Investment Themes Update - The implications of inflation, interest rates, equity valuations, and taxes on the post-Covid economic recovery
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Investment Themes Update
The implications of inflation, interest rates, equity valuations, and
taxes on the post-Covid economic recovery
Q3 2021
Not FDIC Insured May Lose Value No Bank Guarantee
For Investor Use | © 2021 FMR LLC. All rights reserved.
Let’s start with four elements that have ignited the
current economic boom …
For Investor Use
The Widespread COVID Vaccination Rollout in the U.S. has
Brought Cases and Deaths Way Down…
Source: Evercore ISI, as of 06/18/2021
3 For Investor Use
High Personal Savings Rates and Pent-up Demand for
Leisure Has Helped Spur a Pick-up in Economic Activity…
Source: Strategas, as of 06/16/2021
4
For Investor Use
President Biden’s Stimulus Plan should continue to provide a
significant boost to the economy (and there might be more in
the Fall)…
Blue = Financial Crisis
Red = Coronavirus
Source: Strategas, as of 04/24/2021
5 For Investor Use
And Interest Rates Have Been Low and are Projected to Remain Fairly Low for the Medium-term Future Source: Strategas, as of 7/23/2021 6 For Investor Use
Given these four Tailwinds, GDP Has High Potential to Bounce Back Strongly in 2021 Source: Strategas, as of 03/12/2021, Q1 2021 number updated as of 6/21/2021 7 For Investor Use
Importantly for Equity Markets, We Remain in the Early-to-mid Cycle Phase Note: The diagram above is a hypothetical illustration of the business cycle. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one. Source: Fidelity Investments (AART), as of 06/30/2021. 8 For Investor Use
And Returns in the Early-to-mid Cycle Have Historically Been Strong until the next Recession U.S. Stock: Dow Jones U.S. Total Stock Market Index; Bonds: Bloomberg Barclays U.S. Aggregate Bond Index. Source: Fidelity Investments, Morningstar, Bloomberg Barclays. Past performance is no guarantee of future results. It is not possible to invest directly in an index. All market indices are unmanaged. Index performance is not meant to represent that of any Fidelity mutual fund Source: Asset Allocation Research Team, FMR, as of 12/31/2020 9 For Investor Use
Could This Recovery Be Derailed By …..?
- Inflation?
- Interest rate spike?
- Equity Valuations?
- Higher taxes?
10 For Investor UseFixed Income Markets predict Inflation to be Transitory
Why is inflation rising?
- Comparing a “locked down
economy” to one that is reopening
(baseline effect)
- Sudden shift in demand
preferences and volume due to
reopening
- One-off effects (e.g.,
homebuilding, semiconductors)
Why it is likely to be transitory:
- Fiscal stimulus mostly running out
this year.
- Pent up savings likely to be spent
- Aging demographics
- Automation/Technology
- Supply/demand response
Source: Bloomberg and Fidelity Investments AART, as of 06/30/2021
Inflation expectations derived from USD Inflation Zero-Coupon Swaps.
11
For Investor UseWhich should keep Inflation in the Sweet-spot Level for
Equities over the long-term
Source: Strategas, as of 02/17/2021
12 For Investor UseHigher Inflation Levels Appear to Already be Priced In, as Bond
Yields have not Moved Much Amid the Recent Inflation Increase
Past performance is no guarantee of future results. It is not possible to invest directly in an index. All market indices are unmanaged. Index performance is not meant to
represent that of any Fidelity mutual fund.
Source: StockCharts.com, as of 07/19/2021
13
For Investor UseAnd even if Interest Rates Rise, It Is Not Likely to
Negatively Impact Equity Performance
Sector Performance During Periods Sector Performance NTM Following
of Rising Interest Rates (Average, Sep Periods of Rising Interest Rates
1993 - Oct 2018) (Average, Nov 1994 - Oct 2019)
Information Technology 34.4% Financials 27.5%
Consumer Discretionary 21.3% Information Technology 26.5%
Materials 18.9% Health Care 23.6%
S&P 500 17.0% Industrials 23.3%
Industrials 16.8% Real Estate 23.2%
Financials 15.3% Consumer Staples 21.2%
Health Care 15.0% Utilities 21.2%
Energy 13.0% S&P 500 20.0%
Consumer Staples 10.2% Materials 16.7%
Real Estate 9.8% Consumer Discretionary 16.7%
Communication Services 3.9% Communication Services 15.7%
Utilities 3.3% Energy 15.4%
Past performance is no guarantee of future results. It is not possible to invest directly in an index. All market indices are unmanaged. Index performance is not meant to
represent that of any Fidelity mutual fund.
Source, left: Strategas, as of 02/17/2021. Source, right: Strategas, as of 03/17/2021
14 For Investor UseAs Earnings Recover Alongside the Gradual Reopening of
the Economy, Valuation Multiples Should Move Lower
22.1x*
•calculated based on Q1 2021 annualized earnings, as of 4/23/2021
Source: Strategas, as of 03/22/2021
15 For Investor UseHistorically, Strong Equity Market Performances Have
Occurred in Years in Which Taxes Have Been Raised
Past performance is no guarantee of future results It is not possible to invest directly in an index. All market indices are unmanaged. Index performance is not meant
to represent that of any Fidelity mutual fund.
Source: Haver, FMR, as of 07/01/2020
16 For Investor UseTaking a Long-term View, the Market Gradually Cycles
Between Peak Greed and Peak Fear…
DJ 30 Industrials Average - Price Peak to Next
Secular Bull
100,000
2001–2013?
Peak to Next
10,000
Secular Bull
1969–1982
Peak to Next
1,000 Secular Bull
1929–1942
100
10
1900 1905 1910 1916 1921 1926 1932 1937 1942 1948 1953 1959 1964 1969 1975 1980 1985 1991 1996 2001 2007 2012 2018
Source: Factset as of 01/05/2021; (Chart’s y-axis is on log-scale)
Past performance is no guarantee of future results. It is not possible to invest directly in an index. Index performance is not meant to represent
that of any Fidelity mutual fund.
17 For Investor UseAnd Based on Large Flows into Bonds and only Modest Flows
Into Equities, the Market has a ways to run until “Peak Greed”
How much of that is
invested in assets that
may not beat inflation?
Source: Strategas, as of 05/28/2021
18 For Investor UseThe Path of This Market Resembles Equity Bull Markets of
the 50s & 80s – and Both Had a Deep Correction in Year 8
Source: Factset, as of 07/23/2021
Past performance is no guarantee of future results. It is not possible to invest directly in an index. All market indices are unmanaged. Index
performance is not meant to represent that of any Fidelity mutual fund.
19 For Investor UsePerhaps, most importantly, from a long-term perspective the U.S. Equity Market continues to follow the Secular Trend Line Source: FMRCo, Bloomberg, Global Financial Data (GFD). Coinmetrics, Haver Analytics, FactSet. As of 7/26/2021. 20 For Investor Use
Given This Situation, One Consideration Would Be Moving to
a Diversified Equity Overweight, While Seeking to Balance
Risk with Fixed Income
EQUITIES FIXED INCOME
❖ Overweight equities
Credit sensitive sectors
❖ Broadly diversify through all style Risk On that can take advantage
boxes and international markets to of higher coupons and
potentially offset the smaller improving credit outlook
diversification benefits of fixed (post-pandemic)
income (especially like to barbell
Large Cap Growth with Small Cap
Value)
Investment grade bonds
❖ Emphasize secular trends for diversification and
▪ Innovation (technology, Risk Off potential downside
healthcare) mitigation if something
▪ Demographic shifts (emerging goes wrong
economies)
Diversification and asset allocation do not ensure a profit or guarantee against a loss.
21 For Investor UseDetailed Strategies and Funds to Consider in 2021
EQUITIES FIXED INCOME
▪ Fidelity Advisor Growth Opportunities Fidelity Advisor Strategic
(FAGCX) Income (FSRIX)
▪ Fidelity Advisor New Insights (FINSX) Risk On Fidelity Advisor Real
Estate Income (FRIRX)
▪ Fidelity Advisor International Capital
Appreciation (FCPIX) Fidelity Advisor Floating
Rate High Income Fund
▪ Fidelity Advisor Focused Emerging (FFRIX)
Markets (FIMKX)
Fidelity Advisor Total
▪ Small Cap Funds (FCIGX, FCDIX, Bond (FEPIX)
FCVIX)
Risk Off Fidelity Advisor
▪ Fidelity Advisor Healthcare (FHCIX) Investment Grade Bond
(FGBPX)
▪ Fidelity Advisor Strategic Dividend &
Income (FSIDX) Fidelity Advisor
Intermediate Municipal
Diversification and asset allocation do not ensure a profit or guarantee against a loss. Income (FZIIX)
Please see the end of this presentation for important fund disclosures.
22 For Investor UseAppendix For Investor Use
Performance May Be Volatile Through Much of 2021, as
Seen Historically in Periods Following Large Run-ups
Past performance is no guarantee of future results. It is not possible to invest directly in an index. All market indices are unmanaged. Index performance is not meant to
represent that of any Fidelity mutual fund.
Source: Strategas, as of 04/19/2021
24 For Investor UseImportant Information
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.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa.
This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation, credit, and default risks for both issuers and
counterparties. (Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price
volatility is not possible.) Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
The FA Total Bond, FA Strategic Income, Fidelity Advisor Investment Grade Bond, FA Strategic Dividend and Income, and FA Intermediate Municipal
Income funds can invest in securities that may have a leveraging effect (such as derivatives and forward-settling securities) that may increase market
exposure, magnify investment risks, and cause losses to be realized more quickly.
FA Intermediate Municipal Income: The municipal market is volatile and can be significantly affected by adverse tax, legislative, or political changes and the
financial condition of the issuers of municipal securities. Income exempt from federal income tax may be subject to state or local tax. All or a portion of the
Fund’s income may be subject to the federal alternative minimum tax. Income or fund distributions attributable to capital gains are usually subject to both
state and federal income tax.
FA Real Estate Income: Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.
FA Small Cap Growth: 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.
Fidelity Advisor Stock Selector Small Cap Fund: The securities of smaller, less well-known companies can be more volatile than those of larger companies.
Fidelity Advisor Small Cap Value: The securities of smaller, less well-known companies can be more volatile than those of larger companies. Value stocks
can perform differently than other types of stocks and can continue to be undervalued by the market for long periods of time.
FA High Income: Commodity prices could impact some issuers in the high-yield segment.
FA Growth Opportunities: Growth stocks can perform differently from other types of stocks and the market as a whole and can be more volatile than other
types of stocks.
FA Health Care: The health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and
services, which could have a significant effect on price and availability and can be significantly affected by rapid obsolescence and patent expirations.
FA Floating Rate High Income: Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. Floating rate loans may
not be fully collateralized and therefore may decline significantly in value. Fixed income investments entail interest rate risk (as interest rates rise bond prices
usually fall), the risk of issuer default, issuer credit risk and inflation risk. Foreign securities are subject to interest rate, currency exchange rate, economic,
and political risks.
25 For Investor UseImportant Information Information provided in this document is for informational and educational purposes only. To the extent any investment information in this material is deemed to be a recommendation, it is not meant to be impartial investment advice or advice in a fiduciary capacity and is not intended to be used as a primary basis for you or your client’s investment decisions. Fidelity and its representatives may have a conflict of interest in the products or services mentioned in this material because they have a financial interest in them, and receive compensation, directly or indirectly, in connection with the management, distribution, and/or servicing of these products or services, including Fidelity funds, certain third-party funds and products, and certain investment services. 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. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. S&P 500 Index is a market capitalization-weighted index of 500 widely held U.S. stocks and includes reinvestment of dividends. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. Dow Jones Industrial Average, published by Dow Jones & Company, is a price–weighted index that serves as a measure of the entireU.S. market. The index comprises 30 actively traded stocks, covering such diverse industries as financial services, retail, entertainment, and consumergoods. Bloomberg Barclays US Aggregate Bond Index is a broad-based, market-value-weighted benchmark that measures the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market. Sectors in the index include Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS. 26 For Investor Use
For Investor Use
Past performance is no guarantee of future results.
Investing involves risk, including risk of loss.
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Not NCUA or NCUSIF insured. May lose value. No credit union guarantee.
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Before investing, consider the mutual fund or exchange traded products’, investment objectives, risks,
charges, and expenses. Contact Fidelity or visit institutional.fidelity.com for a prospectus or, if available, a
summary prospectus containing this information. Read it carefully.
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