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
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.
Investment Themes Update - The implications of inflation, interest rates, equity valuations, and taxes on the post-Covid economic recovery
Let’s start with four elements that have ignited the
       current economic boom …

For Investor Use
Investment Themes Update - The implications of inflation, interest rates, equity valuations, and taxes on the post-Covid economic recovery
The Widespread COVID Vaccination Rollout in the U.S. has
    Brought Cases and Deaths Way Down…

  Source: Evercore ISI, as of 06/18/2021
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Investment Themes Update - The implications of inflation, interest rates, equity valuations, and taxes on the post-Covid economic recovery
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
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Investment Themes Update - The implications of inflation, interest rates, equity valuations, and taxes on the post-Covid economic recovery
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
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Investment Themes Update - The implications of inflation, interest rates, equity valuations, and taxes on the post-Covid economic recovery
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
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Investment Themes Update - The implications of inflation, interest rates, equity valuations, and taxes on the post-Covid economic recovery
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
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Investment Themes Update - The implications of inflation, interest rates, equity valuations, and taxes on the post-Covid economic recovery
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.
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Investment Themes Update - The implications of inflation, interest rates, equity valuations, and taxes on the post-Covid economic recovery
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
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Investment Themes Update - The implications of inflation, interest rates, equity valuations, and taxes on the post-Covid economic recovery
Could This Recovery Be Derailed By …..?

                      - Inflation?
                      - Interest rate spike?
                      - Equity Valuations?
                      - Higher taxes?

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Fixed 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.
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Which should keep Inflation in the Sweet-spot Level for
    Equities over the long-term

   Source: Strategas, as of 02/17/2021
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Higher 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
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And 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
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As 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
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Historically, 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
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Taking 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.
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And 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
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The 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.
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Perhaps, 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.
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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.
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Detailed 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.

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Appendix

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
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Important 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.
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Important 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.

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For Investor Use

Past performance is no guarantee of future results.
Investing involves risk, including risk of loss.

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