Quarterly Market Perspective - Fidelity Investments
[Pages:17]Quarterly Market Perspective
Fourth Quarter / 2021
SUMMARY
The following pages provide greater detail into some of the themes discussed in the Quarterly Market Perspective video:
MARKET SUMMARY:
1. For the year, U.S. and international stocks rose while bonds fell modestly
BUSINESS CYCLE:
2. The U.S. economy is in a mid-cycle expansion, supported by corporate profit growth and a strong labor market
INVESTMENT STRATEGY:
3. Over the year, we gradually reduced exposure to stocks and increased allocations to bonds
DIVERSIFICATION:
4. Bonds continue to offer attractive diversification benefits
STAYING INVESTED:
5. Investors who remain disciplined are typically rewarded over the long term
FIDELIT Y INVESTMENTS / QUARTERLY MARKET PERSPECTIVE / FOURTH QUARTER 2021
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1. MARKET SUMMARY
Global stocks rose for the year while investment-grade bonds experienced a modest decline
?Extremely high corporate profit growth led to exceptional returns for U.S. stocks.
?International stocks rose but more modestly, due to uneven economic recoveries and growth concerns in China, which affected markets in multiple regions.
?Bonds were slightly down for the year as the strong U.S. economic recovery led to higher interest rates.
In 2021, U.S. stocks experienced strong gains and international stocks rose modestly while bonds fell slightly
Hypothetical growth of $100,000
$130,000
U.S. Stocks
International Stocks
Bonds
Q4 2021
$125,658
$120,000
$110,000
$107,984
$100,000
$98,458
$90,000 Dec 2020
Jan 2021
Feb 2021
Mar 2021
Apr 2021
May 2021
Jun 2021
Jul 2021
Aug 2021
Sep 2021
Oct 2021
Nov 2021
Dec 2021
This chart illustrates the performance of a hypothetical $100,000 investment made in the indexes noted below. Index returns include reinvestment of capital gains and dividends, if any, but do not reflect any fees or expenses. This chart is not intended to imply any future performance of the investment product.
Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indexes are unmanaged. Please see Important Information for index definitions. Source: Fidelity Investments, as of 12/31/2021. U.S. Stocks -- Dow Jones U.S. Total Stock Market Index; International Stocks -- MSCI All Country World Ex-U.S. Index (Net MA); Bonds -- Bloomberg U.S. Aggregate Bond Index.
FIDELIT Y INVESTMENTS / QUARTERLY MARKET PERSPECTIVE / FOURTH QUARTER 2021
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1. MARKET SUMMARY
Markets can experience moments of volatility even during years of strong performance, so focusing on long-term results may help
?In 2021, U.S. stocks experienced exceptionally strong returns, yet some investors were discouraged by market volatility in the second half of the year.
?Historically, we can see that market volatility is normal, but stocks have usually experienced gains despite periods of near-term volatility.
?That's why we believe focusing on long-term returns can help periods of volatility feel less stressful.
U.S. stocks can experience gains despite moments of volatility
S&P 500? Index annual total returns & intra-year declines: 1980?2021
S&P 500?
S&P 500? Negative Years
Intra-year Declines
50%
40%
30%
20%
10%
0%
?10%
?20%
?30%
?40%
?50%
?60% 1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2021
Past performance is no guarantee of future results. Indexes are unmanaged. It is not possible to invest directly in an index. Returns are based on index price appreciation and dividends. Intra-year drops refer to the largest index peak-to-trough decline during the year. For illustrative purposes only. See Important Information for index definition. Data as of 12/31/2021. Source: Standard & Poor's, Bloomberg Finance L.P.
FIDELIT Y INVESTMENTS / QUARTERLY MARKET PERSPECTIVE / FOURTH QUARTER 2021
4
2. BUSINESS CYCLE
The U.S. economy is in a mid-cycle expansion, which historically has been supportive of stocks
?The mid-cycle phase of the business cycle has historically been the longest phase and typically good for stock market performance.
?In addition to the U.S., many other global economies, such as China, are starting to experience economic expansions of their own.
?These periods of economic growth can lead to rising corporate profits for businesses and improving job prospects for individuals.
U.S. ecUo.nSo. mreymiasinins imn itdh-ecmycolereemxpataunrseiophnase of mid-cycle growth Four phases of an economy's business cycle
Early
Mid
Late
RECOVERY
EXPANSION
U.S.
+ Economic
Growth ?
Recession
CONTRACTION
Asset Classes 30%
U.S. Stocks
High-Quality Bonds
High-Yield Bonds
Short-Term
Commodities
20%
Average Annual 10% Returns*
0%
?10%
Please see Important Information for the Business Cycle Framework methodology. Note: This is a hypothetical illustration of a typical business cycle. There is not always a chronological progression in this order, and there have been cycles when the economy has skipped a phase or retraced an earlier one. Past performance is no guarantee of future results.
*Asset class total returns are represented by indexes from the following sources: Fidelity Investments, Morningstar, and Bloomberg. Fidelity Investments source: a proprietary analysis of historical asset class performance, which is not indicative of future performance. From 1950?2020, as of 10/31/2020. Source: Fidelity Investments (AART), as of 12/31/2021.
FIDELIT YSINoVuErScTeM:EBNlToSo/mQbUeArRgTEFRiLnYaMnAcReKELT.PP.E,RFSiPdEeClTiItVyEIn/ vFeOsUtmRTeHnQtUsA(RATAERR2T0)2,1as of 12/30/2020.
5
2. BUSINESS CYCLE
Most economic indicators support a mid-cycle expansion in the U.S.
?The outlook for corporate profit growth is still strong, interest rates remain low, and consumers are still spending, all of which are supportive of economic growth.
?Inflation readings have been high for a few months but may start to ease from recent levels as supply chain issues start to resolve in the new year.
?Economic activity in China and other international markets may start to recover, which can help global economic growth.
Summary of business cycle indicators
As of December 31, 2021
Favorable
Mixed
Unfavorable
Indicator
Current View Notes
Economic Growth
The U.S. economy remained in mid-cycle expansion despite continued challenges by COVID variants.
Corporate Profits
Corporate profits grew significantly in 2021 and are expected to increase in 2022 at a more normalized pace.
Borrowing/Credit
Borrowing conditions for companies and consumers remains favorable, but an uptick in rates could temper demand.
Inventory
Inventory levels remain low, helping to drive manufacturing activity and corporate profits for some firms.
Federal Reserve
The Fed continues to reduce its bond purchases (quantitative easing) and has signaled its intention to begin slowly raising overnight borrowing rates in 2022, presuming that the economic conditions remain strong.
Government Spending
Proposed spending measures remain in prolonged negotiations, with the size and types of spending in flux.
Inflation
Inflation pressures remain high and while we expect it may start to decline over the coming quarters, we are cautious about the long-term trend, which will take more time to develop.
Consumer
The Delta and Omicron variants dampened spending on dining and travel, but consumer activity was robust across most of the economy, helping to drive sales and profits for most businesses.
Manufacturing Activity
Manufacturing remains well above historical averages and is expected to stay elevated as supply chain issues eventually improve and inventories are replenished over the next few quarters.
International Developed Markets
The Delta and Omicron variants continue to pose challenges to economic growth, but lower mortality rates and ongoing vaccinations could support higher economic and profit growth in 2022.
Emerging Markets
Sluggish economic activity in China and pandemic-related issues continued to challenge emerging markets, but growth appears poised to improve in the coming quarters.
Represent directional change from last quarter
Sources: Fidelity Investments (AART), Strategic Advisers LLC, as of 12/31/2021.
FIDELIT Y INVESTMENTS / QUARTERLY MARKET PERSPECTIVE / FOURTH QUARTER 2021
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3. INVESTMENT STRATEGY
In 2021, slightly reduced exposure to U.S. stocks, commodities, and high-yield bonds in favor of investment-grade bonds
?The U.S. economy transitioned from an early-cycle recovery to mid-cycle expansion in 2021.
?While mid-cycle expansions have historically been good for stocks, instances of market volatility are also more common than in early cycle.
?Therefore, over the last several quarters, we increased allocations to investment-grade bonds to diversify risk and provide stability during times of heightened market volatility while reducing exposure to more volatile asset classes.
Asset class positioning for Total Return approach, September 2017 through December 2021
Relative weight versus long-term asset allocation mix
U.S. Stocks 8%
International Stocks
Bonds
Short-Term
Extended Asset Classes NBER Recession
5.4%
4%
2.0%
0.5%
0%
?0.3%
4.4% 3.0%
0.0%
?3.6%
?4%
?3.8%
?7.6%
?8%
?12% Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 2020 2021 2021 2021 2021
Diversification does not ensure a profit or guarantee against loss. This chart represents the relative asset class weights over time versus the long-term asset allocation mix of a PAS Total Return Growth with Income Blended preference. Stocks reference both U.S. and international stock allocations. Bonds represent investment-grade bond allocations. Short-term investments include money market funds and short-duration bond fund allocations. Extended asset classes refer to allocations to funds not within traditional stock, investment-grade bond, and short-term investment categories, including high-yield bond, commodity, and alternative investment allocations. The Growth with Income strategy has a long-term asset allocation mix of 42% U.S. stock (Dow Jones U.S. Total Stock Market Index), 18% international stock (MSCI All Country World Ex-U.S. Index (Net MA)), 35% bonds (Bloomberg U.S. Aggregate Bond Index), and 5% short-term investments (Bloomberg U.S. 3?6 Month Treasury Bill Index), as of 12/31/2021. Current composition may differ, perhaps significantly. Recession time frame from March 2020 to April 2020. Source: National Bureau of Economic Research (NBER) recession.
FIDELIT Y INVESTMENTS / QUARTERLY MARKET PERSPECTIVE / FOURTH QUARTER 2021
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3. INVESTMENT STRATEGY
Market corrections are common during mid-cycle expansion but have historically provided rebalancing opportunities
One-Year Median Return from Market Bottom
?Our research shows that stocks generally post strong returns over the 12-month periods following a midcycle correction.*
?On average, stock market corrections during mid-cycle expansions have historically averaged ?14% and lasted about 3 months but have usually been followed by recoveries of about 29% over the next 12 months.
?We closely monitor how stock market volatility affects the asset allocation levels of our clients' accounts. If a mid-cycle correction occurs, we usually rebalance portfolios back to our target allocation level for their account.
Number of Corrections
Stocks posted an average return of 29% one year after a mid-cycle correction
S&P 500? corrections since 1950 by phase of the business cycle
Number of Corrections
One-Year Median Return from Market Bottom
10
50%
9
8
40%
7
6
30%
5
4
20%
3
2
10%
1
0
Early Cycle
Mid Cycle
Late Cycle
0%
Recession
*Correction defined as a 10% to 20% market decline from peak to trough. Source: Bloomberg Finance L.P., Fidelity Investments (AART), as of 12/31/2021.
FIDELIT Y INVESTMENTS / QUARTERLY MARKET PERSPECTIVE / FOURTH QUARTER 2021
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