first quarter 2014 quarterly market update€¦ · first quarter 2014 quarterly market update 1....
TRANSCRIPT
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 EquityMarkets
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 diverge, suggesting a more beneficial environment for active management and diversification.
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Asset Class Pair-wise Correlations Median 60-Day Asset Class Pair-wise Correlations
Correlations Among: 1994–2006 Avg. 2007–2013 Avg. Last 60 Days Asset Classes 16% 38% 27% Country Equity Markets 21% 48% 34% S&P 500 Stocks 21% 40% 30%
Past performance is no guarantee of future results. You cannot invest directly in an index. See appendix for important index information. Diversification does not ensure a profit or guarantee against a loss. 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, Bank of America Merrill Lynch (BofA ML) High Yield Bond Index, FTSE NAREIT Equity Only Index. Country equity markets represented by the country sub-indices of the MSCI AC World Index. Source: FactSet, Fidelity Investments (AART) through 12/31/13. 8
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Theme: Shift in Liquidity and Risk Backdrop
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*Returns as of 12/31/13. Past performance is no guarantee of future results. You cannot invest directly in an index. See appendix for important index information. Asset categories represented by: Developed-World Equities (non-U.S.) – MSCI EAFE Index; EM Debt – JP Morgan EMBI Global Index; EM Equities – MSCI EM Index; High Yield Bonds – Bank of America Merrill Lynch (BofA ML) High Yield Bond Index; Investment Grade Bonds – Barclays U.S. Aggregate Bond Index; U.S. Equities – S&P 500 Index. Source: Federal Reserve, European Central Bank, Bank of Japan, Bank of England, Haver Analytics, Fidelity Investments (AART). Balance sheet growth data as of 11/30/13.
Central Bank Liquidity Boom Helped Boost Asset Prices Since 2008, an unprecedented expansion of major central banks’ balance sheets has provided a dramatic offset to the financial crisis and helped to fuel a terrific five-year span for asset-market performance. Only Japan heads into 2014 with an undiminished plan for further accommodation, implying slower global liquidity growth ahead.
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Japan United Kingdom U.S Eurozone Incremental expansion, 2007–2013
Total $6.3T
Asset Class Returns* (5-Year Annualized) High Yield Bonds 18.7% U.S. Equities 17.9% EM Equities 15.2% Developed-World Equities 13.0% EM Debt 11.5% Investment-Grade Bonds 4.4%
Central Bank Balance Sheet Growth
Indexed: 8/31/2007 = 100
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U.S. Treasury Yield Curves
Market Expectations: Ongoing Tapering, Rate Hikes on Hold A dramatically steeper yield curve suggests the market expects ongoing Fed QE tapering, but Fed funds futures indicate that investors do not expect imminent rate hikes. With this relatively balanced outlook, 2014 tapering may have a less violent impact on rates than experienced during the summer, but could affect some assets vulnerable to lower liquidity.
Asset Class Returns during 2013 “Taper Scare,” 5/21/13–9/17/13
U.S. Equities 2.8% Developed-World Equities 1.7% High Yield Bonds -1.8% EM Equities -3.0% Investment-Grade Bonds -3.1% EM Debt -7.6%
Past performance is no guarantee of future results. You cannot invest directly in an index. See appendix for important index information. Performance not annualized. Asset Categories represented by: Developed-World Equities (non-U.S.) – MSCI EAFE Index; EM Debt – JP Morgan EMBI Global Index; EM Equities – MSCI EM Index; High Yield Bonds – Bank of America Merrill Lynch (BofA ML) High Yield Bond Index; Investment-Grade Bonds – Barclays U.S. Aggregate Bond Index; U.S. Equities – S&P 500 Index. Source: Bloomberg Finance, L.P., Fidelity Investments (AART) as of 12/31/13.
Yield (%)
End 2013
Pre-September Fed Meeting
Pre-Taper Talk
December 2015 Fed Funds Futures
Dec. 2013 0.73% Sep. 2013 1.12% May 2013 0.59%
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Shift in Risk: From Crisis Countries to Rapid Credit Growers Countries such as the U.S. that experienced the bursting of a credit bubble during the 2008 financial crisis have since then deleveraged, which has added stability to their private-sector financial outlooks. In contrast, some non-crisis countries such as China have had a massive credit expansion, which may lead to slower growth and/or rising financial risks.
PPS: percentage points. Source: Bank of International Settlements, Organization for Economic Cooperation and Development, Haver Analytics, Fidelity Investments (AART) as of 6/30/13.
Credit to GDP Ratios
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China United States
Current (%) 5-Year Change (pps)
Sweden 255% 69
Hong Kong 240% 64
Singapore 130% 39
Thailand 117% 23
Brazil 70% 29
Turkey 58% 25
Non-Financial Private Credit-to-GDP
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Higher U.S. Financial Stability amid Global Rebalancing Multi-year lows for both the household debt service ratio and the current account deficit suggest improved U.S. financial stability. Globally, current account balances in many formerly large-deficit countries have improved, while the balances for many emerging-market countries and countries with surpluses have deteriorated.
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Consumer Debt Service Current Account
5-Year Change (pps)
Current Level (%)
Improved
Greece 18.6 2.6
Ireland 14.1 6.2
Spain 9.9 0.9
Italy 4.1 0.8
U.S. 2.5 -2.3
Deteriorated
Hong Kong -13.5 3.5
China -8.0 1.8
Canada -4.2 -3.3
Indonesia -3.4 -4.0
Japan -2.3 0.5
Current Account Balances (% of GDP) U.S. Consumer Debt vs. Current Account
PPS: percentage points. LEFT: Household Financial Obligation Ratio: ratio of financial obligation payments to disposable personal income. Source: Federal Reserve Board, Bureau of Economic Analysis, Haver Analytics, Fidelity Investments (AART) as of 9/30/13. RIGHT: Countries’ official estimates. Data seasonally adjusted except China. Source: Haver Analytics, Fidelity Investments (AART) as of 9/30/13.
Household Financial Obligation Ratio Current Account (% of GDP)
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Economy/Macro Backdrop
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MY Improving Trend in Global Business Cycle
The global economy continues to indicate a steady upward trend despite the relatively slow pace of overall growth. Most of the world’s developed economies—including Europe, the U.S., and Japan—remain in the more favorable early-cycle or mid-cycle phases. Despite late-cycle dynamics, China’s near-term outlook has stabilized.
For developed economies, we use the classic definition of recession, involving an outright contraction in economic activity. For developing economies, such as China, we have adopted a “growth cycle” definition because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity, and deviation from trend tends to matter most for asset returns. Source: Fidelity Investments (AART) through 12/31/13. 15
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MY Manufacturing Upswing Underpins Global Momentum
The global economy enters 2014 with increasing momentum, as leading indicators have improved in most of the world’s 37 largest economies. Progress is most uniform among developed countries, which is particularly evident in an upturn for manufacturing activity that has boosted global trade.
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Global Leading Indicators Diffusion Index Manufacturing Purchasing Managers’ Indices
LEFT: Global Leading Indicators Diffusion Index is a proprietary index. Please see appendix for list of countries. Source: Organization for Economic Cooperation and Development (OECD), Foundation for International Business and Economic Research (FIBER), Haver Analytics, Fidelity Investments (AART) through 10/31/13. RIGHT: Source: Official country statistical organizations, Institute for Supply Management, Markit, HSBC, Haver Analytics, Fidelity Investments (AART) as of 12/31/13.
% of Countries with Rising Leading Indicators over Six Months
Level Bullwhip
(New Orders minus Inventories)
U.K. 57.3 12.7
U.S. 57.0 17.2
Japan 55.2 8.2
Germany 54.2 8.2
Mexico 52.6 0.7
Spain 50.8 5.7
S. Korea 50.8 2.1
India 50.7 1.1
China 50.5 1.8
Brazil 50.5 1.1
Russia 48.8 0.9
Australia 47.6 3.3
France 47.1 -2.6
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MY Europe Improving Cyclically, but Deleveraging Continues
Leading economic indicators continue to improve in most developed European markets, suggesting the region as a whole remains in an early-cycle expansion. However, the post-crisis improvement in the European banking system remains behind that in the U.S., suggesting that ongoing deleveraging pressures may limit the potential upside of Europe’s expansion.
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Bank Loan/Deposit Ratios
See appendix for important index information. LEFT: Source: Organization for Economic Cooperation and Development, Haver Analytics, Fidelity Investments (AART) as of 12/31/13. RIGHT: Household and Nonfinancial Corporate Loan-to-Deposit Ratios. Source: European Central Bank, Federal Reserve Board, Haver Analytics, Fidelity Investments (AART) as of 11/30/13.
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UK Germany France Italy
Leading Economic Indicators Index
Year-over-Year Change (%)
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Japan: Looming Consumer Tax Increase Japan’s consumption value-added tax (VAT) will rise from 5% to 8% in April 2014, with the intent of narrowing the budget deficit. Consumption rose when a similar hike in 1997 pulled spending forward, but plummeted immediately afterward. The tax increase threatens to disrupt Japan’s cyclical momentum, which thus far has been highly dependent on policy stimulus.
Shaded regions indicate recessions as defined by the Cabinet Office of Japan. Source: Cabinet Office of Japan, Haver Analytics, Fidelity Investments (AART) through 9/30/13.
VAT increase from 3% to 5%, April 1997
Japan Private Consumption Expenditures Year-over-Year Change (%)
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Floor Space Started Infrastructure Investment
China Residential and Infrastructure Construction
China Remains Stable for Now; Liquidity Risks Remain Domestic economic activity improved, led by a re-acceleration in government-driven infrastructure construction. While central-bank liquidity operations have maintained near-term stability, interest rates on both short- and long-term borrowing have risen steadily, which could threaten the rapid credit expansion and sow the seeds for slower growth.
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7-Day Reverse Repo 5-Year Government Bonds
China Interest Rates
Year-over-Year Change (%)
LEFT: Source: China National Bureau of Statistics, Haver Analytics, Fidelity Investments (AART) as of 11/30/13. RIGHT: Reverse repo rates are a 30-day moving average. Source: Bloomberg Finance L.P., Fidelity Investments (AART) as of 12/31/13.
Yield (%)
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MY Global Disinflationary Backdrop Benefits U.S. Consumer
Developed economies experienced lower inflationary pressures in 2013 amid weak wage growth and stable commodity prices. In combination with a stronger U.S. dollar, global disinflationary trends helped lower U.S. import prices and supported the purchasing power of the U.S. consumer.
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Consumer Inflation U.S. Import Prices
Year-over-Year Change (%)
Year-over-Year Change (%)
LEFT: Headline Consumer Price Indices. BIITS: Equal-weighted CPI for Brazil, India, Indonesia, Turkey, South Africa. Source: Official country estimates, Haver Analytics, Fidelity Investments (AART) as of 11/30/13. RIGHT: Source: Bureau of Labor Statistics, Fidelity Investments (AART) as of 11/30/13. 20
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MY U.S. Employment Trends Suggest Favorable Outlook
The labor market recovery remains on a steady course, with employment sentiment indicators rising to post-recession highs. The outlook for real (inflation-adjusted) wages has improved amid tightening labor markets and lower inflation. Sustained real wage growth would have the potential to support consumption more broadly.
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Job Quits Consumers thinking jobs are plentiful
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Nominal Real
U.S. Wages and Salaries U.S. Employment Sentiment
Year-over-Year Change (%) Millions Net % of Consumers Thinking Jobs are Plentiful
LEFT: Source: Bureau of Labor Statistics, The Conference Board, Haver Analytics, Fidelity Investments (AART) as of 11/30/13. RIGHT: Source: Bureau of Labor Statistics, Fidelity Investments (AART) as of 11/30/13. 21
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MY Retirements Now Driving Decline in Participation Rate
The aging of the U.S. population has been pushing the labor force participation rate lower for close to a decade. Although the recession caused a cyclical decline in the participation rate, the number of discouraged workers peaked in 2012, which suggests that demographics have been a stronger driver of recent participation-rate declines than employment conditions.
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2006 2013 Participation Rate
Age Cohort
U.S. Working Age Population
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People Not in Labor Force Who Want a Job
Number of Discouraged Workers
LEFT: Participation rate is the size of the labor force divided by the total civilian noninstitutional population. Participation rates by age cohort shown are for 2013. Source: Bureau of Labor Statistics, Haver Analytics, Fidelity Investments (AART) as of 12/31/13. RIGHT: Shaded areas are U.S. recessions, as defined by the National Bureau of Economic Research. Source: Bureau of Labor Statistics, Haver Analytics, Fidelity Investments (AART) as of 12/31/13.
2006 2013
Overall Participation Rate 66.2% 63.3%
Millions Participation Rate (%) Millions
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CO
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MY Despite Slowing, Housing Supported By Solid Fundamentals
The housing market is transitioning from a fast-paced recovery to a more mature expansion underpinned by a balanced supply-demand outlook. As a result of higher home prices and deleveraging, U.S. homeowners in the aggregate now have more home equity than debt, underscoring a dramatic improvement in a number of housing-related indicators.
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Sep-95 Sep-97 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13
Homeowners' Equity Home Mortgages
Housing Indicators 2011 Most Recent*
Underwater Mortgages (millions) 16.5 10.8
Real Mortgage Rate 9.2% -8.6%
Net Worth-to-Disposable Income 5.3x 6.2x
Net % of Banks Easing Standards -2.7% 5.9%
Mortgage Debt Service Ratio 5.4% 4.8%
Homeowners’ Equity and Mortgages
$ Trillions
*Most recent dates: underwater mortgages, real mortgage rates, net worth-to-disposable income and mortgage debt service ratio as of 9/30/13; net % of banks easing standards as of 12/31/13. Underwater mortgages: number of single-family homes with negative owner equity. Real mortgage rate: 30-year mortgage rate minus the year-over-year change in home prices. Home prices represented by the S&P/Case-Shiller Composite 20 Home Price Index. Source: Standard & Poor’s, Zillow.com, Federal Reserve Board, Haver Analytics, Fidelity Investments (AART) through 12/31/13. 23
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CO
NO
MY
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-3%
-2%
-1%
0%
1%
2%
3%
Oct
-199
8
Mar
-199
9
Aug
-199
9
Jan-
2000
Jun-
2000
Nov
-200
0
Apr
-200
1
Sep
-200
1
Feb-
2002
Jul-2
002
Dec
-200
2
May
-200
3
Oct
-200
3
Mar
-200
4
Aug
-200
4
Jan-
2005
Jun-
2005
Nov
-200
5
Apr
-200
6
Sep
-200
6
Feb-
2007
Jul-2
007
Dec
-200
7
May
-200
8
Oct
-200
8
Mar
-200
9
Aug
-200
9
Jan-
2010
Jun-
2010
Nov
-201
0
Apr
-201
1
Sep
-201
1
Feb-
2012
Jul-2
012
Dec
-201
2
May
-201
3
Oct
-201
3
Consumer Inflation minus Producer Inflation Cyclical Productivity
Environment for Profit Margins Still Constructive U.S. companies are benefiting from a shift in relative pricing power, as producer input prices have recently been rising more slowly than prices paid by consumers, reversing the post-recession trend and relieving downward margin pressure. Healthy net income margins continue to be boosted by cyclical productivity gains amid low borrowing rates and increased efficiencies.
CPI = Consumer Price Index. PPI = Producer Price Index. Inflation is the year-over-year change in a price index, expressed as a percentage. Core inflation excludes food and energy prices. Source: Bureau of Labor Statistics, Haver Analytics, Fidelity Investments (AART) through 10/31/13.
Relative Inflation & Cyclical Productivity
Core CPI Inflation Minus Core PPI Inflation (%) Year-over-Year Change in Cyclical Productivity (%)
Positive for Profit Margins
Negative for Profit Margins
24
E
CO
NO
MY Improved 2014 Fiscal Outlook: Less Drag, Lower Deficit
Tax increases and budget cuts in 2013 reduced the federal budget deficit and created significant drag on the economy. The budget outlook is expected to improve further in 2014 but with much less fiscal drag, which, combined with the two-year budget deal struck by Congress, provides greater certainty and a better near-term fiscal outlook than at any point in years.
Fiscal Deficits and Drag
9.8 8.7 8.4
6.8
3.9 3.5
-1.1 -0.3
-1.7
-2.9
-0.4
-4
-2
0
2
4
6
8
10
2009 2010 2011 2012 2013 2014(Estimate)
Budget Deficit Fiscal Drag
% of GDP
Fiscal drag: defined as the one-year change in the budget deficit as a percentage of GDP for the years shown in blue bars. Source: Congressional Budget Office, Haver Analytics, Fidelity Investments (AART) as of 12/31/13. 25
E
CO
NO
MY Outlook: Market Assessment
According to Fidelity’s Business Cycle Board, composed of portfolio managers responsible for a variety of asset allocation strategies across Fidelity’s asset management unit, the U.S. macro environment provides a stable backdrop for U.S. assets. The global economy has cyclical momentum, but policy risks have become more acute among emerging economies.
Opportunities: • Positive backdrop for U.S. equities
–Constructive macro environment: reduced fiscal drag, healthy credit availability, recovery in construction activity
Risks: • Policy risks shifting to emerging markets
–Developing economies need significant structural reforms, are exposed to potential reductions in global liquidity
Potential Asset Allocation Implications: • Global business cycle generally supportive of
equities • Fixed income: Fewer interest-rate headwinds and
more stable yield-curve outlook projected in 2014
Fewer fiscal disruptions in outlook, less ambiguity in
U.S. policy backdrop
Greater clarity and continued accommodation from Fed; most of tapering already
priced in
More positive global growth backdrop
entering 2014
Source: Market Assessment Statement of Global Asset Allocation’s Business Cycle Board, Fidelity Investments as of 12/31/13. 26
Firs
t Qua
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014
QU
ARTE
RLY
MAR
KET
UPD
ATE
U.S. Equity Markets
U
.S. E
QU
ITY Strong Gains for Most U.S. Equity Categories
After rallying through the fourth quarter, U.S. equities showed strong returns in 2013, with the record-setting S&P 500 gaining more than in any year since 1997. Nearly all major categories experienced similarly impressive gains. The exception was REITs, which had outperformed in 2012 but faced pressure from high valuations and alternative sources of income yield.
2013 Total Return
Q4 2013 8.7% 8.4% 10.2% 10.0% 10.5% -0.2%
38.8%
34.8% 34.2% 32.7% 32.4%
2.9%
Small Caps Mid Caps Growth Value Large Caps REITs
Past performance is no guarantee of future results. You cannot invest directly in an index. All indices are unmanaged. Please see appendix for important index information. Equity market returns represented by: Growth – Russell 3000 Growth Index; Large Caps – S&P 500 Index; Mid Caps – Russell Midcap Index; REITs (Real Estate Investment Trusts) – FTSE NAREIT Equity Only Index; Small Caps – Russell 2000 Index; Value – Russell 3000 Value Index. Source: FactSet, Fidelity Investments (AART) as of 12/31/13. 28
U
.S. E
QU
ITY
Q4 2013 10.8% 10.1% 13.5% 10.3% 13.3% 8.7% 10.7% 8.4% 2.8% 5.5% 10.5%
Economically Sensitive and Domestically Oriented Sectors Led With the U.S. in mid-cycle, economically sensitive sectors and sectors tied to the domestic economy showed higher returns, including consumer discretionary and financials. Sectors connected to global commodity cycles tended to lag as emerging-market demand slowed, while defensive, dividend-heavy sectors underperformed amid rising interest rates.
2013 Total Return
43.1% 41.5% 40.7%
35.6%
28.4% 26.1% 25.6% 25.1%
13.2% 11.5%
32.4%
ConsumerDiscretionary
Health Care Industrials Financials Info Tech ConsumerStaples
Materials Energy Utilities TelecomServices
S&P 500
Past performance is no guarantee of future results. You cannot invest directly in an index. All indices are unmanaged. 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 more diversified baskets of securities. Sector returns represented by S&P 500 sectors. Source: FactSet, Fidelity Investments (AART) as of 12/31/13. 29
U
.S. E
QU
ITY
17.2
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
10x
15x
20x
25x
30x
35x
40x
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Recession Price-to-Earnings (P/E) Average P/E Price Index
Current Valuations Suggest Decent Return Expectations
Average P/E since 1926 = 15.1
Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indices are unmanaged. Please see appendix for important index information. Shaded areas are U.S. recessions, as defined by the National Bureau of Economic Research. Source: Standard & Poor’s, Robert Shiller, Haver Analytics, Fidelity Investments (AART) through 12/31/13.
S&P 500 Price and Valuation
Price-to-Earnings Ratio S&P 500 Price Level
Price-to-earnings ratios have risen over the past year, as improving investor confidence helped drive market gains. Current valuations are slightly above their long-term average, which suggests average intermediate-term return expectations. While most stock indexes are above all-time highs, the market’s valuation has compressed since the 2001 peak.
30
U
.S. E
QU
ITY Shiller CAPE Overstates U.S. Equity Market Valuation
A simple 10-year average of past earnings fails to capture the long-term growth trend in profits. Moreover, during periods of large balance sheet write-offs—such as 2009—the calculation diverges even more from the true future cash-flow generating power of U.S. businesses. The result is artificially high valuation signals, particularly since the 2009 market bottom.
S&P 500 Real Earnings
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
2006
2007
2008
2009
2010
2011
2012
2013
Real Earnings
10-Year Average
Long-term Earnings Growth TrendShiller CAPE
Subsequent Stock Market Total
Return (ann.)
March 2009 13.3 21.9%
June 2009 16.4 19.3%
September 2009 18.8 16.5%
Median 15.9
P/E Ratios Current Reading
Shiller CAPE 25.0
Five-Year Peak Real Earnings 19.3
12-Month Trailing 17.2
12-Month Forward 15.1
LEFT: S&P 500 Long-term Earnings Growth Trend: long-term compound annual growth rate in S&P 500 real diluted earnings is 1.78% since 1871. Source: Standard & Poor’s, Bureau of Labor Statistics, Robert Shiller, Fidelity Investments (AART) as of 12/31/13. RIGHT: Price-to-earnings (P/E) ratio (or multiple): stock price divided by earnings per share, which indicates how much investors are paying for a company’s earnings power. Real returns: nominal returns adjusted by inflation rate (Consumer Price Index). CAPE: Cyclically adjusted P/E ratio. Stock market return represented by S&P 500 Index annualized total return. Past performance is no guarantee of future results. You cannot invest directly in an index. Source: Standard & Poor’s, Robert Shiller, Bloomberg L.P., Haver Analytics, Fidelity Investments (AART) as of 12/31/13. 31
U
.S. E
QU
ITY Small-Caps Benefiting from Greater Domestic Exposure
Small-caps outpaced large-cap stocks in 2013, likely benefiting from greater exposure to improving domestic economic trends amid an environment of slow global growth. Although large-caps typically outperform small-caps during the mid-cycle economic phase, small-cap stocks may also have benefited from some early-cycle dynamics in housing and financials.
0%
10%
20%
30%
40%
50%
60%
Index Info Tech Materials Energy Industrials Cons.Staples
Cons. Disc. Health Care Financials Telecom Utilities
Large-Cap Small-Cap
Larg
e-C
ap
Smal
l-Cap
Foreign Sales as a % of Total Sales (2012) Relative Performance during Business Cycle Phases
(Small-Cap minus Large-Cap) 1950–2013
Business Cycle Phases
Median Relative Performance
% of Time Outperforming
Early 15.1% 89% Mid -5.9% 33% Late 0.1% 56%
Recession 2.5% 56%
Large-Cap & Small-Cap Valuations
Current P/E Average since 1979
Large Caps 17.2x 16.4x Small Caps 21.9x 15.9x
Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indices are unmanaged. Please see appendix for important index information. In chart: Large-cap stocks represented by the S&P 500 Index; small-cap stocks represented by the S&P Small-Cap 600 Index; sectors as defined by GICS. In tables: Small cap stocks in tables represented by the IA SBBI U.S. Small Stock Index from 1950 through 1978 and the Russell 2000 since 1979. Source: FactSet, Fidelity Investments (AART) as of 11/30/13. 32
U
.S. E
QU
ITY Equity Sectors: Building Blocks for Portfolio Construction
A disciplined business cycle approach to sector allocation can produce active returns, even though historically, the least pronounced relative performance patterns have occurred in the mid-cycle. Quantitative analysis of past stock market returns shows that sector exposure is a significant factor for explaining differences in performance between individual stocks.
Business Cycle Approach to Sectors
Past performance is no guarantee of future results. Sectors as defined by GICS. LEFT: Green portions suggest a historical pattern of outperformance, red portions suggest underperformance, and unshaded portions indicate no clear pattern of out- or underperformance vs. broader market, as represented by the top 3,000 U.S. stocks by market capitalization. Analysis includes performance for 1962 to 2010. Source: The Business Cycle Approach to Sector Investing, Fidelity Investments (AART) as of May 2012. RIGHT: Anova = analysis of variation. Source: FactSet, Fidelity Investments (AART) as of 12/31/12.
Average Source of Return for Stocks in Russell 3000
Rolling 12-Month Anova Analysis
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sector Market Cap Style Company
33
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t Qua
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014
QU
ARTE
RLY
MAR
KET
UPD
ATE
International Equity Markets & Global Assets
IN
TER
NA
TIO
NA
L
29.7% 27.3% 26.0% 23.3%
6.4% 2.3%
-2.3% -4.6%
-13.2% -9.5%
-27.3%
EAFESmall Cap
Japan Europe EAFE Canada EM Asia EmergingMarkets
EMEA LatinAmerica
Commodities Gold
Rally in Developed Markets, Losses in EM and Commodities For the year, equities in non-U.S. developed markets posted stellar broad-based returns, though the depreciation in the yen caused Japan’s returns to be lower in U.S.-dollar terms. EM equities lagged, with depreciating currencies driving U.S.-dollar returns negative. Commodities faced weaker supply–demand dynamics, while gold plummeted amid rising real interest rates.
2013 Total Return
2013 Local Currency 36.1% 54.8% 22.3% 27.5% 13.6% 5.6% 3.8% 7.8% -4.3% N/A N/A
Q4 2013 USD 5.9% 2.3% 7.9% 5.7% 4.2% 3.7% 1.9% 0.3% -2.3% -1.1% -9.2%
EM: emerging markets. 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. All indices are unmanaged. Please see appendix for important index information. Index returns represented by: Canada – MSCI Canada Index; Commodities – S&P GSCI Commodities Index; EAFE – MSCI Europe, Australasia, Far East Index; EAFE Small Cap – MSCI EAFE Small Cap Index; EM Asia – MSCI Emerging Markets Asia Index; EMEA (Europe, Middle East, and Africa) – MSCI EM EMEA Index; Emerging Markets (EM) – MSCI EM Index; Europe – MSCI Europe Index; Gold – Gold Bullion Price, LBMA PM Fix; Japan – MSCI Japan Index; Latin America – MSCI EM Latin America Index. Source: FactSet, Fidelity Investments (AART) as of 12/31/13.
Developed-Market Equities Emerging-Market Equities Commodities
35
IN
TER
NA
TIO
NA
L
Non-U.S. Equity Valuations Still Relatively Inexpensive Trailing 12-month P/E multiples remained below long-term averages in both developed and emerging non-U.S. equity markets, although developed-market valuations expanded. Using peak earnings over the past five years to calculate a cyclical P/E, non-U.S. markets—particularly developed Europe and many emerging markets—are relatively inexpensive.
Trailing 12-Month P/E Ratios
Price-to-Earnings Ratio
Past performance is no guarantee of future results. You cannot invest directly in an index. All indices are unmanaged. Please see appendix for important index information. Price-to-earnings (P/E) ratio (or multiple) = stock price divided by earnings per share, which indicates how much investors are paying for a company’s earnings power. LEFT: Long-term average P/E for emerging markets includes MSCI EM Index data for 1988 to 2013. Long-term average P/E for non-U.S. developed markets includes MSCI EAFE Index data for 1978 to 2013. Source: FactSet, Fidelity Investments (AART) as of 12/31/13. RIGHT: Five-year peak earnings are adjusted for inflation. Source: FactSet, country statistical organizations, Haver Analytics, Fidelity Investments (AART) as of 12/31/13.
Cyclical P/Es: Price-to-Five-Year Peak Earnings
0.0 5.0 10.0 15.0 20.0 25.0
MexicoPhilippines
SwitzerlandUnited States
JapanDeveloped Markets
GermanyAustraliaCanada
Developed EuropeEmerging Markets
South KoreaChinaIndia
United KingdomBrazil
PolandSpain
ItalyIrelandRussia
5
10
15
20
25
30
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
EM EM AverageEAFE EAFE Average
36
IN
TER
NA
TIO
NA
L
Commodity Prices and EM Currencies Weakened in 2013 Slowing growth in emerging economies, rising real interest rates in developed markets, and global disinflationary trends weighed on both commodity prices (particularly precious metals) and EM currencies in 2013. Improving fundamentals in some developed European economies resulted in modest currency gains versus the dollar.
30
40
50
60
70
80
90
100
110
Dec
-12
Jan-
13
Feb-
13
Mar
-13
Apr
-13
May
-13
Jun-
13
Jul-1
3
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Energy Industrial MetalsPrecious Metals Agriculture
Index Level (12/31/12 = 100)
EM: emerging markets. Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. LEFT: Standard & Poor’s Goldman Sachs Commodity Sub-Indices. Source: Standard & Poor’s, Haver Analytics, Fidelity Investments (AART) through 12/31/13. RIGHT: Source: Financial Times, Haver Analytics, Fidelity Investments (AART) as of 12/31/13.
Commodity Performance
Price Change 2013
Energy 4%
Industrial Metals -9%
Agriculture and Livestock -16%
Precious Metals -29%
2013 Currency Performance vs. U.S. Dollar
-30% -20% -10% 0% 10%
Eurozone
Switzerland
UK
S. Korea
Mexico
Canada
Russia
India
Brazil
Australia
Turkey
Japan
South Africa
Indonesia
37
IN
TER
NA
TIO
NA
L
Earnings Expectations Rise for Developed Markets Analysts are raising their 2014 earnings expectations for developed markets as most of those economies remain in early- or mid-cycle phases of the business cycle. In contrast, analysts continue to lower their earnings expectations for most emerging markets, as many of those economies continue to face structural challenges.
80
85
90
95
100
105
110
Jan-
13
Feb-
13
Mar
-13
Apr
-13
May
-13
Jun-
13
Jul-1
3
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
EM Asia EM EMEA EM Europe EM Latin America
Emerging Markets
Earnings Expectations (Next 12 Months, Jan 2013 = 100)
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; Pacific ex Japan – MSCI Pacific ex Japan Index; North America – MSCI North America Index; EM Asia – MSCI Emerging Market Asia Index; EM Latin America – MSCI Emerging Markets Latin America Index; EM Europe – MSCI Emerging Markets Europe Index; EM EMEA – MSCI Emerging Markets Europe, Middle East, and Africa Index. Source: FactSet, Fidelity Investments (AART) as of 12/31/13.
95
100
105
110
115
120
125
Jan-
13
Feb-
13
Mar
-13
Apr
-13
May
-13
Jun-
13
Jul-1
3
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Japan North America Europe Pacific ex Japan
Developed Markets
Earnings Expectations (Next 12 Months, Jan 2013 = 100)
38
IN
TER
NA
TIO
NA
L
Secular Growth Outlook for EMs Remains Positive While many emerging-market economies continue to face structural reform headwinds that contribute to asset-class underperformance on a cyclical basis, our long-term outlook projects emerging economies to continue generating higher GDP growth rates than advanced economies, providing a solid secular backdrop for asset markets.
0
1
2
3
4
5
6
7
Japa
n
Net
herla
nds
Italy
Ger
man
y
Sw
eden
Aus
tralia
Can
ada
U.K
.
Fran
ce
Spa
in
U.S
.
Rus
sia
Sou
th A
frica
Per
u
Sou
th K
orea
Bra
zil
Thai
land
Mex
ico
Indo
nesi
a
Egy
pt
Col
ombi
a
Mal
aysi
a
Turk
ey
Phi
lippi
nes
Chi
na
Indi
a
Global Growth Rate = 2.3%
Real GDP Growth Forecasts, 2011–2030 Annualized % Change
Real GDP: inflation-adjusted gross domestic product. Source: Fidelity Investments (AART) as of 12/31/13. 39
Firs
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QU
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MAR
KET
UPD
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Fixed Income Markets
F
IXE
D IN
CO
ME
Amid Rate Rise, Some Riskier Fixed-Income Assets Gained Most bond sectors showed negative returns as interest rates rose, with the longest-duration categories suffering the most. However, spread tightening partly offset rising yields in many U.S. credit categories, and riskier credit-sensitive classes such as high-yield corporate bonds and leveraged loans gained. Rising real interest rates hurt TIPS returns.
2013 Total Return
Q4 2013 3.5% 1.7% 0.6% 0.3% -0.2% -0.4% 0.9% 0.3% -0.8% 0.9% -2.0% -0.1% -0.1%
7.4% 5.3%
0.2%
-0.3% -1.4% -1.5% -2.0% -2.6% -2.7%
-6.6% -8.6% -8.8%
-2.0%
Hig
h Yi
eld
Leve
rage
dLo
an CM
BS
ABS
Age
ncy
MB
S
Cre
dit
Mun
icip
al
Trea
surie
s
EM
Deb
t
TIP
S
Long
Gov
t & C
redi
t
Agg
rega
te
Past performance is no guarantee of future results. You cannot invest directly in an index. Please see appendix for important index information. All indices are unmanaged. Index returns represented by: ABS (Asset-Backed Securities) – Barclays ABS Index; Agency – Barclays U.S. Agency Index; Aggregate – Barclays U.S. Aggregate Bond Index; CMBS (Commercial Mortgage-Backed Securities) – Barclays Investment-Grade CMBS Index; Credit – Barclays U.S. Credit Bond Index; EM Debt (Emerging-Market Debt) – JP Morgan EMBI Global Index; High Yield – BofA ML U.S. High Yield Index; Leveraged Loan – S&P/LSTA Leveraged Loan Index; Long Government & Credit (Investment-Grade) – Barclays Long Government & Credit Index; MBS (Mortgage-Backed Securities) – Barclays MBS Index; Municipal – Barclays Municipal Bond Index; TIPS (Treasury Inflation-Protected Securities) – Barclays U.S. TIPS Index; Treasuries – Barclays U.S. Treasury Index. Source: FactSet, Fidelity Investments (AART) as of 12/31/13. 41
F
IXE
D IN
CO
ME
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
10-Year Yield CPI Inflation (Year-over-Year Change %)
Bond Investors Face a Challenging Environment High-quality bonds consistently produced positive real returns during the past three decades. With nominal interest rates near historic lows, however, Treasury yields have recently been in line with current rates of inflation, which may create a challenging environment for bond investors to achieve positive real (inflation-adjusted) returns.
10-Year Treasury Yield and Inflation
CPI: Consumer Price Index. Past performance is no guarantee of future results. Total returns represented by IA SBBI U.S. Intermediate-Term Government Bond Index. Real returns are adjusted by rates of inflation; differences are due to rounding. Source: U.S. Treasury, Federal Reserve Board, Haver Analytics, Morningstar EnCorr, Fidelity Investments (AART) as of 11/30/13.
Total Return Inflation
Real Return
Rising-rate period 1941–1981 3.3% 4.6% -1.3%
Falling-rate period 1981–2013 8.8% 3.0% 5.8%
Entire period 1926–2013 5.5% 3.0% 2.5%
42
F
IXE
D IN
CO
ME
18
19
8 9 2
10
20
17
53
28 21
37
0
10
20
30
40
50
60
70
80
90
100
0
1
2
3
4
5
6
U.S. AggregateBond
MBS CMBS CorporateInvestment Grade
CorporateHigh Yield
Emerging MarketDebt
Bond Yields Still Relatively Low, Credit Spreads Narrowed Unlike during the summer (when fears of tapering caused a sharp increase in rates and subsequent bond outflows led to a widening of spreads), bond markets held up well following the Fed’s December meeting. During Q4, rates modestly increased but remained historically low, while spreads narrowed further below their long-term historical averages.
Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indices are unmanaged. Please see appendix for important index information. Percentile ranks of yields and spreads based on historical period from 2000 to 2013. MBS: Mortgage-Backed Securities; CMBS: Commercial Mortgage-Backed Securities. All categories represented by respective Barclays bond indices. Source: Barclays, Fidelity Investments (AART) as of 12/31/13.
Fixed Income Yields and Spreads
Yield (%) Yield and Spread Percentiles (%)
Credit Spread Treasury/Rates Spread Percentile Yield Percentile
43
F
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Short Duration Offers Positive Yields, Limited Rate Risk With cash yields near zero and well below inflation during the past three years, short-duration fixed-income categories have provided higher returns. While short-duration categories offer less interest-rate risk than longer-duration bonds, different combinations of rate and credit risk result in divergent risk-return characteristics among various categories.
Cash
Short Duration Bond
(IG 1-3 Years)
Limited Term Bond (IG 1-5 Years)
Limited Term Municipal*
(Muni 1-5 Years)
Leveraged Loans (Non-IG: Floating
Rate)
Short Duration High Yield
(Non-IG: 1-5 Year)
0
1
2
3
4
5
6
7
8
9
0 1 2 3 4 53-Year Annualized Standard Deviation (%)
Current Inflation (1.2% Year-over-Year)
Short Duration: Risk vs. Reward
*Reflects pre-tax returns. IG: Investment-grade. Current Inflation: headline Consumer Price Index inflation. Past performance is no guarantee of future results. You cannot invest directly in an index. See appendix for important index information. Asset categories represented by: Cash – Citigroup 3-month Treasury Bill Index; Leveraged Loans – S&P/LSTA Lev Perf Loan Index; Limited Term Bond – 80% Barclays U.S. 1-5 Year Credit Index, 20% Barclays U.S. 1-5 Year Gov Index; Limited Term Municipal – Barclays U.S. 1-5 Year Municipal Index; Short Duration Bond – Barclays U.S. 1-3 Year Gov/Credit Index; Short Duration High Yield – Bank of America Merrill Lynch (BofA ML) 1-5 Yr BB-B High Yield Bond Index. Source: Bloomberg Finance L.P., Fidelity Investments (AART) as of 11/30/13.
3-Year Annualized Return (%)
44
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Steep Yield Curve Helps Offset Risk of Rising Rates As time passes, bonds “roll down” a steep yield curve and become shorter-maturity, higher-priced bonds. The current yield curve is particularly steep in the 3–7 year range, offering opportunities for a roll-down strategy to boost intermediate-term bond returns. Forward markets indicate bond prices already reflect higher rates, providing a cushion against potential losses.
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1-Year 2-Year 3-Year 5-Year 10-Year 30-Year
0.00
0.10
0.20
0.30
0.40
0.50
0.0
1.0
2.0
3.0
4.0
5.0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Yield Curve Yield Curve Slope
Years
Market Expectations of Rate Increases Yield Curve Steepness
Yield (%) Change in Yield / Years to Maturity
Treasury 1-Year Forward Rates less Current Yields (%)
Source: Bloomberg Finance, L.P., Fidelity Investments (AART) as of 12/31/13.
Steepest Slope
Most Attractive Roll Opportunity
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-5%
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10%
15%
20%
2006
2007
2008
2009
2010
2011
2012
2013
Property Tax Sales Tax Personal Income Tax
LEFT: Past performance is no guarantee of future results. After-tax yields assume the highest tax bracket calculated using top federal income tax rate for 2013 (39.6%) and Medicare contribution tax (3.8%). Muni pre-tax yield data uses the Thompson Municipal Market Data (MMD) AAA Curve. Source: Bloomberg Finance, L.P., Thomson Reuters, Fidelity Investments (AART) as of 12/31/13. RIGHT: Shaded area is U.S. recession, as defined by the National Bureau of Economic Research. Chart represents four-quarter average of quarterly year-over-year percentage 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, Fidelity Investments (AART) as of 6/30/13.
0%
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3%
4%
5%
6%
7%
8%
Muni30-Year
Treasury Muni10-Year
Treasury Muni2-Year
Treasury
Pre-Tax Yield Tax-Equivalent Yield
Muni Valuations Still Favorable; Fundamentals Improved Although fiscal challenges still exist for many municipalities, state revenues have improved for 14 straight quarters, and the recent uptick in property tax revenues is a positive sign for localities. Highly-rated municipal bonds have offered better tax-equivalent yields than comparable Treasuries.
State and Local Tax Revenue Growth Municipal Bonds vs. Treasuries
Muni Muni Muni Treasury Treasury Treasury
30-Year 10-Year 2-Year
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Asset Allocation Themes
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Non-Bond Opportunities to Diversify Income Sources Despite the 2013 rise in interest rates, many non-bond categories offer similar yield opportunities to bonds. Combining various non-bond sources of income may create diversification benefits by lowering the entire portfolio’s potential volatility and raising its expected risk-adjusted return profile.
3
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11
11 13 15 17 19 21 23 25 27Standard Deviation (%)
Portfolio: 50% High Dividend 20% Preferred 15% REITs 15% Convertibles
Average Annualized Return (%)
Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. Efficient frontier represents optimal risk-return combinations of four assets. Index returns represented by: Convertibles – BofA ML All U.S. Convertibles Index; High Dividend – MSCI USA High Dividend Index; Preferred – BofA ML U.S. Fixed Rate Preferred Securities Index; REITs (Real Estate Investment Trusts) – FTSE NAREIT Equity REIT Index. Portfolio allocation is 50% High Dividend Stocks, 20% Preferred Stocks, 15% REITs, and 15% Convertibles. Source: Morningstar EnCorr, Fidelity Investments (AART) as of 12/31/13.
Preferred
High Dividend
Convertibles
REITs
Portfolio
Efficient Frontier, 1999–2013
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Allocating to Fixed Income: A Multisector Approach With yields on high-quality U.S. bonds near historic lows, diversifying across a broad spectrum of fixed-income sectors may significantly improve a portfolio’s Sharpe ratio, or risk-adjusted return. Investing in a variety of sectors may also provide opportunities to diversify across risk characteristics, which could enhance inflation resistance or geographic variation.
Portfolio Description
#1
High-quality portfolio with limited risk 80% U.S. Investment Grade
5% U.S. High Yield 5% U.S. Real Estate Debt
5% Leveraged Loans 5% Emerging Market
Portfolio Description
#2
Mix of high yield, government, and foreign 40% U.S. High Yield
30% U.S. Government 15% Foreign Developed 15% Emerging Market
Yield to Maturity (%)
Efficient Frontier Using Yield to Maturity, 1998–2013
Efficient frontier represents optimal risk-return combinations of seven assets. Yield to maturity: rate of return for investor who holds bond to maturity. Volatility is represented by standard deviation. Please see appendix for important definitions and index information. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You cannot invest directly in an index. Index returns represented by: Emerging Market Debt – JP Morgan (JPM) EMBIG Composite Index; Foreign Developed-Country Bonds – Citigroup G-7 Non-USD Bond Index; Leveraged Loans – S&P/LSTA Performing Loan Index; Real Estate Debt – 50% Barclays CMBS Index and 50% BofA ML Corporate Real Estate Index; U.S. Government – Barclays U.S. Government Index; U.S. High Yield – BofA ML High Yield Index; U.S. Investment Grade – Barclays U.S. Aggregate Bond Index. Source: FactSet, Bloomberg Finance, L.P., Morningstar EnCorr, Fidelity Investments (AART) as of 12/31/13.
Portfolio Sharpe Ratio
#1 0.67 #2 0.65
U.S. Investment Grade 0.46
U.S. High Yield
Foreign Developed-Country Bonds
Emerging Market Debt #2
Real Estate Debt #1
U.S. Investment Grade U.S. Government
Leveraged Loans
Volatility of Returns (%)
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Real Return: Managing Inflation Risk Still Matters Investments with hard-asset or income-adjusting characteristics have historically offered inflation resistance, particularly when investors needed it most—as inflation increased. Combining assets into a diversified real-return composite has increased the frequency of outpacing inflation as it rises, a difficult task for cash in today’s low-rate environment.
Frequency of Outperforming Inflation, 1998–2013
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CompositePortfolio
Commodities TIPS Leveraged Loans Real EstateStocks
Real EstateBonds
Cash
Outperformed during Rising Inflation Outperformed during Falling Inflation
Overall Rate of Outperformance
80% 62% 84% 84% 71% 74% 48%
% of Periods Outperforming Inflation Rate
Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index. Please see appendix for important index information. Inflation rate: year-over-year change in the consumer price index. Asset classes represented by: Cash – IA SBBI U.S. 30 Day Treasury Bill Index; Commodities – Dow Jones-UBS Commodities Index; Composite portfolio – 30% TIPS, 25% leveraged loans, 25% commodities, 10% real estate equity, 10% real estate income; Leveraged Loans – S&P/LSTA Leveraged Performing Loan Index; Real Estate Bonds – BofA ML U.S. Corporate Real Estate Index; Real Estate Stocks – Dow Jones U.S. Select Real Estate Securities Index; TIPS (Treasury Inflation Protected Securities) – Barclays U.S. TIPS Index. Source: Morningstar EnCorr, Fidelity Investments (AART) as of 11/30/13. 50
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-9.2%
-1.1%
0.4% 1.0%
-38.9%
-10.6% -9.7%
0.5%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
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-5%
0%
5%
1 Year 3 Year 5 Year 10 Year
Investment-Grade Bonds Equities
Past performance is no guarantee of future results. You cannot invest directly in an index. See appendix for important index information. Based on rolling monthly holding periods. Bond returns represented by the performance of a composite of the IA SBBI U.S. Intermediate-Term Government Bond Index (67%) and the IA SBBI U.S. Long-Term Corporate Bond Index (33%) from Jan. 1941 through Dec. 1975, and by the Barclays Aggregate Bond Index from Jan. 1976 through Dec. 1981. Stocks represented by the S&P 500 Index. Source: Morningstar EnCorr, Fidelity Investments (AART) as of 9/30/13.
Bonds Historically Less Volatile Even amid Rising Rates Historically, investment-grade bonds—the bond category most sensitive to interest rates—offered more downside protection than U.S. equities, even when rates were rising. During the 40-year bond bear market from 1941 to 1981, yields rose from 2% to 16%, yet bonds had less severe episodes of losses and lower frequencies of negative returns over all holding periods.
Worst Total Returns over Various Holding Periods, 1941–1981
Annualized Total Return
Period of Rising Rates 10-Year Treasury Yield
1941 2% 1981 16%
Percentage of Holding Periods with Negative Returns 1 Year 3 Year 5 Year 10 Year
Bonds 18% 3% 0% 0% Stocks 25% 8% 5% 0%
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Performance Rotations Underscore Need for Diversification The performance of different assets has fluctuated 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 potential benefits of diversification.
Periodic Table of Returns
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: Commodities – DJ-UBS Commodity Index; Emerging-Market – MSCI Emerging Markets Index; Foreign-Developed Country – MSCI EAFE Index; Growth – Russell 3000 Growth Index; High Yield – Bank of America Merrill Lynch U.S. High Yield Index; Investment-Grade – Barclays U.S. Aggregate Bond Index; Large Cap – S&P 500 Index; Real Estate – FTSE NAREIT Equity-Only Index; Small Cap – Russell 2000 Index; Value – Russell 3000 Value Index. Source: Ibbotson Associates, Standard & Poor’s, Haver Analytics, Fidelity Investments (AART) as of 12/31/13.
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Legend
18% 75% 17% 38% 35% 35% 35% 66% 32% 14% 26% 56% 32% 35% 35% 40% 5% 79% 28% 8% 20% 39% Small Cap Stocks
17% 33% 8% 37% 23% 33% 29% 34% 26% 8% 10% 47% 26% 21% 33% 16% -20% 58% 27% 8% 19% 34% Growth Stocks
15% 20% 3% 37% 23% 29% 21% 27% 12% 5% 4% 39% 21% 14% 27% 12% -26% 37% 19% 4% 18% 33% Value Stocks
15% 19% 2% 30% 22% 24% 20% 24% 8% 2% -2% 37% 18% 12% 22% 11% -34% 32% 18% 4% 18% 32% Large Cap Stocks
11% 19% 1% 28% 22% 22% 14% 21% -1% -2% -6% 31% 17% 7% 18% 7% -36% 28% 17% 2% 16% 23% Foreign-Developed Country Stocks
8% 17% 0% 20% 16% 20% 9% 21% -3% -4% -9% 31% 11% 5% 16% 6% -36% 27% 16% 2% 16% 19% 60% Large Cap40% IG Bonds
8% 10% -1% 18% 15% 13% 3% 12% -5% -4% -15% 29% 11% 5% 12% 5% -37% 26% 15% 0% 16% 7% High-Yield Bonds
7% 10% -2% 15% 11% 10% -3% 7% -9% -12% -16% 28% 9% 5% 11% 2% -38% 20% 15% -4% 15% 3% Real Estate Stocks
5% 10% -2% 15% 6% 2% -18% 3% -14% -20% -20% 24% 8% 4% 9% -1% -38% 19% 12% -12% 11% -2% Investment-Grade Bonds
4% 4% -3% 12% 6% -3% -25% -1% -22% -20% -22% 19% 7% 3% 4% -2% -43% 18% 8% -13% 4% -2% Emerging-Market Stocks
-12% -1% -7% -5% 4% -12% -27% -5% -31% -21% -28% 4% 4% 2% 2% -16% -53% 6% 7% -18% -1% -10% Commodities
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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 authors and not necessarily those of Fidelity Investments or its affiliates. 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.
Fidelity does not provide legal or tax advice and the information provided herein is general in nature and should not be considered legal or tax advice. Consult with an attorney or a tax professional regarding your specific legal or tax situation.
Past performance and dividend rates are historical and do not guarantee future results.
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against a 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 non-U.S. 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 from other types of stocks, and can be more volatile than other types of stocks. Value stocks can perform differently from 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.
Floating rate loans generally are subject to restrictions on resale and sometimes trade infrequently in the secondary market; as a result, they may be more difficult to value, buy, or sell. A floating rate loan may not be fully collateralized and therefore may decline significantly in value. The municipal market can be affected by adverse tax, legislative, or political changes, and by the financial condition of the issuers of municipal securities. Interest income generated by municipal bonds is generally expected to be exempt from federal income taxes and, if the bonds are held by an investor resident in the state of issuance, from state and local income taxes. Such interest income may be subject to federal and/or state alternative minimum taxes. Investing in municipal bonds for the purpose of generating tax-exempt income may not be appropriate for investors in all tax brackets. 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 restrictions between countries.
Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.
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.
53
Appendix: Important Information
54
Index Definitions
Market Indices
Bank of America Merrill Lynch (BofA ML) All U.S. Convertibles Index is an unmanaged index that tracks the performance of all U.S. convertible securities. BofA ML Corporate Real Estate Index, a subset of BofA ML U.S. Corporate 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. 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. BofA ML High Yield Bond 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. The Bank of America Merrill Lynch U.S. High Yield BB-B Rated 1-5 Year Index includes fixed income securities with a remaining term to final maturity less than 5 years and rated BB1 through B3 by Moody’s. BofA ML U.S. Fixed Rate Preferred Securities Index is an unmanaged index that tracks the performance of fixed-rate preferred securities publicly issued in the U.S. domestic market.
Bank of America Merrill Lynch (BofA ML) All U.S. Convertibles Index is an unmanaged index that tracks the performance of all U.S. convertible securities. BofA ML Corporate Real Estate Index, a subset of BofA ML U.S. Corporate 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. 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. BofA ML High Yield Bond 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. The Bank of America Merrill Lynch U.S. High Yield BB-B Rated 1-5 Year Index includes fixed income securities with a remaining term to final maturity less than 5 years and rated BB1 through B3 by Moody’s. BofA ML U.S. Fixed Rate Preferred Securities Index is an unmanaged index that tracks the performance of fixed-rate preferred securities publicly issued in the U.S. domestic market.
Barclays U.S. 1-3 Year Government Credit Index includes all publicly issued U.S. government and corporate securities that have a remaining maturity between one and three years and are rated investment grade. Barclays U.S. 1-5 Year Credit Index is designed to cover publicly issued U.S. corporate and specified non-U.S. debentures and secured notes with a maturity between one and five years and meet the specified liquidity and quality requirements; bonds must be SEC-registered to qualify. Barclays U.S. 1-5 Year Municipal Index covers the one- to five-year maturity, U.S. dollar-denominated, tax-exempt bond market with four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.
Barclays 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. Barclays 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 maturities of at least one year. Barclays Emerging Market Bond Index is an unmanaged index that tracks total returns for external-currency-denominated debt instruments of the emerging markets. Barclays Long U.S. Government Credit Index includes all publicly issued U.S. government and corporate securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value. Barclays 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). Barclays U.S. Agency Index is designed to cover publicly issued debt of U.S. government agencies, quasi-federal corporations, and corporate or non-U.S. debt guaranteed by the U.S. Government. Barclays U.S. 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. Barclays U.S. Corporate High Yield Bond Index is a market value-weighted index which covers the U.S. non-investment grade fixed-rate debt market. Barclays U.S. Credit Bond Index is designed to cover publicly issued U.S. corporate and specified non-U.S. debentures and secured notes that meet the specified maturity, liquidity, and quality requirements; bonds must be SEC-registered to qualify. Barclays® U.S. Government Index is designed to cover public obligations of the U.S. Government with a remaining maturity of one year or more. Barclays 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. Barclays U.S. TIPS Index is an unmanaged market index made up of U.S. Treasury Inflation-Protected Securities. Barclays® 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 Citigroup 3-Month Treasury Bill Index is an unmanaged index of three-month Treasury bills. Citigroup Non-USD Group-of-Seven (G7) Index is designed to measure the unhedged performance of the government bond markets of the G7 excluding the U.S., which are Japan, Germany, France, United Kingdom, Italy, and Canada. Issues included in the index have fixed-rate coupons and maturities of one year or more.
Market Indices (continued)
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. 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 National Association of Real Estate Investment Trusts (NAREIT) All REITs Index is a market capitalization-weighted index that is designed to measure the performance of all tax-qualified REITs listed on the NYSE, the American Stock Exchange, or the NASDAQ National Market List. FTSE NAREIT Equity REIT Index is an unmanaged market value-weighted index based on the last closing price of the month for tax-qualified REITs listed on the New York Stock Exchange (NYSE).
The IA SBBI U.S. Small Stock Index is a custom index designed to measure the performance of small capitalization U.S. stocks. The IA SBBI U.S. Intermediate-Term Government Bond Index is an unweighted index that measures the performance of five-year maturity U.S. Treasury bonds. Each year, a one-bond portfolio containing the shortest non-callable bond having a maturity of not less than five years is constructed. IA SBBI U.S. Long-Term Corporate Bond Index is a custom index designed to measure the performance of long-term U.S. corporate bonds. The IA SBBI U.S. 30-Day Treasury Bill Index is an unweighted index that measures the performance of 30-day maturity U.S. Treasury bills.
JPM® EMBI Global Index, and its country sub-indices, tracks total returns for traded external debt instruments issued by emerging-market sovereign and quasi-sovereign entities. JPM® EMBI Global Investment Grade Index, and its country sub-indices, tracks total returns for traded external debt instruments issued by emerging-market sovereign and quasi-sovereign entities rated investment grade. JPM® EMBI Global Investment Grade Index, and its country sub-indices, tracks total returns for traded external debt instruments issued by emerging-market sovereign and quasi-sovereign entities rated speculative grade.
The Merrill Option Volatility Estimate (MOVE), a trademark product of Merrill Lynch, is a yield curve-weighted index of the normalized implied volatility on one-month Treasury options.
MSCI® All Country (AC) Europe Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of Europe; it consists of the following developed and emerging-market country indices: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Netherlands, Norway, Poland, Portugal, Russia, Spain, Sweden, Switzerland, Turkey, and United Kingdom. MSCI All Country World Index (ACWI) is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of developed and emerging markets. The countries included in the index are: Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, Morocco, Netherlands, New Zealand, Norway, Peru, Philippines, Poland, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United States, United Kingdom. MSCI Europe Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom. MSCI North America Index is a free float-adjusted market capitalization weighted index designed to measure the performance of large and mid cap segments of the U.S. and Canada markets. MSCI Pacific ex Japan Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of four of the five developed market countries in the Pacific region including Australia, Hong Kong, New Zealand and Singapore. MSCI World ex USA Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of developed markets excluding the United States. MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of developed markets.
MSCI Emerging Markets (EM) Index is a market capitalization-weighted index of over 850 stocks traded in 22 world markets. MSCI EM Asia Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in the following countries: China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand. MSCI EM 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; it consists of the following 10 emerging-market country indices: Czech Republic, Hungary, Poland, Russia, Turkey, Israel, Jordan, Egypt, Morocco, and South Africa. MSCI EM Latin America Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in Latin America; it consists of the following six emerging-market country indices: Argentina, Brazil, Chile, Colombia, Mexico, and Peru. MSCI EM Large Cap Index is composed of those securities in the MSCI EM Index that are defined as large-capitalization stocks.
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. 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.
Appendix: Important Information
55
Market Indices (continued)
MSCI Canada Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in Canada. MSCI China Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in China. MSCI Japan Index is an unmanaged index 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 non-U.S. taxes.
MSCI USA High Dividend Index is an unmanaged index that tracks the performance of U.S. high-dividend-yield equities; it consists of those securities in the MSCI USA Index that have a higher-than-average dividend yield, a track record of consistent dividend payments, and the capacity to sustain future dividend payments. MSCI USA Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of the United States.
Russell 2000® Index is a market capitalization-weighted index of smaller company stocks. 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. 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. 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. 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.
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 and its affiliates. The S&P SmallCap 600 measures the small-cap segment of the U.S. equity market. The index is designed to be an investable portfolio of companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.
Sectors and industries defined by Global Industry Classification Standards (GICS®).
S&P 500 sectors are defined as follows: 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 services and equipment, including seismic data collection; or the exploration, production, marketing, 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.
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.
Standard & Poor’s/Loan Syndications and Trading Association (S&P/LSTA) 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.
Thomson Reuters Municipal Market Data (MMD) AAA Curve is a proprietary yield curve that provides the offer-side of “AAA” rated state general obligation bonds, as determined by the MMD analyst team. In the interest of transparency, MMD publishes extensive yield curve assumptions relating to various structural criteria which are used in filtering market information for the purpose of benchmark yield curve creation. MMD yield curves are available on a subscription basis from Thomson ReutersTM.
VIX® is the Chicago Board Options Exchange Volatility Index®, a measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
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Other Indices
The Conference Board Consumer Confidence Index® measures U.S. consumer attitudes using a set of survey questions. Content from this index reproduced with permission from The Conference Board, Inc. No further reproduction is permitted without the express approval of The Conference Board, Inc.
The Core Consumer Price Index (CPI) is a monthly inflationary indicator that measures the change in the cost of a fixed basket of products and services, excluding food and energy prices.
Cyclical Productivity is a proprietary index comparing aggregate hours worked to a set of economic indicators. It is calculated monthly, then reported as a year-over-year percentage change.
The Global Leading Indicators Diffusion Index is a proprietary index combining six-month averages for multiple leading indicators in the 37 largest economies. A score over 50 represents rising leading indicators, while a score under 50 represents falling leading indicators, and a score of 50 indicates no change. The economies included in the Global Leading Indicator 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.
The Producer Price Index (PPI) measures the selling price received by domestic producers for their output. Core PPI excludes food and energy prices
A 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 Institute for Supply Management (ISM) reports U.S. PMIs. Markit compiles non-U.S. PMIs.
The S&P/Case-Shiller® Home Price Indices measure the average change in home prices in a particular geographic market and are designed to be a reliable and consistent benchmark of U.S. housing prices. The S&P/Case-Shiller 20-City Composite Home Price Index measures the value of residential real estate in 20 U.S. metropolitan areas.
Definitions
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.
Sharpe ratio compares portfolio returns above the risk-free rate relative to overall portfolio volatility. A higher Sharpe ratio implies better risk-adjusted returns.
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. A higher standard deviation represents greater relative risk.
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