: Source: Standard & Poor’s, FAM (AART) through 3/29/12. RIGHT: Payout ratio = percentage of earnings paid in dividends to shareholders. Source: Standard & Poor’s, Haver Analytics, FAM (AART) through 12/31/11.
U.S
. EQ
UIT
Y 4.
Sector Breakdown: Domestic vs. Global Exposure
Domestic Exposure of S&P 500 Sectors and Industries
34
Companies with higher proportions of revenues from the U.S. economy may offer a purer play on domestic trends than the broader market. Sectors such as technology, materials, and energy generally derive more sales from abroad, while utilities, telecom, and financials are more domestic-oriented. Within sectors, there is often a wide disparity among industries as well.
0%
20%
40%
60%
80%
100%
Info Tech Materials Energy Consumer Staples
Industrials Health Care
Consumer Discretionary
Financials Utilities Telecom Services
Sector Industries
Construction
Metals & Mining Household
Products
Food & Staples Retailing
Road & Rail
Conglomerates Pharma
Healthcare Providers Retail
Autos
Consumer Finance
Semi- conductors
Internet Services
Sector investing involves risk. Because of its narrow focus, sector investing may be more volatile than investing in a more diversified basket of securities. Source: FactSet, FAM (AART) as of 12/31/11.
Domestic Sales % of Total Sales
U.S
. EQ
UIT
Y 4.
Corporate Earnings Growth Positive But Slowing
S&P 500 Earnings Growth
0%
10%
20%
30%
40%
50%
60%
Mar
-10
Jun-
10
Sep-
10
Dec
-10
Mar
-11
Jun-
11
Sep-
11
Dec
-11
Actual Estimates
Negative Corporate Guidance
35
During the past eight quarters, actual S&P 500 earnings growth has generally exceeded expectations, although the growth rate and the size of the surprise have moderated recently. Company earnings guidance has also deteriorated, a possible sign that positive earnings surprises may become more difficult in the quarters ahead.
10%
20%
30%
40%
50%
60%
70%
80%
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
1-Month 3-Month
Expected Earnings Growth
Q1 2012 0%
Full Year 2012 12%
LEFT: Source: FactSet, FAM (AART) through 3/31/12. RIGHT: Source: Bloomberg, FAM (AART) through 3/28/11.
Earnings Growth (Year-over-Year) Negative Guidance as % of Total Guidance
QU
ARTE
RLY
MAR
KET
UPD
ATE
Firs
t Qua
rter 2
012
International Equity Markets & Global Assets
INTE
RN
ATI
ON
AL
5.
In a reversal from 2011, foreign equities rebounded and riskier asset categories such as small-cap and emerging-market stocks had the highest returns. Dollar weakness generally added to returns, except for Japan where yen depreciation detracted. Gold lagged more economically sensitive assets, and commodity markets other than crude oil softened.
37
Strong Returns for International Equities
Q1 2012 Total Return
Q1 2012 LC 15.0% 10.8% 19.1% 10.3% 7.7% N/A N/A
1-Year USD -5.9% -8.5% 0.4% -5.3% -6.9% 15.5% -16.3%
14.9% 14.1%
11.3% 11.0% 10.8%
5.6%
0.9%
MSCI EAFE Small Cap
Emerging Markets
Japan MSCI EAFE Europe Gold Commodities
LC = Local currency. All returns are gross in U.S. dollars unless otherwise noted. Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. Index returns represented by: Europe – MSCI® Europe Index; Japan – MSCI® Japan Index; Emerging Markets – MSCI® EM Index, Gold – Gold Bullion Price, London PM Fix; Commodities – S&P GSCI Commodities Index. Source: FactSet, FAM (AART) as of 3/31/12.
INTE
RN
ATI
ON
AL
5.
Foreign stock advances were widespread as monetary authorities boosted liquidity around the world. With the U.S. no longer the destination of the global flight to safety, the dollar fell modestly against most currencies, which enhanced the international equity gains experienced by U.S. investors.
38
Global Equity Returns Were Boosted By Currency Gains
Local = Local currency returns. US$ = U.S. dollar returns. Parentheses denote negative returns. Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. Index returns represented by: Europe, Middle East, & Africa (EMEA) = MSCI EM EMEA. Developed Europe = MSCI® Europe Index. Asia Pacific = MSCI AC Asia Pacific Index. Latin America = MSCI EM Latin America. All country/region returns are gross MSCI® country/region indexes, in US$ unless otherwise noted. Sources: MSCI®, FactSet, FAM (AART) as of 3/31/12.
Local US$
Latin America 10 15
Chile 11 18
Mexico 6 16
Brazil 11 14
Local US$
Asia Pacific 14 12
India 15 20
China 10 10
Australia 8 9
Local US$
Developed Europe 8 11
Germany 18 21
Greece 11 14
Spain (5) (3)
Local US$
EMEA 9 16
Russia 10 19
Egypt 41 41
South Africa 6 11
Q1 2012 Global Equity Market Performance Total Return (%)
INTE
RN
ATI
ON
AL
5.
Commodity Prices Ticked Up, But Generally Trendless
Commodity Price Index
39
Most commodity prices rose during the first quarter, though they remained lower than one year ago. Rising crude oil prices more than offset weak natural gas. Better-than-expected global economic growth supported industrial metals such as copper and aluminum. Gold held up as a reserve asset over the year, but silver fared better in the quarter’s risk-on environment.
70
80
90
100
110
120
130
140
Apr-
11
May
-11
Jun-
11
Jul-1
1
Aug-
11
Sep-
11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Feb-
12
Mar
-12
Energy Industrial Metals Precious Metals Agriculture
Price Change Q1 1-Year
Precious Metals 8% 11%
Energy 8% -2%
Agriculture and Livestock 2% -14%
Industrial Metals 7% -17%
Index Level (3/31/11 = 100)
Past performance is no guarantee of future results. You cannot invest directly in an index. Standard & Poor’s Goldman Sachs Commodity Sub-Indices. Please see appendix for important index information. Source: Standard & Poor’s, Haver Analytics, FAM (AART) as of 3/31/12.
INTE
RN
ATI
ON
AL
5.
Secular Trends: Emerging Market Consumer Growth
Consumer Debt Levels Luxury Goods Sales to Emerging Asia
40
Consumers in the developing world represent a significant growth opportunity. Relatively low debt levels provide potential purchasing power as emerging markets deepen their financial systems and expand consumer credit. Rising household wealth, especially in Asia, is already accelerating growth in the markets for luxury goods.
8%
12%
16% 17%
18% 18%
21%
24%
0%
5%
10%
15%
20%
25%
2003
2004
2005
2006
2007
2008
2009
2010
LEFT:. Source: country statistical organizations, FAM (AART) as of 12/31/11. RIGHT: Data reflects combined share of total revenues of four luxury retailers—Hermes, Christian Dior, Burberry, and Citizen—reporting sales by geography, calculated in U.S. dollars. Source: FactSet, as of 12/31/10.
Emerging Asia Sales as % of Total Sales
8% 13% 15% 16%
27% 30% 34%
67%
87%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Indi
a
Indo
nesi
a
Braz
il
Turk
ey
Chi
na
Chi
le
Pola
nd
Japa
n
U.S
.
% of GDP
INTE
RN
ATI
ON
AL
5.
Foreign Stock Valuations Remain Below Long-Term Average
Emerging Markets’ P/E Ratio Developed Markets’ P/E Ratio
41
Earnings multiples rose somewhat in both developed and emerging markets as investor sentiment improved. However, following one year of compression, price-to-earnings ratios remain well below long-term averages and may suggest that investors are pricing in slower profit growth.
5
7
9
11
13
15
17
19
21
23
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Trailing P/E Forward P/E Long-Term Avg P/E
5
10
15
20
25
30
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Trailing P/E Forward P/E Long-Term Avg P/E
Price-to-Earnings Ratio Price-to-Earnings Ratio
Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. Price-to-earnings ratio (P/E) = Stock price divided by earnings per share. Also known as the multiple, P/E gives investors an idea of how much they are paying for a company’s earnings power. Long-term average P/E for Emerging Markets includes data for 1988–2011. Long-term average P/E for Developed Markets includes data for 1978–2011. Foreign Developed – MSCI EAFE Index, Emerging Markets – MSCI EM Index. Source: FactSet, FAM (AART) as of 3/31/12.
QU
ARTE
RLY
MAR
KET
UPD
ATE
Firs
t Qua
rter 2
012
Fixed-Income Markets
FIXE
D IN
CO
ME
6.
Investors flocked to lower-quality, more economically sensitive fixed income assets, leading to narrowing credit spreads and strong performance by corporate high-yield bonds and emerging market debt in the first quarter. Treasury yields rose on solid economic data, causing higher-quality categories to lag.
43
Lower-Quality Debt Outpaced Safer Assets
Q1 2012 Total Return
1-Year 5.6% 12.6% 2.8% 9.6% 12.1% 12.2% 5.3% 6.3% 4.5% 8.6% 7.7%
5.2% 4.9%
3.7%
2.0% 1.7%
0.9% 0.8% 0.6%
0.0%
-1.3%
0.3%
High Yield EM Debt Leveraged Loan
Credit Municipal TIPS ABS MBS Agency Treasuries Aggregate
Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. Index returns represented by: BC = Barclays Capital® Sectors represented by: Treasury – BC U.S. Treasury Index; Aggregate – BC Aggregate Bond Index; Agency – BC U.S. Agency Index; Mortgage-Backed Securities (MBS) – BC MBS Index; Commercial Mortgage-Backed Securities (CMBS) – BC Investment-Grade CMBS Index; Credit – BC Credit Bond Index; High Yield – Bank of America Merrill Lynch® U.S. High Yield Master II Index; Municipal – BC Municipal Bond Index; TIPS – BC U.S. TIPS Index; Leveraged Loan – S&P/LSTA Leveraged Loan Index; Emerging-Market Debt (EM Debt) – JP Morgan EMBI Global Index; Asset-Backed Securities (ABS) – BC Asset-Backed Securities Index. Source: FactSet, FAM (AART) as of 3/31/12.
FIXE
D IN
CO
ME
6.
1.5
2.0
2.5
3.0
3.5
4.0
Jan-
11
Mar
-11
May
-11
Jul-1
1
Sep-
11
Nov
-11
Jan-
12
Mar
-12
Treasury Yields Up, But No Signs of Flagging Demand
10-Year Treasury Yield
44
Interest rates rose during the first quarter—creating a headwind to fixed-income investment returns—but are still far below their levels at the beginning of 2011. Demand for Treasuries continued to be solid. The Fed and foreign central banks have absorbed much of the issuance in recent years, leaving official institutions as the largest holders of Treasuries.
Yield (%)
Past performance is no guarantee of future results. LEFT: Source: Bloomberg, FAM (AART) as of 3/31/12. RIGHT: Source: U.S. Treasury, Federal Reserve Board, Haver Analytics, FAM (AART) as of 1/31/12.
Q1 2012
$0
$2
$4
$6
$8
$10
$12
Jan-
01
Jul-0
1 Ja
n-02
Ju
l-02
Jan-
03
Jul-0
3 Ja
n-04
Ju
l-04
Jan-
05
Jul-0
5 Ja
n-06
Ju
l-06
Jan-
07
Jul-0
7 Ja
n-08
Ju
l-08
Jan-
09
Jul-0
9 Ja
n-10
Ju
l-10
Jan-
11
Jul-1
1 Ja
n-12
China Official Foreign Official Foreign Private Federal Reserve U.S. Private
Holders of Treasury Securities
Trillions
Ownership
33%
17%
14%
25%
12%
FIXE
D IN
CO
ME
6.
During the past several years, the U.S. economy has abruptly shifted through varying conditions, which have historically affected the relative performance of different fixed-income sectors. The uncertain global macro backdrop and low yields-to-maturity on high-quality bonds reinforce the need to diversify across multiple fixed-income categories.
45
Uncertainty Drives Need for Multisector Bond Exposure
Past performance is not a guarantee of future results. Diversification does not ensure a profit or guarantee against loss. Source: Morningstar EnCorr, FAM (AART) as of 3/31/12.
FIXE
D IN
CO
ME
6.
Corporate Bond Spreads Narrowed, Fundamentals Solid
Corporate Debt Service Burden
46
Yield spreads for both investment-grade and high-yield bonds compressed sharply—by 57 bps and 124 bps, respectively—during the first quarter, but remain above their historical averages. Given the solid condition of corporate balance sheets and the lowest debt-servicing burden in more than five decades, further spread tightening may be justified.
0%
20%
40%
60%
80%
100%
120%
1951
19
54
1957
19
60
1963
19
66
1969
19
72
1975
19
78
1981
19
84
1987
19
90
1993
19
96
1999
20
02
2005
20
08
2011
Interest Expense as % of Profits
LEFT: Interest expense for all non-financial U.S. firms as defined by Bureau of Economic Analysis. Source: Bureau of Economic Analysis, Haver Analytics, FAM (AART) as of 12/31/11. RIGHT: OAS = option-adjusted spread. bps = basis points. High Yield – Bank of America Merrill Lynch® U.S. High Yield Master II Index; Investment-grade – Barclays Capital Corporate Bond Index. Source: Bank of America Merrill Lynch, Haver Analytics, FAM (AART) as of 3/31/12.
602 177
0
100
200
300
400
500
600
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Mar
-90
Mar
-92
Mar
-94
Mar
-96
Mar
-98
Mar
-00
Mar
-02
Mar
-04
Mar
-06
Mar
-08
Mar
-10
Mar
-12
Corporate Bond Credit Spreads
High Yield OAS (bps) Investment Grade OAS (bps)
568
128
High Yield High Yield Average
Investment Grade Investment Grade Average
FIXE
D IN
CO
ME
6.
Higher Credit Quality Boosts Emerging Market Debt Universe
Emerging Market Debt Credit Quality and Valuation
47
Yield spreads on sovereign debt from the governments of developing countries fell during the first quarter and remained well below the average level seen in the 2000s. Higher valuations for emerging market debt may be warranted due to issuers’ sharply rising credit quality. However, higher credit quality also tends to bring greater sensitivity to interest rate movements.
0%
10%
20%
30%
40%
50%
60%
70%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Feb-
94
Sep-
94
Apr-
95
Nov
-95
Jun-
96
Jan-
97
Aug-
97
Mar
-98
Oct
-98
May
-99
Dec
-99
Jul-0
0
Feb-
01
Sep-
01
Apr-
02
Nov
-02
Jun-
03
Jan-
04
Aug-
04
Mar
-05
Oct
-05
May
-06
Dec
-06
Jul-0
7
Feb-
08
Sep-
08
Apr-
09
Nov
-09
Jun-
10
Jan-
11
Aug-
11
Mar
-12
% of Universe Rated Investment Grade Stripped Spread
Spread (basis points) % Investment Grade
Emerging Market Debt – JP Morgan EMBI Global Index. Source: J.P. Morgan, Bloomberg, Haver Analytics, FAM (AART) as of 3/31/12.
FIXE
D IN
CO
ME
6.
Muni Yields Still Attractive, Fundamentals Still Solid
AAA Municipal Bond-to-Treasury Ratio
48
AAA-rated municipal bond yields became less attractively valued versus Treasuries, but offered superior after-tax yields across all maturities. The fiscal outlook for many municipalities remains challenging, but state revenues reflect signs of improvement with stronger income and sales tax revenues, while localities are faced with declining property tax revenue.
60%
80%
100%
120%
140%
160%
180%
200%
220%
240%
0 5 10 15 20 25 30 Years to Maturity
3/31/12 12/30/11
Yield Ratio
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Q4
1999
Q4
2000
Q4
2001
Q4
2002
Q4
2003
Q4
2004
Q4
2005
Q4
2006
Q4
2007
Q4
2008
Q4
2009
Q4
2010
Q4
2011
Personal Income Tax Sales Tax Property Tax
Tax Revenue Growth
After-Tax Breakeven Level at Highest Tax Bracket = 65%
LEFT: Past performance is no guarantee of future results. Breakeven level uses current top federal income tax bracket (35%). Source: FAM (AART) as of 3/31/12. RIGHT: Shaded areas are U.S. Recessions as defined by National Bureau of Economic Research. Chart represents 4-quarter average of quarterly year-over-year percent change. Data not adjusted for legislative changes. Personal income tax and sales tax represent state portion only, while property tax reflects state and local components. Source: U.S. Census Bureau, Quarterly Summary of State and Local Tax Revenue, FAM (AART) as of 3/22/12.
QU
ARTE
RLY
MAR
KET
UPD
ATE
Firs
t Qua
rter 2
012
Asset Allocation Themes
AS
SE
T A
LLO
CA
TIO
N
7.
Falling Correlations: Better Backdrop for Active Management
Russell 1000 Stock Correlations Stock Relative Returns and Correlations
Stock correlations fell significantly from their all-time highs in October, creating a better environment for individual stock picking. In a high correlation environment, underlying corporate fundamentals have had less impact on prices. Since 2008, for example, companies that beat earnings expectations the most saw their returns beat the market by smaller margins.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1985
1988
1991
1994
1997
2000
2003
2006
2009
Correlation Median for Period
Dec 2008
Oct 2011
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0
5
10
15
20
25
30
35
40
45
50
2000
2002
2003
2004
2005
2007
2008
2009
2010
2012
50
LEFT: Source: FAM (AART) through 2/29/12. RIGHT: Top Surprisers = Top quartile of Russell 1000 companies beating median consensus earnings expectations. Relative return versus Russell 1000 Index. pps = percentage points. Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. Source: FAM (AART) through 3/31/12.
60-Day Stock Correlation Relative Return (pps) 1-Year Daily Stock Correlation
2012
Top Surprisers’ Relative Return Median for Period
Russell 1000 Correlations Median for Period
AS
SE
T A
LLO
CA
TIO
N
7.
Despite short-term deviations due to movements in inflation or interest rates, real (inflation-adjusted) yields have usually been a good indicator of real bond returns over the long term. Since 1923, the average 10-year real yield was 2.1% and the average 10-year real return was 2.0%. The current 10-year real yield stands at roughly zero, implying a difficult outlook for real returns.
51
Real Treasury Yields Inform Real Bond Return Expectations
U.S. 10-Year Real Yield vs. Subsequent 10-Year Real Return
-10%
-5%
0%
5%
10%
15%
1923
1926
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Subsequent 10-Year Real Return 10-Year Real Yield
Past performance is no guarantee of future results. 10-year Treasury real returns are the difference between the total return and the change in Consumer Price Index (CPI) over the period. Proprietary methodology used to calculate the 10-year Treasury real yields. Source: FAM (AART) through 3/31/12.
2012
AS
SE
T A
LLO
CA
TIO
N
7.
Over the long run, cash has rarely been able to outpace the rate of inflation. Several assets offer some inflation protection through their hard-asset nature or income-adjusting characteristics. Because these categories have different sensitivities to inflation, combining them into a real return composite may provide a higher frequency of outpacing inflation.
52
Asset Categories That May Help Protect Against Inflation
Frequency of Exceeding Inflation, 1973–2011
39%
67% 69% 70%
79% 79% 86%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Cash Commodities Real Estate Stocks Real Estate Income
TIPS Leveraged Loans Real Return Composite*
* Real Return Composite represented by 30% TIPS, 25% Leveraged Loans, 25% Commodities, 10% Real Estate Income, 10% Real Estate Equity. Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. Asset performance uses monthly data. Index returns represented by: Cash – U.S. 30-day T-Bill; Commodities – Goldman Sachs Commodities Index through 12/1990, Dow Jones UBS Commodity Index from 1/1991; TIPS – FAM-compiled index through 2/1997, Barclays Capital US TIPS Index from 3/1997; Real Estate Equity – FTSE NAREIT All REITS Index through 12/1977, DJ US Select RESI from 1/1978; Real Estate Income – NAREIT until 12/1996, 40% BofA Merrill Lynch Corporate Real Estate Index /40% MSCI REIT Preferred/20% NAREIT from 1/1997 ; Leveraged Loans – Barclays Capital Intermediate Credit for 1/1973–12/1975, Barclays Capital 1-3 Yr Credit for 1/1976–1/1978, ML 1-3 Corp for 2/1978–12/1991, Credit Suisse Leveraged Loans for 1/1992–1/1999, S&P/LSTA Lev Loan from 2/1999; Source: Morningstar EnCorr, FAM (AART) through 12/31/11.
AS
SE
T A
LLO
CA
TIO
N
7.
Investors Continued to Favor Bonds Over Stocks
Equity Fund Flows and Performance Bond Fund Flows and Performance
53
While stocks handily outperformed bonds during the quarter, investors continued to shun equity funds and piled into bond funds. This extended the post-2008 pattern in which investors have largely gravitated to bonds, even during periods when equities have outperformed—the opposite pattern of behavior displayed over the previous two decades.
-60
-40
-20
0
20
40
60
80
-300
-200
-100
0
100
200
300
400
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2012
Fund Flows Performance
-15
-10
-5
0
5
10
15
20
-300
-200
-100
0
100
200
300
400
1991
1993
1995
1997
1999
2001
2002
2004
2006
2008
2010
2012
Fund Flows Performance Rolling 1-Year Net Flows ($Billions)
Rolling 1-Year Performance (%)
Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. Weekly equity and bond flows used for 3/2012 data. Returns represented by: Equity – S&P 500 Index, Bond – BC Aggregate Index. Source: Investment Company Institute, Morningstar EnCorr, Haver Analytics, FAM (AART) as of 3/31/12.
Rolling 1-Year Net Flows ($Billions)
Rolling 1-Year Performance (%)
AS
SE
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TIO
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7.
Mar-2012 4.7%Spread
Stock Earnings Yield High Relative to Bond Yields
Equity Earnings Yield vs. Bond Yields
54
For decades, the stock earnings yield generally moved in the same direction as Treasury yields and was often lower. Over the past two years, bond yields fell to historic lows, while the earnings yield rose to its highest level since the 1980s. The last time the yield difference was this wide marked the beginning of a prolonged period of stock outperformance.
0%
2%
4%
6%
8%
10%
12%
14%
16%
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
S&P 500 Earnings Yield 10-Year Treasury Yield
Post-September 1974 Annualized Returns
1-Year 3-Year 5-Year
S&P 500 38% 20% 17%
Treasury Bonds 8% 9% 7%
Inflation 8% 6% 8% Sep-1974
6.4% Spread
Sep-2011 6.4% Spread
Earnings yield = one-year trailing earnings divided by end of period price. Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. Treasury bond returns represented by Ibbotson US Intermediate-Term Government Bond Index. As reported earnings for 1963–1987. Operating earnings for 1988–2011. Source: Federal Reserve Board, Morningstar EnCorr, Haver Analytics, FAM (AART) through 3/31/12.
AS
SE
T A
LLO
CA
TIO
N
7.
Performance Rotations Underscore Need for Diversification The performance of different asset categories has varied widely from year to year., and the magnitude of returns can vary significantly among asset classes in any given year—even among asset classes that are moving in the same direction. A simple portfolio allocation with 60% in U.S. equities and 40% in U.S. bonds illustrates the benefits of diversification.
Periodic Table of Returns
55
*Through 3/31/12. Past performance is no guarantee of future results. Diversification/Asset Allocation does not ensure a profit or guarantee against a loss. Asset classes represented by: Large Caps – S&P 500 Index; Small Caps – Russell 2000 Index; Growth – Russell 3000 Growth Index; Value – Russell 3000 Value Index; Developed Country – MSCI EAFE Index; Emerging Markets – MSCI Emerging Markets Index; High Yield – Bank of America Merrill Lynch U.S. High Yield Index; Investment-Grade Bonds – Barclays Capital U.S. Aggregate Bond Index; Real Estate – NAREIT Equity-Only Index; Commodities – DJ-UBS Commodity Index. Source: Ibbotson Associates, Standard & Poor’s, Haver Analytics, FAM (AART) as of 3/31/12.
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* Legend
18% 75% 17% 38% 35% 35% 35% 66% 32% 14% 26% 56% 32% 35% 35% 40% 5% 79% 28% 8% 15% Growth Stocks
17% 33% 8% 37% 23% 33% 29% 34% 26% 8% 10% 47% 26% 21% 33% 16% -20% 58% 27% 8% 14% Emerging-Market Stocks
15% 20% 3% 37% 23% 29% 21% 27% 12% 5% 4% 39% 21% 14% 27% 12% -26% 37% 19% 4% 13% Large Cap Stocks
15% 19% 2% 30% 22% 24% 20% 24% 8% 2% -2% 37% 18% 12% 22% 11% -34% 32% 18% 4% 12% Small Cap Stocks
11% 19% 1% 28% 22% 22% 14% 21% -1% -2% -6% 31% 17% 7% 18% 7% -36% 28% 17% 2% 11% Value Stocks
8% 17% 0% 20% 16% 20% 9% 21% -3% -4% -9% 31% 11% 5% 16% 6% -36% 27% 16% 2% 11% Foreign-Developed Country Stocks
8% 10% -1% 18% 15% 13% 3% 12% -5% -4% -15% 29% 11% 5% 12% 5% -37% 26% 15% 0% 10% Real Estate Stocks
7% 10% -2% 15% 11% 10% -3% 7% -9% -12% -16% 28% 9% 5% 11% 2% -38% 20% 15% -4% 8% 60% Large Cap40% IG Bonds
5% 10% -2% 15% 6% 2% -18% 3% -14% -20% -20% 24% 8% 4% 9% -1% -38% 19% 12% -12% 5% High-Yield Bonds
4% 4% -3% 12% 6% -3% -25% -1% -22% -20% -22% 19% 7% 3% 4% -2% -43% 18% 8% -13% 1% Commodities
-12% -1% -7% -5% 4% -12% -27% -5% -31% -21% -28% 4% 4% 2% 2% -16% -53% 6% 7% -18% 0% Investment-Grade Bonds
56
Appendix: Important Information
Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author and not necessarily those of Fidelity Investments. Fidelity does not assume any duty to update any of the information. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.
These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security, sector, or investment strategy.
Past performance is no guarantee of future results.
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
All indices are unmanaged and performance of the indices includes reinvestment of dividends and interest income and, unless otherwise noted, is not illustrative of any particular investment. An investment cannot be made in any index.
Although bonds generally present less short-term risk and volatility than stocks, bonds do contain interest rate risk (as interest rates rise, bond prices usually fall and vice versa) and the risk of default, or the risk that an issuer will be unable to make income or principal payments. Additionally, bonds and short-term investments entail greater inflation risk, or the risk that the return of an investment will not keep up with increases in the prices of goods and services, than stocks.
Increases in real interest rates can cause the price of inflation-protected debt securities to decrease.
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest-rate, currency-exchange-rate, economic, and political risks, all of which are magnified in emerging markets.
The securities of smaller, less well-known companies can be more volatile than those of larger companies.
Growth stocks can perform differently from the market as a whole and other types of stocks and can be more volatile than other types of stocks. Value stocks can perform differently than other types of stocks and can continue to be undervalued by the market for long periods of time.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.
The municipal market is volatile and can be significantly affected by adverse tax, legislative, or political changes and by the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a debt security to decrease. A portion of the dividends you receive may be subject to federal, state, or local income tax or may be subject to the federal alternative minimum tax. Generally, tax-exempt municipal securities are not appropriate holdings for tax advantaged accounts such as IRAs and 401(k)s.
The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.
The gold industry can be significantly affected by international monetary and political developments such as currency devaluations or revaluations, central bank movements, economic and social conditions within a country, trade imbalances, or trade or currency.
Changes in real estate values or economic conditions can have a positive or negative effect on issuers in the real estate industry, which may affect your investment.
Leverage can magnify the impact that adverse issuer, political, regulatory, market, or economic developments have on a company. In the event of bankruptcy, a company's creditors take precedence over the company's stockholders. Although the companies that the fund invests in may be highly leveraged, the fund itself does not use leverage as an investment strategy.
CPI – Consumer Price Index. An inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. The CPI is published monthly.
The Russell 2000® Index is a market capitalization-weighted index of smaller company stocks. The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 26% of the total market capitalization of the Russell 1000 Index. The Russell 3000® Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected. The Russell 3000 Growth Index is an unmanaged index that measures the performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 3000 Value Index is an unmanaged index that measures the performance of those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth values.
The Morgan Stanley Capital InternationalSM (MSCI®) Europe, Australasia, Far East Index (EAFE) is an unmanaged market capitalization-weighted index designed to represent the performance of developed stock markets outside the United States and Canada. The MSCI Europe Index is a market capitalization-weighted index of over 550 stocks traded in 14 European markets. The MSCI® Emerging Markets (EM) Index is a market capitalization-weighted index of over 850 stocks traded in 22 world markets. The MSCI Emerging Markets Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors in emerging markets. The MSCI EM (Emerging Markets) Latin America Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in Latin America. The MSCI EM Latin America Index consists of the following six emerging-market country indices: Argentina, Brazil, Chile, Colombia, Mexico, and Peru. The MSCI EM (Emerging Markets) Asia Index is a free float-adjusted, market capitalization index designed to measure equity-market performance in the following countries: China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand. The MSCI Japan Index is an unmanaged index of stock prices that reflects the common stock prices of the index companies translated into U.S. dollars, assuming reinvestment of all dividends paid by the index stocks net of any applicable foreign taxes. The MSCI Spain Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in Spain. The MSCI Russia Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in Russia. The MSCI Germany Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in Germany. The MSCI Greece Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in Greece. The MSCI South Africa Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in South Africa. The MSCI Egypt Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in Egypt. The MSCI China Index is a free float-adjusted, market capitalization-weighted index designed to measure-equity market performance in China. The MSCI India Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in India. The MSCI Brazil Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in Brazil. The MSCI Mexico Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in Mexico. The MSCI Chile Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in Chile. The MSCI Australia Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in Australia.
The MSCI EAFE Small Cap Index currently consists of the following 21 developed-market countries: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and United Kingdom. This index aims to capture 40% of the full market capitalization of the eligible small-cap universe of companies in each country by industry. This is a range of 200–1500 billion USD. MSCI then free float-adjusts the included companies.
The MSCI EM (Emerging Markets) Europe, Middle East, and Africa (EMEA) Index is a free float-adjusted, market capitalization-weighted index designed to measure equity-market performance in the emerging-market countries of Europe, the Middle East, and Africa. The MSCI EM EMEA Index consists of the following 10 emerging-market country indices: Czech Republic, Hungary, Poland, Russia, Turkey, Israel, Jordan, Egypt, Morocco, and South Africa.
The Bank of America Merrill Lynch High-Yield Bond Master II Index is an unmanaged index that tracks the performance of below-investment-grade, U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
Russell 1000 Index is a market capitalization–weighted index designed to measure the performance of the large-cap segment of the U.S. equity market.
CoreLogic distressed sales include short sales and REOs. A short sale is typically a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. REO (Real Estate Owned) is property in the possession of a lender usually obtained through a foreclosure.
The BofA Merrill Lynch US 1-3 YearCredit Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market with maturities between one and three years.
57
Appendix: Important Information
Credit Suisse Leveraged Loan Index is a market value–weighted index designed to represent the investable universe of the U.S. dollar–denominated leveraged loan market.
The Barclays Capital® (BC) U.S. Treasury Index is designed to cover public obligations of the U.S. Treasury with a remaining maturity of one year or more. The BC Aggregate Bond Index is an unmanaged, market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The BC U.S. Credit Bond Index is designed to cover publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements; bonds must be SEC-registered to qualify. The BC U.S. Agency Index is designed to cover publicly issued debt of U.S. Government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. Government. The BC CMBS Index is designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3/BBB-/BBB- or above) using Moody’s, S&P, and Fitch respectively, with maturity of at least one year. The BC MBS Index covers agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARMs) issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The BC U.S. Municipal Bond Index covers the U.S. dollar-denominated, long-term tax-exempt bond market with four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The BC TIPS Index is an unmanaged market index made up of U.S. Treasury Inflation Linked Index securities. The BC U.S. Government Bond Index is a market value-weighted index of U.S. Government fixed-rate debt issues with maturities of one year or more. The BC ABS Index is a market value-weighted index that covers fixed-rate asset-backed securities with average lives greater than or equal to one year and that are part of a public deal; the index covers the following collateral types: credit cards, autos, home equity loans, stranded-cost utility (rate-reduction bonds), and manufactured housing.
FTSE NAREIT Equity REIT Index – The unmanaged National Association of Real Estate Investment Trusts (NAREIT) Equity Index is a market value-weighted index based on the last closing price of the month for tax-qualified REITs listed on the NYSE.
S&P/LSTA Leveraged Performing Loan Index – Standard & Poor's/Loan Syndications and Trading Association Leveraged Performing Loan Index is a market value-weighted index designed to represent the performance of U.S. dollar-denominated, institutional leveraged performing loan portfolios (excluding loans in payment default) using current market weightings, spreads, and interest payments.
S&P GSCI Commodities Index is a world-production weighted index composed of 24 widely traded commodities. All sub-indices of the S&P GSCI™ sub-indices (Energy, Industrial Metals, Precious Metals, and Agriculture and Livestock) follow the same rules regarding world production weights, methodology for rolling, and other functional characteristics.
The S&P 500®, a market capitalization-weighted index of common stocks, is a registered service mark of the McGraw-Hill Companies, Inc. and has been licensed for use by Fidelity Distributors Corporation.
The following is a definition of the S&P 500 sectors: Consumer Discretionary – Companies that tend to be the most sensitive to economic cycles. Consumer Staples – Companies whose businesses are less sensitive to economic cycles. Energy – Companies whose businesses are dominated by either of the following activities: The construction or provision of oil rigs, drilling equipment, and other energy-related service and equipment, including seismic data collection. The exploration, production, market, refining and/or transportation of oil and gas products, coal, and consumable fuels. Financials – Companies involved in activities such as banking, consumer finance, investment banking and brokerage, asset management, insurance and investments, and real estate, including REITs. Health Care – Companies in two main industry groups: Health care equipment suppliers, manufacturers, and providers of health care services; and companies involved in research development, production, and marketing of pharmaceuticals and biotechnology products. Industrials – Companies whose businesses manufacture and distribute capital goods, provide commercial services and supplies, or provide transportation services. Information Technology – Companies in technology software & services and technology hardware & equipment. Materials – Companies that are engaged in a wide range of commodity-related manufacturing. Telecommunication Services – Companies that provide communications services primarily through fixed line, cellular, wireless, high bandwidth and/or fiber-optic cable networks. Utilities – Companies considered electric, gas, or water utilities, or companies that operate as independent producers and/or distributors of power.
The JPM® EMBI Global Index tracks total returns for traded external debt instruments issued by emerging-market sovereign and quasi-sovereign entities.
The CoreLogic Home Price Index provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate "constant-quality” view of pricing trends than basing analysis on all home sales. CoreLogic distressed sales include short sales and REOs. A short sale is typically a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. REO (Real Estate Owned) is property in the possession of a lender usually obtained through a foreclosure.
58
Appendix: Important Information
The major economies included in the Global Leading Indicators Diffusion Index are: Austria, Belgium, Brazil, Canada, China, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Italy, Japan, South Korea, Luxembourg, Malaysia, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Russia, Slovakia, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United States, United Kingdom.
Standard deviation shows how much variation there is from the average (mean or expected value). A low standard deviation indicates that the data points tend to be very close to the mean, whereas a high standard deviation indicates that the data points are spread out over a large range of values.
Correlation coefficient measures the interdependencies of two random variables that range in value from −1 to +1, indicating perfect negative correlation at −1, absence of correlation at 0, and perfect positive correlation at +1.
The Conference Board Leading Economic Indicators (LEI) is a composite of 10 leading indicators designed to signal peaks and troughs in the business cycle. The weighted LEI Index gives each component a certain weight based on the perceived importance as a leading indicator. The LEI Diffusion Index measures the proportion of the components that are rising to those that are falling.
The Purchasing Managers’ Index (PMI) is a survey of purchasing managers in a certain economic sector. A PMI over 50 represents expansion of the sector compared to the previous month, while a reading under 50 represents a contraction, and a reading of 50 indicates no change.
The BofA Merrill Lynch Corporate Real Estate Index is a market capitalization-weighted index of U.S. dollar-denominated investment-grade corporate debt publicly issued in the U.S. domestic market by real estate issuers; it is a subset of the BofA Merrill Lynch US Corporate Index. Qualifying securities must have an investment-grade rating (based on an average of Moody’s, S&P, and Fitch). In addition, qualifying securities must have at least one year remaining to final maturity, a fixed coupon schedule, and a minimum amount outstanding of $250 million.
The Dow Jones-UBS Commodity Index measures the performance of the commodities market. It consists of exchange-traded futures contracts on physical commodities that are weighted to account for the economic significance and market liquidity of each commodity.
The Citigroup Economic Surprise Indexes are objective and quantitative measures of economic news, covering all G10 economies. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median).
Dow Jones U.S. Select Real Estate Securities Index is a float-adjusted market capitalization–weighted index of publicly traded real estate securities such as real estate investment trusts (REITs) and real estate operating companies (REOCs).
FTSE NAREIT All REITs Index is a market capitalization–weighted index that is designed to measure the performance of all tax–qualified Real Estate Investment Trusts (REITs) that are listed on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ National Market List.
MSCI REIT Preferred Index is a preferred stock market capitalization-weighted index of certain exchanged-traded perpetual preferred securities issued by US Equity and US Hybrid REITS.
Barclays Capital U.S. Intermediate Credit Bond Index is a market value-weighted index of investment-grade fixed-rate corporate debt and sovereign, supranational, local authorities, and non-U.S. agency debt with intermediate range maturities. Barclays Capital U.S. 1-3 Year Credit Bond Index is a market value-weighted index of investment-grade fixed-rate debt securities with maturities from one to three years from the U.S. Corporate Indices.
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Products and services provided through Fidelity Financial Advisor Solutions (FFAS) to investment professionals, plan sponsors, and institutional investors by Fidelity Investments Institutional Services Company, Inc., 100 Salem Street, Smithfield, RI 02917.
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Appendix: Important Information
